Brussels, 21/10/2011 (Agence Europe) - The final decisions about the eurozone debt crisis that were expected on Sunday 23 October have now been postponed until Wednesday 26 October as talks continue on strengthening the EFSF bailout fund and the fact-finders' report on the financial and budget situation in Greece has not yet been supplied. The German Chancellor, Angela Merkel, has to get a negotiating mandate from the Bundestag before making any final decision. The fact that one member state, albeit the richest one, can dictate the timing of meetings for all the rest and does so with an eye on purely domestic considerations is deeply embarassing. The summits programmed for Sunday will go ahead in order to decide on the amount of cash to be injected into Europe's banks, a decision to be taken collectively by all 27 member states, so that the financial markets have time to digest the decision before trading opens on Monday. Europe must have a solution for the G20 summit in Cannes, France, on 3-4 November.
Greece. Despite public hostility, the socialist majority at the Greek parliament voted through yet more austerity measures on Thursday evening with a view to meeting the 2012 deficit reduction target (6.8%). It will not be possible to meet the 2011 target of 7.5% (8.5% being a more realistic figure). The new measures should facilitate the granting of the next installment of aid from the first Greek bailout (€8 billion). The fact-finding report on Greece published by the European Commission, the ECB and the IMF has been submitted to eurozone finance ministers, reporting on the colossal structural adjustment measures introduced in the country since May 2010 (cutting the deficit by a massive 7%), but it is proving difficult to meet the budget targets because the recession is biting deeper than forecast (-5.5% in 2011 rather than the initially expected 3.8%). The Eurogroup is already calling for further measures in 2013 and 2014. The report lists delays in the introduction of structural measures like reform of the civil service and a privatisation programme due to net €50bn by 2015. The IMF is said to have disagreed with the other fact-finders about the sustainability of Greece's debt , which is around 160% of GDP this year (€350bn).
Private sector involvement. Along with a slump in the value of Greek bonds, the broader situation has forced the eurozone nations to change the modalities of the second Greek bailout programme, drafted in July 2011, which foresees public aid of €110bn and “voluntary” private sector contributions totalling €37bn in 2011-2014, along with a debt buy-back programme of €12.6bn. In July, Greek bonds were expected to be reduced in value by 21%, but that figure is now unrealistic and negotiators are working on a 30% to 50% writedown. Germany wants the highest write-down possible, but France and the ECB fear that this would encourage the private sector to withdraw and lead to a rout, with Greece defaulting on its debt. At the IIF, the international banking lobby opposes any re-negotiation of the deal reached earlier this year.
Recapitalisation. The recapitalisation of Europe's banks needs to be decided by all 27 member states in common. It is connected with the cost of private sector involvement in the second Greek bailout, of course, along with the write-downs in the value of sovereign debt since the publication of the European bank stress test results in July (see EUROPE 10420). The tests were slammed for not covering the eventuality of a eurozone country going bankrupt and did nothing to prevent Dexia from going under (the bank sailed through the tests). The European Banking Authority has submitted updated details to finance ministers of exposure to sovereign debt at the continent's 50 biggest banks, deemed to be too-big-to-fail. Europe is considering forcing the 50 banks to take out core own capital of 9% of assets (2% more than considered in the stress tests) once the write-down of the face value of bonds has been incorporated. The devil is in the detail, however, and there is disagreement about how to deal with the bonds on the balance sheet. It is estimated that between €80bn and €100bn will be needed, but the IMF says €200bn is more realistic. The deadline (the summer of 2012 or 2013 is being talked about) has to be both firm and credible. Banks are very unhappy about this process. They will be required to raise cash from the money markets before making any call for public handouts. As a last resort, they will be able to apply for cash from the EFSF bailout fund.
EFSF. In order to prevent any further spread of the crisis, the eurozone nations are examining ways of strengthening the EFSF bailout fund (see EUROPE 10478). They are delighted that the somersaults by Slovakia made it possible to ratify the 21 July 2011 eurozone summit decisions so the EFSF is now able to buy up debt directly from struggling countries or on the secondary markets. It can also provide aid to countries not undergoing a structural adjustment programme (like France) to help them bail out their banks. The rates for such loans have been reduced, and the maturity extended to within 15 and 30 years.
Even though extended, the European backstops seem to be vulnerable and under pressure from their international partners, the eurozone nations are seeking ways to increase the EFSF's clout by doubling or quadrupling the current lending capacity of €440bn by means of leverage. Careful to avoid commenting on the mechanics, the United Kingdom is calling for the greatest lending capacity possible. The two biggest eurozone economies, France and Germany, disagree on the details. France wants the EFSF to be able to use ECB cash, but this is not allowed under the EU treaty. Germany wants the EFSF to provide guarantees for a portion of struggling countries' bonds (10% to 20%), but this is disputed by Italy and Spain, which fear that the insurance system would lead to higher interest rates being charged for rolling over their own debt and a two-tier system of bonds emerging. Increased money from the IMF is also under study.
Italy. The EU will examine ways of kickstarting economic growth. According to a draft conclusions document seen by this newsletter, adding to the single market and cutting red tape have been put forward. There will be special paragraphs in the document on countries receiving financial aid or at risk of spread of the crisis. The summit will take note of efforts to meet the budget targets and is expected to urge the member states in question to take further measures as necessary. An ambassador commented that Italy is clearly under pressure. EU Economic and Monetary Affairs Commissioner Olli Rehn explained to French newspaper Les Echos that Italy's aim of achieving a balanced budget in 2013 was good but it is not yet fully clear how it would be achieved. Italy's debt rollover costs are reaching new highs and the country might be demanded to publish draft legislation very quickly to kick-start the economy.
Economic governance. Europe will discuss how to change the economic governance of the eurozone, based on proposals to be submitted by the President of the European Council, Herman Van Rompuy. France and Germany suggest that Van Rompuy should chair the regular eurozone summit meetings. The Netherlands wants the Commission to be given powers to scrutinise countries' budgets and the Commission has already unveiled draft legislation to this effect (see EUROPE 10472). The Hague says that countries that keep breaking the rules might be forced out of the eurozone. The Commission will publish a report later this year on the feasibility of eurobonds.
Deciding on the framework for talks about reforming economic governance will indicate whether the EU treaties will have to change. Countries not in the euro are not very pleased at the idea of changes to the treaties. If the extension of economic governance covers tax harmonisation, then the United Kingdom is expected to react sharply. The countries of Central and Eastern Europe, which will join the euro at some point, fear the creation of a two-speed Europe and being forced to abide by rules that they were not able to influence. Over lunch on Sunday, the European Council is expected to dissipate these fears, expressed by the Polish Presidency. (MB/transl.fl)