Mon, Oct 24, 2011 - Page 10 News List

EU leaders close in on debt crisis deal

INCH BY INCH:The European Banking Authority has said that EU banks need up to 110 billion euros of new capital to achieve a 9 percent core tier 1 capital ratio


EU leaders were scheduled to hold talks yesterday to try and hammer out a comprehensive plan for tackling the eurozone debt crisis, but a breakthrough is not expected until another summit on Wednesday.

“We have to take far-reaching decisions. These have to be prepared properly, I believe that the finance ministers made progress, so that we can achieve our ambitious targets by Wednesday,” German Chancellor Angela Merkel told reporters.

“The breakthrough ... will be on Wednesday,” Merkel said before meeting French President Nicolas Sarkozy and other leaders in a castle outside Brussels on Saturday.

Sarkozy, who earlier in the week sharply disagreed with Merkel over strategy, also said he hoped for a breakthrough in the middle of the week.

“Between now and Wednesday a solution must be found, a structural solution, an ambitious solution, a definitive solution,” Sarkozy said. “There’s no other choice.”

Asked whether he was confident of a deal, he replied: “Yes, otherwise I wouldn’t be here.”

To end the debt crisis that first hit Greece, eurozone countries want to tackle several issues in one go and prevent contagion spreading to Spain and Italy, whose public finances are under market scrutiny and whose borrowing costs have risen sharply.

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 losses they will have to take on their Greek portfolios.

The size of the losses private bond holders would have to suffer was the first key issue scheduled to be discussed yesterday, but a solution was not expected until Wednesday.

A Greek debt sustainability study by international lenders showed that only losses of 50 percent to 60 percent for the private sector would make Greek debt sustainable in the long term. This is much higher than the 21 percent net present value loss agreed with investors on July 21.

To have enough money to support Italy and Spain, if necessary, the eurozone wants to boost the firepower of its bailout fund, the 440 billion euro (US$612 billion) European Financial Stability Facility (EFSF).

However, public opinion in many countries is already strongly against more bailouts and further commitments to the EFSF could drag down some countries’ credit ratings, worsening the crisis.

How to raise the potential of the fund without new cash is a second key contentious point that was to be discussed yesterday, with a resolution again not expected until Wednesday.

France and several other countries would like the bailout fund to be turned into a bank, thereby -giving it access to limitless financing from the European Central Bank (ECB), but Germany and the bank itself are adamantly opposed.

The most likely solution seems to be that the EFSF will guarantee a percentage of new borrowing by Spain and Italy in a bid to improve market sentiment towards those countries.

Such a solution might help ring-fence Greece, Ireland and Portugal — the three countries already cut off from the market and using eurozone emergency loans.

The other measure on the summit agenda is the recapitalization of Europe’s banks, many of which hold large portfolios of Greek, Portuguese, Irish, Spanish and Italian debt.

Unless they get more capital to cover potential losses on those bonds, other banks would remain reluctant to lend to them on the interbank market, triggering a liquidity crunch, currently prevented only by the stepped-up ECB liquidity provisions.

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