Brussels, 10/10/2011 (Agence Europe) - Under pressure from the money markets and their international partners, the eurozone countries have agreed to update their plan for dealing with the sovereign debt crisis and find a proper solution that attacks the roots of the problem by the end of October. In Berlin on Sunday, German Chancellor Angela Merkel and French President Nicolas Sarkozy said they fully agreed that European banks had to acquire greater capital and the second Greek bailout needed to be finalised. Sarkozy said that Europe had to solve its problems ahead of the G20 Summit in Cannes, France, on 3-4 November. The President of the European Council, Herman Van Rompuy, has decided to postpone until 23 October 2011 the next meeting of EU heads of state, scheduled for 17-18 October. The European Commission will be publishing a range of options this week for increasing bank capital.
France and Germany, the two biggest eurozone economies, want to ensure that the break-up of Dexia does not light the European banking powder keg and blow the financial system sky-high. Alongside the woes of Franco-Belgian bank Dexia, Moody's credit rating agency has downgraded the ratings of British and Portuguese banks. France and Germany have therefore publicly stated that European banks have to be recapitalised. The German Chancellor said they were determined to do what is needed to get the banks capitalised, but would not be drawn on what this might entail.
Some commentators say that the paucity of tangible details signals disagreements between France and Germany over how to proceed. France and Belgium are guaranteeing Dexia's financial commitments and France is worried that it might lose its coveted AAA status, although Moody's and fellow rating agency Standard and Poor's confirmed France's AAA status on Monday 10 October. The French government is said to be more in favour of making use of the EFSF bailout fund to bail out the banks than are the Germans. Once the new EFSF powers have been endorsed in all 17 euro countries, the EFSF will be able to lend cash to countries to shore up their banks and France is the eurozone country whose banks are most exposed to eurozone sovereign debt as a proportion of its GDP. The main contributor to the EFSF, Germany, says it should only be used as a last resort, and the European Commission backs this approach, saying that cash should be raised on the financial markets first and foremost and only if this proved impossible should banks be bailed out by the state.
At present, the eurozone is refusing to put any figures on the amount of money needed by the banks, but the European Banking Authority (EBA) is in the process of studying the results of the bank stress tests this summer in the light of the deteriorating value of bonds held by the banks. The 2011 tests were highly criticised for failing to consider the possibility of a eurozone country going bankrupt or entering a “partial default”.
The German media report that the big French banks will be asking for €10-€15 billion in state aid if Deutsche Bank agrees to raise further capital itself. Belgium has said that it can come up with €4 billion to nationalise the Dexia's retail banking arm in Belgium. On Saturday, Irish finance minister Michael Noonan talked of well above €100 bn being needed by banks across the eurozone. The International Monetary Fund suggests that between €100 bn and €200 bn will be needed. A European Commission spokesperson said the Commission would come up with ideas this week about how to coordinate the extra measures to increase banks' capital.
Postponing the European Summit. Following consultation with the nation states, Van Rompuy said on Monday 10 October 2011 that he was postponing next week's European Summit until Sunday 23 October to allow time to finalise the eurozone's crisis management strategy, explaining that more time was needed for the Commission to unveil a bank recapitalisation plan adjusted in line with the updating of the bank stress tests currently being prepared by the EBA; and as the Commission, ECB and IMF are still assessing the Greek situation, an ECOFIN Council decision about providing the next instalment of aid for Greece (€8 bn) cannot be taken yet. Van Rompuy said progress had already been made with the endorsement of the changes to the Stability and Growth Pact and the expected endorsement by eurozone countries of changes to the EFSF. A eurozone summit will be held on Sunday 23 October. There will be two special meetings in the meantime, one of Eurogroup and one of the ECOFIN Council, probably next week.
On Monday evening, Malta is expected to endorse the 21 July 2011 eurozone decisions about the second Greek bailout increasing the lending capacity of the EFSF bailout fund to €440 billion and giving it greater teeth. If Slovakia ratifies the decisions on Tuesday, then the EFSF will be able to buy struggling countries' bonds on the money markets and, after receiving approval from the ECB, will be able to lend countries money to bail out their banks. The Slovakian government is expected to need to win the votes of the opposition left parties to ratify the deal because it is opposed by some of the liberal SaS party (a member of the coalition government). The SaS has said that it will only endorse the vote if Slovakia pledged to refuse to join the European Stability Mechanism (ESM).
Creation of the ESM will require changes to the European treaty. The ESM is due to replace the EFSF in July 2013 but early use of the ESM has been raised by Germany, Finland and the European Commission. Under the ESM, a “managed restructuring” of a eurozone country is possible, whereas the EFSF only allows voluntary participation of the private sector (as is being negotiated for the second Greek bailout).
Greece. Europe knows that the 21 July decisions for the second Greek bailout (EFSF loans of €110 billion and €40 billion or so contribution from the private sector) will not suffice. Germany's Finance Minister Wolfgang Schäuble explained that the ministers in July had not planned a great enough reduction in Greece's debt, expecting the value of Greek bonds to slump by 21%, whereas Germany's DPA says that the bonds could lose 60% of their value. The Greek finance minister, Evángelos Venizélos, said on Monday that the Greek government's meetings with the creditors had come to an end and the fact-finders were expected to publish their report ahead of payment of the next instalment of aid, €8 billion.
At the European Summit at the end of October, Van Rompuy will unveil proposals on strengthening economic governance in the eurozone and Merkel and Sarkozy will also unveil proposals to this end, proposals that are more ambitious than the ones they mooted in August to appoint a eurozone president and hold regular summits. The new Franco-German proposals will re-jig the institutional set-up. Merkel explained that they would involve closer cooperation among eurozone nations. Backed by the Netherlands, Germany is expected to use the rejigging to demand tighter budget discipline. Other eurozone countries are likely to call for a pooling of a portion of public debt and later this month, the Commission is expected to unveil proposals to this end. (MB/transl.fl)