Germany Shoots Down ‘Dreams’of Swift Euro Crisis Solution

By Tony Czuczka and Rainer Buergin - Oct 17, 2011 8:11 PM GMT+0700

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela 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,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. 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 plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels 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.

The euro retreated from a one-month high against the dollar after Seibert’s comments. The currency last week had its biggest gain in more than two years on speculation that policy makers were moving closer to stemming the crisis. German 10-year bonds rallied and the Stoxx Europe 600 Index reversed an advance of as much as 1.5 percent and was down 0.3 percent at 3:10 p.m. in Frankfurt.

Impressing Markets

While tensions “may die down if markets are suitably impressed” with the summit outcome, Merkel is seeking to keep pressure on euro-area countries to lock in budget discipline, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview.

“For her, the longer-term reform is at least equally important” because it increases the chances “that the German taxpayer will get back all the money” put on the line in bailouts for Greece, Ireland and Portugal, he said.

Two years to the week since Greece triggered the turmoil by revising its budget math, policy makers face increasing calls from the U.S. and other global partners to stamp out the turmoil that has pushed the Greek government to the edge of default and the European economy close to recession.

The outlook for German economic growth has worsened as companies cut their business expectations and foreign orders decline, the Bundesbank, Germany’s central bank, said in its monthly report today.

Greek Strikes

In Greece, Finance Ministry workers began a 10-day strike, complicating the government’s efforts to collect taxes. Renewed walkouts have hit Europe’s most-indebted country as Greek lawmakers face another vote on fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

Obstacles to an EU 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 says she wants to preserve.

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.

‘Sustainable Solution’

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece’s debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a “sustainable solution” for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

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, travels to Brussels this week for talks with policy makers.

Greek bond losses of as much as 50 percent envisaged in Europe’s emerging 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.

Five-Point Plan

In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.

“The problems in the eurozone are chronic” and “won’t go away,” said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC.Roubini. He said EFSF needs to be more than four times its current size to be effective.

Even so, leaders won’t present a “definitive solution” for the euro region’s debt crisis at the summit in Brussels, Reuters cited Schaeuble as saying at a tax advisers’ conference in Dusseldorf today.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

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