Brussels, 17/10/2011 (Agence Europe) - The current week, ending with a fresh eurozone summit on Sunday 23 October, is of crucial importance to the European Union, which is urged by its international partners to come up with a big plan for tackling the sovereign debt crisis head-on. The plan should put figures on Greece's increased lending needs and fairly share the financial burden between the public and private sector, based on the final fact-finding report by experts from the European Commission, the ECB and the IMF expected to be published this week. It should also say how much extra capital needs to be invested in European banks to cover the writing down of their bonds from struggling eurozone countries. To avoid any further spread of the crisis, Europe will explain how it plans to boost the clout of the EFSF bailout fund and economic governance in the eurozone in the light of proposals to be unveiled on Sunday by the President of the European Council, Herman Van Rompuy. On Friday, a preparatory meeting of the eurozone nations' finance ministers will be held, followed on Saturday by a special ECOFIN Council.
Meeting in Paris at the weekend, G20 finance ministers and central bankers urged Europe to come up with a comprehensive, sustainable solution to the debt problem. Canadian finance minister Jim Flaherty warned that the risk of recession would rise dramatically if Europe fails to reach the targets it has set itself, by 23 October. The British Chancellor of the Exchequer said that the eurozone ministers left Paris feeling that they had an enormous weight on their shoulders to find a solution to the eurozone crisis, which remains at the epicentre of global problems at the moment.
In a joint press release, the G20 money men welcomed progress since their meeting in Washington at the end of September with the formal adoption of changes to the stability and growth pact (see EUROPE 10462) and the end of the laborious but positive process of getting 17 separate ratifications (one from each euro nation) of improvements in the scope and clout of the intergovernmental EFSF bailout fund (see EUROPE 10474). But the G20 Finance Summit pointed out that much work remains to be done and the G20 expects new work to be undertaken to make the most of the EFSF to avoid any spread of the crisis. Progress in this domain is expected to be revealed at the 23 October European Council, which will unveil a big plan to respond to current challenges with determination.
Greece. At a eurozone summit on 21 July 2011, eurozone leaders agreed on “voluntary” participation by the private sector in the second Greek bailout programme (see EUROPE 10424). Banks, pension funds, insurance companies and investment funds have been asked to provide €37 billion in 2011-2014 in the form of a 21% write-down of the value of the Greek bonds they own. The situation worsened over the summer and led to a further decline in the value of Greek sovereign debt. In order to make a contribution of €37 billion, the private sector will therefore now have to agree to a greater write-down. But will further action have be taken in the light of Greece's increased financial needs due to the economy declining faster and further than expected, which means that it cannot meet its budget commitments.
French economy minister François Baroin said on French radio station EUROPE 1 on Friday that the write-down on Greek bonds would have to be higher than the 21% suggested in July. The figures said to be doing the rounds range from a 30% write-down to 50%. On the fringes of the G20 Finance Summit he was chairing, Baroin discussed the matter with his German and Italian counterparts, Wolfgang Schäuble and Giulio Tremonti, stressing the French view (backed by the European Central Bank) opposing any “credit event” in Greece. If Athens were to default on its debt, it would be punished by the credit rating agencies and could set off a chain reaction destabilising all Greek banks and possibly all banks throughout Europe, leading to the payout of insurance policies and credit default swaps. Baroin said that France wanted neither a restructuring nor a credit event, but if the write-down is too large, then that will negatively impact on investment in Greece itself or anywhere else in the eurozone for that matter.
No great changes to the second Greek bailout are in the pipeline. EU Economic and Monetary Affairs Commissioner Olli Rehn said the basics of the agreement would be tinkered with without altering the broad thrust of the measures.
EFSF. After urging Europe to take its responsibility on board, US Treasury Secretary Tim Geithner said that he had heard some encouraging noises in Paris, particularly about the introduction of a much more substantial financial backstop. Negotiations are ongoing about increasing the clout of the EFSF bailout fund without requiring euro nations to provide further guarantees (currently standing at €440 billion). The idea of enabling the EFSF to provide guarantees to owners of struggling eurozone countries' bonds seems to be gaining ground, but the French idea of turning the EFSF into a bank and giving it free access to the ECB monies seems to be out of favour. ECB President Jean-Claude Trichet said at the weekend that it is nation states that have to solve the sovereign debt crisis, not the ECB.
Recapitalisation. The debt crisis and the woes of the banking industry are two sides of the same coin. The write-down in the value of bonds affects the solvency of banks and the 23 October summit is expected to put figures on the recapitalisation needs of European banks.
The European Banking Authority (EBA) is finalising data about capital held by the 90 banks that sat the stress tests this year, including details of write-downs in sovereign debt since the publication of the stress test results in July 2011 (see EUROPE 10420). Although tougher than in 2010, the 2011 stress tests did nothing to reassure the markets, which were unhappy that the tests did not look at the dangers of a country defaulting on its debt.
Banks have been increasing their capital since the financial crisis of 2008, but the process will be speeded up. The European Commission says that too-big-to-fails should have core capital (business capital plus profits in reserve) of 9% of total assets. Baroin described 9% as acceptable, adding that the recapitalisation process should initially focus on the eight banks that failed the tests and the sixteen that scraped through.
The said banks have until next week to submit recapitalisation plans to the EBA, which should focus on raising capital on the money markets. Where necessary, banks will be able to request public aid in the form of guarantees, golden shares or public bailouts. The EFSF may now be used to help countries bail out their banks, but it will only be considered as a last resort. Concerned to preserve its AAA rating, France would like to use EFSF cash to bail out struggling French banks but Germany, the biggest contributor to the fund, is not happy about bailing out other countries' banks.
Governance. The eurozone summit on Sunday will lay the foundations for greater integration of management of the single currency and the Commission has already announced legal measures based on Article 136 of the EU treaty to allow Europe to intervene in member states' legislative processes by requiring changes to budget plans (see EUROPE 10472). (MB/transl.fl)