Brussels, 27/10/2011 (Agence Europe) - Meeting for the second time in four days, the heads of state of hte eurozone managed to reach agreement in the early hours of Thursday 27 October 2011 on a broad programme to deal with the sovereign debt crisis. They were able to persuade get private investors to agree to a 50% writedown in their Greek bond portfolios and promised to increase the lending capacity of the EFSF bailout fund to a trillion euros. They also decided on a process of recapitalising major European banks, which they say will cost around €105 billion.
The President of the European Council, Herman Van Rompuy, explained that the new deal included finalising by the end of 2011 the details of the second Greek bailout, worth €100 bn, including a voluntary private sector contribution in the form of a 50% writedown in the face value of Greek bonds in order to reduce the country's debt to 120% of GDP by 2020; building a strong backstop to prevent the crisis spreading; increasing the clout of the EFSF bailout fund five-fold to a trillion euros; and strengthening major European banks by forcing them to have at least 9% core capital.
In addition to the above, the three eurozone countries receiving aid (Greece, Ireland and Portugal) are required to introduce further austerity measures, along with Italy and Spain (see separate heading). Van Rompuy said that no Member State should underestimate how its own debt or property bubble affected the other Member States and that peer pressure was now proving effective. The Spanish prime minister, José Luis Rodríguez Zapatero, pointed out that one paragraph of the conclusions document was on Spain and stated that the country had already managed to cut its public debt and modernise its economy. The eurozone is calling on Madrid to make extra effort to reduce its unacceptably high levels of unemployment.
Now the deal has finally been agreed, Europe hopes to cut a dash at the G20 Summit in Cannes, France, on 3 and 4 November. The President of the European Commission, José Manuel Barroso, said that Europe would show its G20 partners next week that it is capable perfectly of dealing with the crisis, The French President, Nicolas Sarkozy, said he believed the results of the Wednesday eurozone summit would be greeted by the whole world with a sigh of relief because the eurozone had been expected to come up with strong answers. The Greek prime minmister, George Papandreou, said that a new day had begun for Greece and he hoped it would also be a new day for Europe, and hoped that the worst was now over. He added that the end of international surveillance of Greece would be achieved by hard work, not by shouting and yelling.
Greece. The toughest talks at the summit were on the scale of the writedown in the nominal value of Greek bonds for the private sector. The eurozone nations managed to force private sector investors to agree to a 50% writedown in their bond portfolio, which will reduce the Greek debt to 120% of GDP by 2020. The writedown had been recommended by the fact-finders of the European Commission, the ECB and the IMF in their latest report on the sustainability of the Greek debt. The financial sector fought hard, represented by the International Institute of Finance (IIF) lobby group, refusing to agree to any more than a 40% writedown but as the talks were in deadlock on Thurrsday, the financial industry only agreed to 50% when Sarkozy and Merkel turned up and threatened to allow Greece to default on its debt.
Sarkozy was cautiously optimistic that all private investors would agree to contribute to the second Greek bailout. In exchange for private investors accepting a €100 bn writedown in the value of their bonds, the public authorities have agreed to provide €30 bn in guarantees to avoid a partial default turning into a credit event, said Sarkozy. The German Chancellor, Angela Merkel, said that Greece's sovereignty can only be restored if the private sector participates and in comparison with July 2011, great progress had been made. Along with private sector involvement, public aid will be provided in the region of €100 bn. Application of the second bailout would be even more closely monitored than the first, with the creditors senidng a permanent group of experts to Athens to follow progress.
A much higher contribution was requested of the private sector than the 21% writedown agreed in the eurozone summit deal of 21 July 2011 (see EUROPE 10424) because the economic recession in Greece is worse than expected (with a 5% shrinkage of its GDP), which has prevented the government from getting the debt under control. It now stands at €350 billion or 160% of GDP. This is a dangerous game because the writedown of Greek bonds must cut the burden for the country while remaining voluntary (not putting private investors off investing in the country) because otherwise it would be a default by another name, which would have unforseen consequences for the Greek, European and world economies. The eurozone says that Greece must remain a one-off situation.
EFSF. Under pressure from their international partners, the EU17 decided to increase the clout of the EFSF bailout fund to prevent any spread of the sovereign debt crisis. Without extending the guarantees underpinning the EFSF, leverage will be introduced to increase capacity to a trillion euros from the current €440 bn. The EFSF will be able to act as a guarantor for some of the bonds of struggling eurozone countries and may join any new funding vehicles set up by the IMF to leverage further public and private finance. The last two options may be usedin tandem. Will the Chinese be allowed to invest in the EFSF? The answer to that will come in the spring, said Sarkozy.
