By Patrick Donahue and Helene Fouquet - Oct 10, 2011 5:01 AM GMT+0700
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Angela Merkel, Germany's chancellor, right, and Nicolas Sarkozy, France's president. Photographer: Michele Tantussi
French Presiddent Nicolas Sarkozy and German Chancellor Angela Merkel at a news conference in Berlin. Photographer: Michele Tantussi/Bloomberg
Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.
“By the end of the month, we will have responded to the crisis issue and to the vision issue,” the French president said in Berlin yesterday at a joint briefing with the German chancellor before they dined at her office.
Under increasing pressure to defuse turmoil that has raged for 18 months and facing growing concern that Greece is headed to default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.
“Maybe they’re still running one step behind, but they are at least discussing the right things,” Carsten Brzeski, an economist at ING Group in Brussels, said in a phone interview.
Underscoring the urgency, the board of French-Belgian Dexia SA (DEXB) met yesterday to begin dismantling the lender, the first victim of the debt crisis at the core of Europe. While the heads of Europe’s two biggest economies reiterated their intention to keep Greece in the euro, they left it to international auditors, known as the “troika,” to guide the next steps. Sarkozy avoided the line he used 10 days ago that “we can’t let Greece fail.”
‘Durable’ Solution
The focus on Europe’s banks and the search for what each called a “durable” solution for Greece signal a willingness to accept a debt restructuring there, an outcome Sarkozy has resisted. Investors may be pushed to take a bigger share of the losses, effectively spiking a debt swap that was part of a July 21 bailout that would impose a 21 percent writeoff.
“This in my opinion kills the July deal for sure and sets up a more credible and deeper Greek debt restructuring,” Jacob Kirkegaard of the Peterson Institute for International Economics in Washington, said in an e-mail.
After their eighth bilateral summit in 20 months, the two leaders unveiled no new agreement on what role should be played by the bailout fund, the European Financial Stability Facility, amid reports that they differed on how to use it.
“We will recapitalize the banks,” Sarkozy said. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.”
European banks need as much as 200 billion euros $268 billion) of capital, Antonio Borges, the International Monetary Fund’s European department head, said last week.
‘Great Risk’
European leaders are bracing for the consequences of a Greek default. German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached the agreement in July. He cited a “great risk” that the crisis could spread further.
Merkel said a report from a team of inspectors from the IMF, the European Union and the European Central Bank later this month will help determine the next step to keep Greece in the 17-nation euro zone.
“On Greece, we are waiting of the troika report,” Sarkozy said. “Here, too, we are on the same line: we will take the appropriate decisions.”
The Greek debt load will climb to 172.7 percent of gross domestic product in 2012 -- about double Germany’s -- as the economy contracts for a fourth year, the Finance Ministry in Athens said Oct. 3.
‘All Possible Strength’
“The decision for a single currency was a path-breaking decision and therefore we’ll defend it with all possible strength,” Merkel said alongside Sarkozy. Sarkozy repeated several times that the two leaders agreed “on everything.”
“The typical German-French experience over the last 20 months is that almost every time they really had to agree when time was running out, they agree,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London.
Investors are demanding a premium of 21.5 percentage points to hold Greek 10-year bonds over benchmark German bunds of similar maturity. The euro has declined 6 percent against the dollar since the beginning of September as investors assessed the risk of a European financial crisis. It traded at $1.3378, down from a May 2 high of $1.4830, as of Oct. 7.
Banks’ credit-insurance costs have surged and their shares have tumbled as the crisis spread from peripheral nations to the core euro states, even including AAA rated France.
The 50-member Stoxx 600 Banks index of European banking shares has slid 34 percent in the last six months, reaching its lowest since April 2009 on Sept. 23.
Paris- and Brussels-based Dexia was victimized by the debt crisis, which has caused the evaporation of short-term funding to what used to be the world’s largest municipal lender. The French, Belgian and Luxembourg governments said they backed management’s plan paving the way for dismantlement.
To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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