Brussels, 23/10/2011 (Agence Europe) - Throughout the weekend, European leaders made headway in their work aimed at reaching a solution to the sovereign debt crisis once and for all. At finance minister level, they reached an agreement, on Saturday, on making a greater effort to inject new capital into the banking system, amounting to around €110 billion by 2012. The soundness of the banking sector is one of the elements of the answer now taking shape and that will be revealed on Wednesday 26 October after two new summits, one with all 27 members of the EU, the other with the 17 eurozone leaders.
Speaking during a joint press conference with French President Nicolas Sarkozy, German Chancellor Angela Merkel said the “euro is our common currency - it is our prosperity”. “It is pointless to just recapitalise the banks. A long-term, realistic solution is needed for Greece. All these points are connected”. Banking recapitalisation, the Greek debt, the optimisation of European hedge funds, these are three parts of one and the same comprehensive package intended to reassure the rest of the world that the EU is resolved to protect eurozone stability, said European Council President Herman Van Rompuy, adding that a comprehensive agreement will be unveiled on Wednesday. In order to achieve this, it is “necessary but not sufficient” to reach an agreement between Paris and Berlin.
Nicolas Sarkozy said: “Work on the banks, on the European Financial Stability Facility (EFSF) and the possibilities of using that fund, is moving forward well. The gap between propositions is narrowing and quite broad agreement is taking shape. On the question of Greece, things are moving forward also”. He went on to underline that “We have to manage the consequences of those who brought a number of countries into the eurozone before they were ready and who relaxed Stability and Growth Pact discipline”. Poland's Prime Minister Donald Tusk said he had the “feeling that the eurozone crisis has reached a worrying pace and dimensions, which will require the corresponding amount of tempo for action on the part of the EU”. The crisis is extremely worrying for both the eurozone and the United Kingdom, his British counterpart, David Cameron, deplored, adding that the UK does not intend to adopt the euro but does need a sound and healthy eurozone.
Banking recapitalisation. The financial upheavals observed since the previous eurozone summit have worsened the situation on the debt markets of countries in difficulty. As an indirect result of this, debtors greatly exposed to public indebtedness have seen their financial situation grow still more fragile. The most emblematic case concerns the plummeting of French bank values on the stock exchange, as they are exposed to the Greek and Italian debts. Under international pressure from the IMF and the United States in particular, Europeans have finally recognised the need to increase efforts already made for injecting fresh capital into the banking sector.
Herman Van Rompuy was clear about the fact that “a coordinated regime” is needed for recapitalisation of banks. The EU27 welcome the progress made by all 27 at the Ecofin Council with a view to enhancing the solidity of the 50 or so European banks of systemic importance. They take the view that the measures will form an essential component of the comprehensive package, the other elements of which will be the subject of an agreement during the eurozone summit on 26 October. “These decisions will only make sense in the context of other decisions that must be adopted partly during the eurozone summit”, said Poland's Finance Minister Jacek Rostowski. In his view, all these decisions should set up a “fire screen that should prevent the virus spreading from Greece to the other states”.
After 10 hours of intense negotiation, finance ministers reached agreement on arrangements for two possibilities to meet any unforeseen circumstances: - 1) banks must have a minimum of 9% capital relative to their risk-weighted assets at market value; and 2) banks must have 9.5% in reserve to meet contingencies. The countries in southern Europe have criticised this method which, schematically, would tend to privilege the banks of northern countries, which are the main holders of German debt instruments.
Angela Merkel confirmed that the procedure for recapitalisation will follow the following sequence: - banks concerned should first of all raise funds on the markets or sell assets. If necessary, they may call on national public funding. As a last resort, subject to conditions, the European bailout fund will come into play. “Savers must not lose money, bank customers must have confidence in the banks, and the economy must have the credit needed to function and get back on the road to growth”, Sarkozy said on the banking issue. “We shall anticipate prudential banking rules so that, as of 21012, they may be applied to our banks”, he added. Recalling that banking recapitalisation concerns “all 27 member states”, Cameron said further progress was still needed.
Greece. During the night of Friday to Saturday, the Eurogroup assessed reports on Greece's economic and budgetary situation and on the sustainability of its public debt that the “troika” (European Commission, IMF and ECB) developed as part of its monitoring mission in Athens. In a press release, eurozone finance ministers state their agreement to pay out the next bailout instalment for Greece. Payment should take place during the first half of November, subject to IMF approval. “Today's decision by the Eurogroup on the Greek Economic Adjustment Programme and the disbursement of the sixth tranche is a positive step that follows yesterday's approval by the Greek Government of the new bill, which guarantees the fiscal targets for 2012 and provides the basis for the necessary structural reforms”, said Greek Finance Minister Evangelos Venizélos. In his view, these measures are the basis for finalising the Greek Economic Adjustment Programme, which will ensure long-term viability of the Greek debt.
