By James G. Neuger and Tony Czuczka - Oct 18, 2011 7:20 AM GMT+0700
Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.
European stocks and the euro reversed initial gains yesterday, slumping after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.
While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.
“We’re really in a bind here,” Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”
The ECB said yesterday it bought 2.2 billion euros ($3 billion) of bonds last week, the least since it restarted the market support program in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed 440 billion-euro rescue fund with enough firepower to do that job.
‘Systemic Threats’
Moody’s Investor Service said today that while Europe’s central banks have “very substantial capacity” to support euro-area lenders and sovereign-debt markets, interventions are likely to remain limited “unless systemic threats accelerate further.”
The euro traded at $1.3743 as of 8:02 a.m. in Tokyo from $1.3738 in New York yesterday, when it slid 1 percent.
“We don’t see how the EU officials will be able to present a solution by the weekend which will remotely approach the current expectations,” Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt, said in a research note yesterday.
Merkel’s spokesmen Steffen Seibert stoked the disagreement by saying that EU leaders won’t provide the complete fix that global policy makers are pushing for at their Brussels summit.
Merkel on ‘Dreams’
Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Seibert told reporters in Berlin. The search for an end to the crisis “surely extends well into next year.”
Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging crisis plan. Providing a week to act, they set the Oct. 23 meeting of European leaders as the deadline.
On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.
Stocks Slide
The Stoxx Europe 600 Index reversed an advance of as much as 1.5 percent yesterday and lost 1 percent.
In Greece, parliamentary debate is due to begin today on a fresh round of austerity measures amid public protests and labor-union unrest. Finance Ministry workers began a 10-day strike yesterday, complicating the government’s efforts to collect taxes and highlighting the mood in Europe’s most- indebted country as Greek lawmakers face another vote on fiscal measures due in two days. That’s a showdown Prime Minister George Papandreou needs to win to ease the way for more foreign financing and stave off default.
Across Europe, obstacles to an accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe’s capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel stresses she wants to preserve.
Bankers Push Back
As EU officials move toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, bankers are pushing back. Options include altering a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. German Finance Minister Wolfgang Schaeuble said yesterday that Greece’s debt may need to be written down by more than that level.
Greek bond losses of as much as 50 percent envisaged in Europe’s plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.
In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.
Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses Greek holdings difficult, Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 13. Ackermann, who chairs the Washington-based Institute of International Finance and spearheaded the July accord, will travel to Brussels this week for talks with policy makers.
“The problems in the eurozone are chronic” and “won’t go away,” said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC. He said the EFSF needs to be more than four times its current size to be effective.
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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