Germany flatly rejected France's idea (backed by Italy) of allowing the EFSF to access the massive ECB coffers. Germany argued that this would run counter to the EU treaties and damage the ECB's independence by amounting to a monetarising of European debt. Asked about the ECB's role, Van Rompuy said that the EU fully respected the ECB's independence and would take note of comments by the ECB that it will continue to intervene until the new EFSF has been put in place, refering to statements made by Mario Draghi, who will become the head of the ECB in November, that the ECB was prepared to continue with its special measures to buy up sovereign debt as required. Since May 2010, the ECB has bought €170 billion in struggling eurozone countries' bonds. Sarkozy said that these decisions were a major breakthrough for introducing powerful backstops to prevent the crisis spreading to other countries in the eruozone and he was sure that the ECB was determined to avoid any breakdown in the financial markets, as Draghi had clearly stated.
The eurozone is delighted that the ratification of the changes to the EFSF is now complete, thanks to political manoeuvering and horsetrading in Slovakia. The EFSF is now authorised to grant loans at close to the market rate and lengthy maturity (between 15 and 30 years) and can buy up bonds from the countries in question or from the secondary markets. Italian bonds may soon be purchased in order to reduce the cost of rolling over its debt, which has recently reached record highs, which is why Italian prime minister Silvio Berlusconi has been coming under such huge pressure from the eurozone to announce austerity measures and reduce the country's debt (see below).
Bank recapitalisation. Poland prime minister Donald Tusk said that the ministers had ageed on a recapitalisation of Europe's banks. The eurozone leaders agreed on a faster increase in bank funding for multinational European banks, an agreement initialled out by eurozone finance minsiters last Saturday (see EUROPE 10480). Van Rompuy said the aim was to inspire confidence in Europe's banking industry.
The European Council says that guarantees of bank assets are needed to help banks raise capital and short-term captial may be provided by the ECB and central banks. The Commission is asked to examine options for raeching a truly coordinated approach to eligibility criteria, pricing and conditions for the introduction of 'liquidity systems'.
The EU requires the banks in question to set up temporary buffers to cope with financial turbulence, particularly problems arising from any deterioration in the sovrereign debt market. Banks will be required to increase their core Tier 1 capital to 9% by the end of June 2012 after accounting for market valuation of their sovereign debt exposure as at 30 September 2011. The European Banking Authority (EBA) must ensure that the banks' plans do not lead to excess deleveraging or a credit crunch in the real economy.
The European Council's conclusions document does not say how much extra capital will be required by the banks, but the EBA says that €105 billion should suffice, divided up as follows: €30 bn for Greece, €26 bn for Spain, €14.8 bn for Italy, €8.8 bn for France, €7.8 bn for Portugal, €5.2 bn for Germany, €4.1 bn for Belgium, €3.6 bn for Cyprus, €2.9 bn for Austria, €1.4 for Sweden and €297 million for Slovenia. No extra capital is required for the banks of Hungary, Ireland, Finland, Luxembourg, Malta, the United Kingdom and the Netherlands. Papandreou said that some Greek banks would be nationalised for a period of time and then sold back to the private sector.
'Banks should first use private sources of capital, including through restructuring and conversion of debt to equity instruments. Banks should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained. If necessary, national governments should provide support , and if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of eurozone countries,' state the EU heads of state. Van Rompuy said aid must always meet EU state aid rule.
On several occasions, Polish finance minister Jacek Rostowski said the bank recapitalisation, covering Poland's PKO, was an isolated incident that would not be repeated in the future. The bank recapitalisation agreement will only come into force if an overall debt crisis-response package is agreed upon because the actual amount of extra cash required by the banks will depend on how much money they lose from the Greek bond writedowns.
Economic governance. Van Rompuy said that there had been agreement on a dozen or so measures to boost economic governance, and Zapatero said they had agreed on practical measures to boost the coordination of economic policies. Merkel said the eurozone nations must introduce a 'Golden Rule' into their constitutions to prevent the state getting into excess debt and said that the EU treaties would need to change to increase budget orthodoxy. Sarkozy said that all eurozone nations must introduce the Golden Rule by the end of next year, preferably adding it to their constitutions. Eurozone summits will be held twice a year from now on. (MB and CG/MD/LC/DD/JK/FG/transl.fl)