Trichet Sees ‘Systemic’ Risk as Writedowns Divide EU

By Jana Randow and James G. Neuger - Oct 11, 2011 5:59 PM GMT+0700

European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis.

“The crisis has reached a systemic dimension,” Trichet told European lawmakers in Brussels today. “Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”

European officials are toiling to meet an end-of-month deadline set by French President Nicolas Sarkozy to get to grips with the crisis, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the 17-nation currency might not survive in its current form.

Trichet’s message comes as Slovakian lawmakers vote on the euro region’s retooled bailout fund. The country is the only member of the 17-nation euro area that hasn’t ratified the measure agreed between leaders in July to fight turmoil that has spread from Greece to larger nations including Italy. Slovakia’s largest opposition party, which pledged to reject the motion today, said it will back the revamp in a second vote if it fails to pass the first time.

Stocks in Europe dropped for the first time in five days and the euro fell from a three-week high against the dollar. The Stoxx Europe 600 Index slid 0.8 percent as of 11:46 a.m. in London. The euro fell 0.4 percent to $1.3588.

Italy sold 9.5 billion euros ($12.9 billion) of Treasury bills today, the maximum set for the auction, as borrowing costs fell and demand rose.

Slovak Vote

Today’s crisis-management efforts range from a vote in Slovakia on upgrading the 440 billion-euro ($600 billion) rescue fund to the release of a report by European and International Monetary Fund experts on Greece’s economic prospects. Risks to the region’s economic outlook have increased as governments struggle to contain the crisis, the European Commission said in a separate assessment published today.

After Malta’s endorsement late yesterday, the Slovak parliament stands as the only barrier to reinforcing the fund with the power to buy bonds in the primary and secondary markets, offer precautionary credit lines and enable the bolstering of bank capital.

Ratification Vote

Slovak Prime Minister Iveta Radicova sought to sideline opponents in her coalition by tying the EFSF ratification to a no-confidence motion. The Freedom of Solidarity party, one of the members of Radicova’s four-way coalition, said it won’t support the EFSF.

Nevertheless, Slovakia’s opposition Smer party will back the bailout revamp in a second vote if the first one fails, its leader, Robert Fico, told reporters in the capital Bratislava. There is no date set for a repeated vote.

Political jousting in Slovakia, which sat out Greece’s original 110 billion-euro aid program last year, showed how Europe’s unanimous decision-making principle makes the emergency response hostage to local politics.

‘Comprehensive’

In postponing a summit of euro leaders by five days yesterday to Oct. 23, European Union President Herman Van Rompuy sought extra time to pursue a “comprehensive” package including a solution for Greece, aid for banks and a further strengthening of the rescue fund.

The summit, now slated for a Sunday when the U.S. and European markets are closed, will be preceded by a finance ministers’ meeting on a date to be determined. Weekends are Europe’s traditional time for market-sensitive decisions, as when the euro area created the rescue fund in May 2010.

“There’s no obvious solution,” Luxembourg Finance Minister Luc Frieden told reporters in Luxembourg today. “There are several options that must be examined from the technical and political points of view.”

Greek bondholders may face writedowns of more than the 21 percent envisioned in a July rescue plan, Luxembourg Prime Minister Jean-Claude Juncker said, setting the stage for high- stakes bargaining at the leaders’ summit.

Juncker’s Comments

Asked by Austrian television last night whether Europe is considering writedowns of 50 percent to 60 percent, Juncker, who chairs euro-area finance meetings, said: “We’re talking about more.” A spokesman for Juncker, Guy Schuller, said today Juncker meant euro-area officials were discussing investor losses on their Greek holdings exceeding 21 percent. Both the ECB and banks oppose such a revision.

The ECB gave its blessing to one method of bolstering the fund, saying it could be used to insure a portion of new bonds sold by debt-strapped nations, automatically extending the fund’s coverage.

EFSF resources “should be dedicated to enhance sovereign debt new issuance of securities, thus multiplying their effect,” ECB Vice President Vitor Constancio said in Milan yesterday.

Officials are working out how to scale up the EFSF’s firepower without requiring another round of parliamentary approvals or dipping into the balance sheet of the ECB. The central bank has ruled out granting the EFSF a banking license.

For Greece, the endgame drew nearer with an announcement that EU, ECB and IMF experts are likely to complete their economic-review mission today.

The report will put Greece’s 2011 budget deficit at 9.1 percent of gross domestic product, missing the original target of 7.5 percent and a revised target of 8.5 percent, Kathimerini newspaper reported, without citing anyone.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

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