Brussels, 25/10/2011 (Agence Europe) - European leaders will meet this Wednesday 26 October to finalise their comprehensive response to the sovereign debt crisis. The response will take in things like building up the bail-out fund in order to prevent contagion spreading to Italy or Spain, the extent of private sector input in the second Greek bailout, the EFSF, and the additional level of recapitalisation of the banking sector exposed to the sovereign debt of countries in difficulty. The decision, on Tuesday 25 October, by the Polish Presidency of the Council of the EU to cancel a meeting of the Ecofin Council that was supposed to take place before the two European summits on Wednesday gives a clear indication of how difficult it is to overcome all the obstacles.
This unheard-of sequence of events, with two European summits, the first of all 27 member states followed by a meeting of the 17 eurozone countries, has come about principally because of domestic German political issues. Chancellor Angela Merkel must get a mandate from the lower House, the Bundestag, before taking part in the final negotiations in Brussels. The Bundestag, and not its budget committee as initially announced, will meet in plenary session and deliver its verdict on Wednesday. Just as with a previous vote at the end of September on giving the EFSF greater clout and flexibility (see EUROPE 10463), the German government will have somehow to find a majority despite the opposition of some 15 coalition MPs, the German Left being more favourable to the idea of Germany's going the extra mile in a display of solidarity. This timetable, even when imposed by the continent's most powerful country, is a source of annoyance in the Council.
Italy. With each new step taken in the response to the debt crisis, the solidarity demanded remains conditional and is accompanied by detailed demands on the countries in difficulty. The hypothesis on EFSF intervention to buy up Italian bonds would go some way to explaining the strong pressure on the Italian authorities to set out in detail the measures aimed at balancing public finances from 2013 and boosting growth (see EUROPE 10480).
The Lega Nord, a key ally of the Berlusconi government, has vetoed any increase in retirement age. “If we touch pensions, the people will kill us!” stated its leader Umberto Bossi, who is prepared to see the government fall over this issue. The Italian authorities were still trying on Tuesday to reassure the EU through a letter expected in Brussels by Wednesday at the latest. They are also considering reform of the labour market and liberalising rail transport, local public services and the professions.
On Monday evening, Berlusconi reacted strongly to the ironic smirks of the Franco-German couple at the weekend over the situation in which Italy finds itself. “Nobody in the EU can declare themselves up as a commissioner and speak on behalf of elected governments”, he said. He promised that, on Wednesday, he would set out his country's “firm positions” on the crisis in the “mainly Franco-German” banking system.
The Commission's request is not a “humiliation” but from now on people will have “to get used to increased peer supervision” within the framework of the reformed stability and growth pact, the spokesman for Economic Affairs Commissioner Olli Rehn said on Tuesday 25 October. Contrary to what is being insinuated in the media, no one is being put under guardianship. Nevertheless, what is happening in Italy has an impact in the eurozone and the financial markets are waiting for answers, he added, stressing the “growth” strand of any strategy.
EFSF. Under pressure from its international partners, the EU has acknowledged the need to build up the bailout fund to prevent the spread of any contagion. It is hoping to leverage at least a doubling of the lending capacity of the EFSF, currently set at €440 billion, without having to touch national guarantees.
Two options are on the table, European Parliament President Jerzy Buzek confirmed on Tuesday (see related article). These are: - the creation of a guarantee mechanism for part of the sovereign debt bonds of countries with fragile economies; - and the creation of specific instruments, potentially under the aegis of the International Monetary Fund, in order to attract investors from non-European countries.
Faced with growth that is weaker than predicted, France fears for its AAA credit rating given its involvement in the bailout of countries in difficulty. A downgrading of France's rating would have an adverse effect on the functioning of established mechanisms. Paris has called - in vain - for the EFSF to be granted unlimited access to liquidities of the European Central Bank. Germany, which is very keen on maintaining the ECB's independence, is opposed to this. Since May 2010 and the first Greek rescue package, the ECB has, however, acquired nearly €170 billion in sovereign debt bonds from countries in difficulty.
Greece. European leaders will, on Wednesday, unveil the amount of the “haircut” on Greek securities as part of the country's second bailout. This private sector participation could amount to up to 60% of the face value of securities, as Germany advocates, The Financial Times reports.
The exercise is a perilous one. In July, Europeans agreed on arrangements for a second Greek bailout - €109 billion in public aid, and €37 billion linked to a private sector contribution (i.e. a 21% haircut on the net value of Greek bonds). This private sector contribution is proving to be insufficient to put Greek indebtedness, which now exceeds 160% of national GDP, back on a sustainable course. The difficulty lies in the fact that it is necessary to operate a sufficiently large discount on par value to ease Greece's debt burden while maintaining the “voluntary” nature of private sector participation in order to prevent Greek default. Bankruptcy in Athens would have unforeseeable consequences on the stability of the Greek, not to mention European, banking sector. The stock exchange value of Greek banks has plummeted since the beginning of the week. Europeans must also seek to convince that the Greek case will remain an isolated case and will not concern other eurozone countries, with Ireland and Portugal taking pride of place.
Charles Dallara, the private sector negotiator, warned that there were “limits” to what could be considered as voluntary participation. The private sector is said to agree to a 40% haircut on the net value of Greek bonds.
Recapitalisation. The EU27 heads of state and/or government will announce the magnitude of the heightened recapitalisation effort to be imposed for the European banking sector. In 2012, banks are expected to increase to 9% the level of their core capital after updating the value of the sovereign bonds they hold. Lengthy debates have been held on the methods behind putting a value on sovereign debt. Using market value would tend to give advantage to the credit establishments holding mainly securities from countries with the soundest economies. The overall recapitalisation amount is said to be around €110 billion. Banks should first of all raise capital on the markets, and may, if necessary, call on participation from national public bodies. The EFSF would only be used as a last resort measure. The governor of Banque de France, Christian Noyer, has indicated that French banks, which are the most exposed to the Greek debt, will require €10 billion, an amount that he finds “may be fully absorbed by the banks themselves”. A 50% haircut on Greek sovereign debt bonds would have an impact of €1.7 billion on BNP Paribas. (MB/DD/transl.rt/jl)