Nonetheless, although Greece's effort to improve its financial situation is “substantial” (7% since May 2010), Eurogroup notes that the challenges that Greeks must continue to confront remain “extensive”. The macro-economic situation has “deteriorated since the last evaluation mission (5.5% recession in 2011). Ministers call on the Greek authorities to make further progress in structural reforms and privatisation. Implementation of these two chapters of the Greek programme have incurred some delay, a situation that is received with irritation on the part of international fund donors. The Eurogroup went on to conclude by confirming that a second rescue package will come about with an appropriate combination of additional public support and private sector participation.
PSI. The serious recession in Greece, together with a further fall in the value of Greek bonds, has compelled the 17 eurozone countries to revise the terms and conditions of the 2nd Greek bailout plan set up in July (see EUROPE 10424), which provided for public aid (€110 billion), and clear and “voluntary” participation from the private sector (€37 billion) over the period 2011-2014. Estimated at 21% in July, the “haircut” operated on Greek bonds will this time be greater, with the figure of 50% on the rails. According to the troika, a 50% haircut on Greek bonds is needed to bring the Greek debt back to 120% of national GDP. Evaluated at over €350 billion, the country's indebtedness has this year exceeded 160% of GDP. Putting the Greek debt back on a sustainable track is a perilous exercise in so far as the contribution of the private sector must remain voluntary in order to prevent Greek default.
Angela Merkel said negotiations with the bank have just begun. Negotiation is underway to achieve a sound result that will show that the situation of Greece is healthy in the long-term, she added.
EFSF. In order to avoid a debt crisis domino effect within the countries of the eurozone, the 17 are discussing how to give the European bail-out fund the greatest possible clout, without increasing the level of their national guarantees. The intergovernmental EFSF, which has already been used to help Ireland and Portugal, has an effective lending capacity of €440 billion. It is now able, unconditionally, to buy up debt holdings directly from issuing countries and on secondary markets. It can also help countries, which are not part of an international programme, stabilise their banking systems. The facility is not big enough to bail out Italy or Spain, however.
“Seven options” were on the table, said Austrian Finance Minister Maria Fekter on Saturday. “Two models” are now under consideration: “neither of these two models includes the European Central Bank”, she stated. France has abandoned the idea of a link between the EFSF and the ECB which would allow the facility unlimited access to the Bank's liquidity. Germany is against this option which, it believes, infringes the treaty which enshrines the independence of the Bank. It wants the European facility to provide guarantees on part of the riskiest sovereign bonds.
Increased involvement of the International Monetary fund (IMF) is also under consideration. According to French daily Les Echos, a separate entity, created under the aegis of the IMF and funded by willing states, would support the EFSF in its efforts to stabilise the eurozone. In the section of their conclusions on the G20 summit in Cannes in 10 days time, EU member states state that the G20 should ensure that the IMF has “adequate resources to fulfil its systemic responsibilities” and should explore possible contributions to the IMF from countries with large external surpluses. When asked about the possibility of aid from emerging countries, Barroso made specific reference to this sentence.
Growth strategy. Bogged down by sovereign debt, Europe needs growth to prove to investors that it has the wherewithal to address its budgetary challenges. Most concerned are the countries, like Italy, which are not competitive and which have seen the cost of refinancing their debt increase. The EU is putting clear pressure on Italy to speed up implementation of its austerity programme and structural reform of the country's economy (see related article).
“Stimulating growth is crucial”, stated Van Rompuy. German Chancellor Angela Merkel said that “the stability of the euro is closely linked with the way encourages growth and jobs”. Sarkozy said that Ireland, which was on the verge of bankruptcy in 2008, was a country gradually moving out of crisis. Thanks to the efforts of the Portuguese government, things were moving in the right direction in Portugal, he stated. Spain, he suggested, was no longer in the firing line, thanks to the efforts of Zapatero's government. Cameron stressed the need for forthcoming decisions on increasing economic convergence to be taken by all the countries of the single market.
Barroso set out the Commission's vision for member states on “European sources of growth”, first among which is completion of the internal market. “We can and must do more. Otherwise, we are in danger of becoming less competitive”, he stated, giving warning against “a lost decade” in Europe. The Commission recommends making full use of the potential of the digital single market and international trade, helping small businesses by means of venture capital and deriving the full benefit of the contribution of European structural funds. Between now and the December Council, it will bring forward a list of proposals to be dealt with speedily. (MB/LC/CG/AN/JK/MD/transk.jl/rt)