European Leaders Push to End Debt Crisis

By Tony Czuczka and Thomas Penny - Oct 23, 2011 5:01 AM GMT+0700

European leaders descended on Brussels in a last-ditch effort to stamp out a two-year-old financial crisis that threatens to tip the world into a recession.

Government chiefs take over after two days of meetings by finance ministers at a 10 a.m. summit to be followed by another on Oct. 26. That’s their self-imposed deadline to complete a plan to beef up the euro bailout fund, cut Greece’s debt without triggering a default, shield banks from the fallout and ensure Italy and Spain don’t succumb to the contagion.

With President Barack Obama and Chinese Premier Wen Jiabao urging a fix, Europe’s room for maneuver narrowed after a report showed Greek finances worsening. Measures being considered include a boost in rescue funds to 940 billion euros ($1.3 trillion), deeper writedowns on Greek debt, and a demand that banks increase Tier 1 capital to 9 percent by mid-2012.

Investors believed the euro region was “a secure terrain, only to find out that you can lose money here -- that, for all of us in Europe, is a troubling message,” German Chancellor Angela Merkel said yesterday. “We need to protect the other countries in the region -- that’s why we’re erecting this big protection umbrella.”

The crisis has prompted warnings from the Group of 20 that failure by policy makers risks a triggering a global slump. The contagion began in Greece in October 2009 with the revelation that its finances were worse than previously reported. Since then, 256 billion euros of bailouts have failed to stem the tide, which rattled France this month, prompting Standard & Poor’s to warn it may lose its top credit rating.

Crisis Convention

European Union office buildings, luxury hotels and a suburban flower park became scenes of a crisis-management convention involving national and EU-level leaders, finance ministers, central and commercial bankers and their aides.

Merkel and French President Nicolas Sarkozy spoke on the phone yesterday before meeting with European Central Bank President Jean-Claude Trichet, EU President Herman Van Rompuy, European Commission President Jose Barroso, EU Economic and Monetary Affairs Commissioner Olli Rehn and International Monetary Fund Managing Director Christine Lagarde.

Lagarde also joined 10 hours of talks as ministers haggled over what they called a “credible firewall” against fallout from deeper writedowns.

Bank Capital

The finance ministers, who failed to produce a blueprint for the role of investors in a Greek rescue, agreed that European banks may need about 100 billion euros in capital after marking sovereign-debt holdings to market values, said a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because the talks are private.

“We have made real progress and we have come to important decisions on strengthening European banks,” U.K. Chancellor of the Exchequer George Osborne told reporters after the meeting. “That is just one part of the package and obviously there’s more work to do.”

Narrowing the options for expanding the reach of the 440 billion-euro rescue fund, ministers discussed setting up a pool to entice investors to buy troubled euro-area government bonds, said a person familiar with the matter. The fund was weighed alongside the option of using the European Financial Stability Facility to insure countries’ bond sales as well as those purchased through the investment vehicle.

EFSF Guarantees

A special-purpose vehicle was also discussed at this month’s meeting of the Group of 20 finance ministers and central bankers. It would be run by the IMF as a way to channel loans from countries such as China and Brazil.

“To be able to do this we’d have to create a special purpose vehicle, which we have done in the past in other circumstances,” Antonio Borges, the IMF’s European department head, said Oct. 5. “It could be done, it’s not to be excluded.”

Expansion of the EFSF was the focus of a Franco-German dispute in which France backed down. France had complained that the insurance option wouldn’t be enough and sought to turn the fund into a bank that could borrow from the ECB, a step opposed by Germany and the central bank.

The start of the six-day summit marathon on Oct. 21 was overshadowed by the report by the European Commission, ECB and IMF on Greece that highlighted the dilemma of righting Greece’s finances without sending shockwaves through the banking system.

Greek Finances

A deepening recession and delays in enacting budget cuts have raised Greece’s financing needs by at least 20 billion euros since July, when euro leaders hammered out a 159 billion- euro package, the people said.

“We have to discuss with the private sector and see what is suitable,” Spanish Economy Minister Elena Salgado told reporters. Ministers discussed investor losses of “more than 21 percent,” she said.

Officials are considering five scenarios to update a July agreement that foresaw 21 percent losses on Greek debt for private bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so- called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.

The ministers on Oct. 21 signed off on the payout of the EU’s 5.8 billion-euro share of an 8 billion-euro loan to Greece. It’s the sixth installment of a 110 billion-euro package awarded in May 2010.

To contact the reporters on this story: Tony Czuczka in Brussels at aczuczka@bloomberg.net; Thomas Penny in Brussels at tpenny@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net