EUROPEAN leaders agreed yesterday to force banks to raise more capital by June next year, to protect against losses from any Greek debt restructuring and to try to contain the region’s financial crisis.
A draft statement from an emergency summit, obtained by Reuters, said two options were being considered to leverage the €440 billion fund designed to shore up heavily indebted states.
An EU source told Reuters the stability fund was expected to be leveraged by something like a factor of four giving it scope of around €1 trillion. Other sources said banks were expected to be told to increase capital by between €100 billion and €110 billion.
If the draft is adopted with little change, the second euro zone summit in four days will have sketched broad intentions but failed to produce a detailed masterplan to scale up the fund, recapitalise banks and reduce Greek debt to a sustainable level, despite Franco-German assurances a “comprehensive solution” would be found.
British Prime Minister David Cameron said last night “some good progress” had been made by the EU leaders at the emergency summit towards agreeing a package of measure to resolve Europe’s debt crisis.
Emerging from the meeting – which was to be followed by talks between countries who use the single currency – Cameron said particular progress had been made on the moves to recapitalise banks which had “not been watered down” and was now agreed as part of a three-pronged strategy. “We have made some good progress tonight,” he said.
With the departure of the 10 non-eurozone leaders, the remaining 17 were settling in for a night of negotiations on the complex financial mechanism which will be needed to reach the target figures the EU hopes will calm market fears that not enough is being done to solve the crisis.
Earlier, German Chancellor Angela Merkel branded the crisis the continent’s worst since the Second World War.
Ahead of the summit, Merkel raised the stakes by warning that peace in Europe could not be taken for granted. Speaking to the Bundestag, she said: “No-one should take it for granted that there will be peace and affluence in Europe in the next half-century. The world is watching Germany and Europe to see if we are ready and able to take responsibility. If the euro fails, Europe fails.”
The problem with the recapitalisation figure is that experts are already estimating that it is not enough. They say half as much again will be required to shore up banks sufficiently to satisfy markets.
The deal on recapitalisation remains subject to final agreement on the other two parts of the economic package being thrashed out – a much bigger bailout fund for the eurozone and a writing-off.
A statement from the EU leaders’ meeting said national supervisory authorities must ensure banks do not “excessively” shrink their loan books to meet tougher capital rules, so as not to freeze lending and push an already weak European economy into a deep recession.
Polish Finance Minister Jacek Rostowski said the plan would only work if euro zone leaders agreed on a reduction in Greek debt and to increase the firepower of the euro zone’s EFSF bailout fund to convince investors that Spain and Italy had the backing they need to refinance their debts.
“Bank recapitalisation without the remaining elements, such as the so-called firewall… wouldn’t have any chance of success,” he told the news conference.
Euro zone leaders intend to multiply the capacity of their rescue fund around fourfold to one trillion euros but details of how they plan to draw a line under Europe’s worsening debt crisis will not be nailed until next month, sources said.
One proposal involves creating a special purpose investment vehicle (SPIV) to tap foreign sovereign and private investors, such as Chinese and Middle Eastern wealth funds, to buy bonds of troubled euro zone countries.
The other method for scaling up the European Financial Stability Facility involves using it to offer partial guarantees to purchasers of new euro zone debt. The two options could be used simultaneously and the International Monetary Fund could also help.
Euro zone finance ministers will be asked to finalise the terms and conditions in November, the statement said.
“It’s moving in the right direction but it is going to disappoint the market, particularly given the emphasis policy makers put on this meeting,” said Jessica Hoversen, foreign exchange analyst at MF Global in New York.
Aside from the EFSF, specifics of a Greek debt write-down may also be left for later negotiation among finance ministers.
While there is consensus on the need for European banks to raise around €110 billion in extra capital to withstand a potential Greek debt default and wider financial contagion, governments and banks are still haggling over the scale of write-offs private bondholders will have to take on their Greek debt holdings, sources said.
“There will be give and take with the banks until the last minute,” a Greek government source involved in the Brussels negotiations said. “As far as now, the talks are going on.”
European leaders’ pattern of responding too little, too late has spawned a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.
Mario Draghi, the incoming head of the European Central Bank threw the euro zone a lifeline hours before the summit, signalling the ECB would go on buying troubled states’ bonds as leaders of the 17-nation single currency area struggled to agree a convincing set of measures.
“The Eurosystem (of central banks) is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission,” he said in typically coded ECB language in a speech text released in Rome.
Draghi, who will succeed Jean-Claude Trichet on November 1, made clear that measures could only be a temporary expedient and said it was up to governments to tackle the roots of the debt crisis that began in Greece two years ago.
However, his statement appeared to rebuff pressure from Germany’s powerful Bundesbank for the ECB to end the bond-buying programme which prompted the resignation of the two most senior German ECB policymakers this year.
It also appeared to supersede a dispute between Germany and France over how the ECB, the ultimate defender of the euro, should be involved in trying to resolve the crisis.
And a decision is still awaited on a demand that private investors – mainly banks – absorb at least a 50 per cent write-off of their loans to Greece. A consortium of global banks has so far suggested 40 per cent, but that has been rejected.
Meanwhile, the spectre of a debt-laden Italy was hanging over the talks, with Prime Minister Silvio Berlusconi facing demands to act on austerity measures in return for financial aid.
The fear is that a Greek-style crisis in Italy will be totally unaffordable for Europe, and make the scale of financial support for Athens look like pocket money.
Under huge pressure from its euro zone partners, Rome promised a package of reform steps to boost growth and control its public debt, including labour and pensions reforms and additional revenues from property divestments.
In a letter sent to the summit in Brussels, the government said it would produce a plan of action to boost growth by Nov. 15, promising to raise the retirement age to 67, cut red tape and modernise state administration to improve conditions for business and raise 5 billion euros a year from divestments and improved returns from state property.
Rome’s inability to deliver a substantive plan for reforming its pensions system has raised doubts about Prime Minister Silvio Berlusconi’s seriousness in tackling a crisis that threatens the euro zone’s third largest economy.
Italy has the euro zone’s largest sovereign bond market, with a public debt of 1.8 trill
ion euros, 120 per cent of GDP. If it went the same way as Greece, Ireland and Portugal, the rescue fund does not have enough money to bail Rome out.
