Merkel, Sarkozy see progress on debt woes – EU looks to recapitalize banks. PM: “The crisis is not a Greek but a European one”.
Frankfurt (MarketWatch) — German Chancellor Angela Merkel and French President Nicolas Sarkozy presented a united front Sunday, telling reporters that European leaders remained on track for a Wednesday agreement on solutions to the euro zone’s long-running debt crisis, but providing little evidence of a breakthrough. “We will see to it that the decisions to be taken may be taken on Wednesday,” Merkel said in a joint news conference with Sarkozy following a meeting of all 27 European Union leaders in Brussels.
Sarkozy held out hope for agreement on recapitalizing banks, addressing Greece’s worsening financial situation and moves to leverage the European Financial Stability Facility to provide more firepower in the effort to contain the crisis. Merkel said discussions on leveraging the EFSF centered on two options but don’t involve utilizing the European Central Bank. Sarkozy, who had reportedly pushed for ECB involvement, said France respects the central bank’s independence and that any solution must be supported by all euro-zone institutions. Germany and the ECB have opposed leveraging the EFSF through the central bank.
European Council president Herman van Rompuy on Sunday expressed optimism that a “comprehensive package” for a viable solution to the Greek debt, recapitalisation of vulnerable European banks, boosting the European Fiscal Stability Facility (EFSF) and enhancement of economic governance will be agreed at another summit on Wednesday.
Speaking in Brussels after a summit meeting of the 27-member European Union, Rompuy said that “satisfactory progress” had been made Sunday regarding the recapitalisation of banks, which is expected to be finalised on Wednesday, when another, extraordinary, EU summit has been called at 7:00 p.m. (Greek time), ahead of a follow-up eurozone summit of the 17 euro area member countries.
On economic governance, Rompuy said the 27 leaders agreed Sunday to examine the prospects for a “limited” change to the treaties and that the matter will be taken up again at the EU summit in December.
Leaders of the 17 euro-zone nations were set to continue meeting Sunday evening. A second summit is scheduled for Wednesday
PRESSURE ON ITALY
European Union leaders piled pressure on Italy on Sunday to speed up economic reforms to avoid a Greece-style meltdown as they began a crucial two-leg summit called to rescue the euro zone from a deepening sovereign debt crisis.
The aim is to agree by Wednesday on reducing Greece’s debt burden, strengthening European banks, improving euro area economic governance and maximizing the firepower of the EFSF rescue fund to stop contagion engulfing bigger states.
The euro zone’s two main powers, Germany and France, remain at odds over whether to draw the European Central Bank deeper into crisis fighting, officials said.
A document prepared by finance ministers for the 27 EU leaders and seen by Reuters outlined possible guarantee schemes to help banks secure access to wholesale funding at a time when many are shut out of inter-bank lending.
Before the 27 leaders began work on a comprehensive plan to stem the crisis, German Chancellor Angela Merkel and French President Nicolas Sarkozy held a 30-minute private meeting with Italian Prime Minister Silvio Berlusconi, officials said.
Diplomats said they wanted to maximize pressure on Rome to implement labor market reforms and cut red tape for business to raise Italy’s growth potential and reassure investors worried by its huge debt ratio, second only to Greece’s.
A German government source said Merkel and Sarkozy underlined “the urgent necessity of credible and concrete reform steps in euro area states,” without which any collective EU measures would be insufficient.
Merkel warned in a speech on Saturday that if Italy’s debt remained at 120 percent of gross domestic product “then it won’t matter how high the protective wall is because it won’t help win back the markets’ confidence.
Arriving for Sunday’s sessions of the full EU and the 17-nation euro zone, the leader of Europe’s most powerful economy played down expectations of a breakthrough, telling reporters decisions would only be taken on Wednesday.
Before then, Merkel must secure parliamentary support from her fractious center-right coalition in Berlin for increasingly unpopular steps to try to save the euro zone.
Finance ministers made progress at preparatory sessions on Friday and Saturday, agreeing to release an 8 billion euro ($11 billion) lifeline loan for Greece and to seek a far bigger write-down on Greek debt by private bondholders. They also agreed in principle on a framework for recapitalizing European banks, which banking regulators said need just over 100 billion euros to help them withstand losses on sovereign bonds, although some details remain in dispute.
The key outstanding issues were how to make Greece’s debt burden manageable and how to scale up the euro zone rescue fund to shield Italy and Spain, the euro area’s third and fourth largest economies, from bond market turmoil that forced Greece, Ireland and Portugal into EU-IMF bailouts.
Markets are concerned that Greek debt, forecast to reach 160 percent of GDP this year, will have to be restructured, but investors do not know what kind of damage they will have to take on their Greek portfolios.
A debt sustainability study by international lenders showed that only losses of 50-60 percent for private bondholders would make Greek debt sustainable in the long term.
This is much more than a 21 percent net present value loss agreed with investors on July 21 and some officials question whether it can be achieved voluntarily, or only through a forced default that would trigger wider market ructions.
Euro zone officials say recession in Greece is much deeper than expected, the country is behind on privatizations and fiscal targets and market conditions have deteriorated in the past three months. Greek officials fear a run on their banks, the biggest holders of government debt, unless the write-down exercise is carefully managed to restore banks’ solvency.