By James G. Neuger and Tony Czuczka - Oct 21, 2011 9:16 AM GMT+0700
Oct. 21 (Bloomberg) -- Uwe Parpart, head of research at Reorient Financial Markets Ltd., talks about Europe's sovereign debt crisis and its implications for Asian economies and financial markets. Parpart speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
Oct. 21 (Bloomberg) -- Steve Brice, chief investment strategist at Standard Chartered Plc, talks about the outlook for a European rescue fund to fight the region's debt crisis, and its potential implications for financial markets. Brice speaks with Susan Li on Bloomberg Television's "First Up."(Source: Bloomberg)
European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days.
Negotiations on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash, two people familiar with the discussions said. They declined to be identified because political leaders will have to decide.
That option may be one way out of the impasse between Europe’s two biggest economies. Finance ministers meet in Brussels today from about 2 p.m. to lay the groundwork for an Oct. 23 meeting of government leaders that had been the deadline for a solution to the debt crisis. A summit for Oct. 26 was set yesterday after Germany and France said the EU needs more time to seal a “global and ambitious” accord.
“The market wants the euro crisis solved yesterday, and the politicians and finance ministries seem to be saying ‘yes we can, but no we won’t,’” Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an e-mail. “Europe has the wealth to deal with Greece, it is just that the process in incredibly complex.”
Disclosure of the dual-use option helped reverse declines in U.S. stocks and the euro yesterday. The Standard & Poor’s 500 Index added 0.5 percent after losing as much as 1 percent. The euro climbed to $1.3781 in New York from as low as $1.3656.
Greek Vote
In Greece, Prime Minister George Papandreou won a parliamentary vote late yesterday on further austerity measures designed to secure more aid under the 2010 bailout. As hooded protesters threw rocks and battled riot police outside the parliament building in Athens, one man died of heart failure after a rock hit him on the head, the government said.
EU officials weighing deeper losses for Greek bondholders in a revamped bailout are concerned that any investor involvement risks further roiling markets, say people familiar with the deliberations.
Five Scenarios
Greece has accumulated at least 20 billion euros in additional financing needs since a 159 billion-euro package was set in July, because of a deepening recession and delays in enacting the plan, said the people, who declined to be identified because euro-area leaders have yet to agree on their strategy. The EU is considering five scenarios, ranging from sticking with July’s voluntary swap to a so-called hard restructuring, where investors could be forced to exchange Greek bonds for new ones at 50 percent of their value, the people said.
The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. Instead of replacing it with the European Stability Mechanism, which will hold 500 billion euros, in mid-2013, a consensus is emerging on merging the two funds, the people said.
The 500 billion-euro total was deemed sufficient when Greece, Ireland and Portugal were the primary victims of the debt crisis. Widening bond spreads in Italy, Spain, Belgium and France upended that calculation.
Credit Lines
Standard & Poor’s said France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario. The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, it said in a report.
The EFSF may be authorized to provide credit lines of as much as 10 percent of a country’s economy, according to a proposal prepared for this week’s meetings. By that measure, credit lines for Spain and Italy, countries that required European Central Bank support as their borrowing costs soared, could reach 270 billion euros ($371 billion).
“EFSF will need to be leveraged up,” Lael Brainard, the U.S. Treasury’s undersecretary for international affairs, said to a Senate subcommittee yesterday in Washington.
Germany and France, the euro region’s biggest financial backers, are at odds over how to do that. The fund’s tasks include recapitalization of banks and buying bonds in primary and secondary markets.
France favors creating a bank out of the EFSF, boosting its financial clout with backing from the ECB, a proposal that Germany rejects, Finance Minister Wolfgang Schaeuble told lawmakers in Berlin this week. French Prime Minister Francois Fillon said yesterday that the euro region should agree to use leverage to make the fund “massive.”
Europe’s Impact
German Chancellor Angela Merkel and French President Nicolas Sarkozy facing growing pressure from the U.S. and other global partners to end the wrangling. Federal Reserve Chairman Ben S. Bernanke briefed Senate Democrats yesterday about the European debt crisis and said it “could have an impact” on the U.S. economy, Senator Dick Durbin of Illinois said in Washington. Merkel and Sarkozy plan to meet one-on-one in Brussels tomorrow on the eve of the first summit.
The focus on the lending ceiling came after central bankers ruled out giving the EFSF a banking license, blocking the most potent option for scaling it up. France has pushed Germany to go beyond a less powerful, ECB-backed option of using it to insure 20 percent to 30 percent of new bond issues.
Still, the 280 billion euros left in the EFSF cannot be wholly committed to bond insurance, since that would drain the fund to zero, the people said. Instead, finance ministers are likely to decide on the use of the EFSF’s instruments on a case- by-case basis, the people said.
Meanwhile, the ECB is considering lending more money against asset-backed bonds if issuers provide additional information about the loans underpinning the securities, according to a person familiar with the matter. The proposed change is part of a broader ECB initiative to encourage banks to improve transparency in asset-backed bonds they sell to investors and boost confidence in a market blamed for worsening the credit crisis in 2007.
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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