Brussels, 19/07/2011 (Agence Europe) - The political leaders of the eurozone have been summoned to a special meeting in Brussels in the afternoon of Thursday 21 July to decide on the details of the second Greek bailout and how the private sector will contribute to it. They are expected to examine measures that need to be taken to prevent the euro debt crisis from spreading any further, to Italy and Spain, for example.
The costs of rolling over Spanish and Italian bonds has reached new record highs and the bank stress test results have done little to reassure investors about the strengths of the EU banking system. Europe's leaders are finding it difficult to agree among themselves and show a united determination to shore up the single currency. Some observers suggest that the biggest eurozone economies are now at a crossroads and have to decide whether Europe needs to be boosted to deal with the euro crisis or whether the stronger economies should abandon the euro and go back to their old currencies. Continuing with the single currency would require beefing up the bailout fund (EFSF) and making use of other means to intervene on the money markets, such as better coordination of the 17 eurozone countries' economic policies and possibly the creation of eurobonds, something that Italy, Luxembourg and also Ireland have been calling for. The other course of action would mean a parting of the ways, forcing Greece to leave the euro. The consequences of such a dire move are totally unpredictable and the eurozone refuses to discuss the issue.
All eyes are on Germany, the biggest eurozone economy, whose vote is key to any eurozone decision. A section of public opinion in Germany is not keen to provide more cash, and the German Chancellor, Angela Merkel, is being criticised within her own party for refusing to take a resolutely pro-European line. She has said that she will not turn up at the special summit of heads of state in Brussels on Thursday unless there is tangible progress on private sector involvement in the new Greek bailout.
The first Greek bailout started in May 2010, to the tune of €110 billion, €80bn of which in the form of loans from eurozone countries (not including Slovakia) and €30bn from the International Monetary Fund. Some €65bn of the total aid package has been handed over so far (including the most recent batch of €12bn). Despite the drastic structural adjustment programme implemented by Greece (a condition for the loans), the country's deficit reduction is not on target (the aim is to reduce it to 7.5% of GDP in 2011), the public debt is growing (the Commission forecasts that it will reach 157.7% of GDP in 2011 and 166.1% in 2012), and the country is plunged in deep economic recession.
The second Greek bailout will be of a similar scale to the first one and will include a three-year austerity plan. The Greek finance minister, Evángelos Venizélos, is reported by AFP as saying that he wanted a solution that would make the country's debt payments sustainable and cover Greece's financial needs until at least the summer of 2014, when it hoped to be able to roll over its debt itself on the financial markets and by which time he hoped Greek banks would have resolved their cash flow problems. On pressure from Germany (backed by Finland and the Netherlands), the three-year aid programme will be part funded by EFSF loans at reduced interest rates and long maturity periods and partly by a Greek privatisation programme, which is forecast to net some €50bn by 2015. Most importantly, the eurozone countries want the private sector to contribute to the bailout costs (banks, insurance companies and pension funds, in other words) and this has been the sticking point in the talks over the past few weeks. At the end of last month, Greece introduced a new batch of austerity measures estimated to be worth some €28bn (see EUROPE 10408).
Private sector involvement. Several ways of getting the private sector to voluntarily contribute to the Greek bailout costs have been discussed. The French European affairs minister, Jean Leonetti, says that a tax on banks is being examined, which would have the advantage of not leading to a selective or full Greek default. The EFSF may lend Greece money for it to use to buy back some of its written-down bonds on the money markets as a way of slashing its debt. Last week, the Eurogroup suggested that the option of the EFSF buying up Greek bonds directly from the secondary markets (from investors, in other words) should be examined (see EUROPE 10417). Germany is suggesting re-scheduling Greek bonds due to mature by the end of 2013 by a further seven years. French banks suggest that some of the bonds reaching maturity should be reinvested in bonds of a longer maturity date.
At one point, the eurozone wanted to avoid a Greek default at all costs, but due to their awareness that the sheer scale of Greece's debt has to be reduced, they might now be tempted to decide to let the country go bankrupt “temporarily”. Vehemently opposed to this idea, the European Central Bank has warned that it if this were to be done, then the ECB would refuse to accept Greek bonds as guarantees for low-interest loans, requiring the Greek Central Bank to provide capital instead, or for eurozone countries to drip-feed the Greek banking system to prevent it completely collapsing. Reuters reports that a preparatory document for the special summit on Thursday says this would be the most expensive option. (M.B./transl.fl)