EU finance ministers were warned on Monday of the “dramatic consequences” a US debt default could have as they discussed how to prevent failing banks from ever again collapsing their own economies.
With US President Barack Obama holding yet another round of talks to head off a first-ever US debt default tomorrow, EU Economic Affairs Commissioner Olli Rehn said it was vital a solution was found.
“Otherwise, it could have potentially dramatic consequences on the world economy and on the still-nascent recovery in Europe,” Rehn said.
Jeroen Dijsselbloem, who heads the Eurogroup of the 17 eurozone-nation finance ministers, said finance ministers had reviewed positively the situation in Spain, whose overextended banks had to be bailed out, and in rescued Ireland.
“In both, the economic and budgetary outlook has improved,” Dijsselbloem said, with Dublin and Madrid set to complete their programs by the end of the year.
Whether they would need “accompanying measures” to get them through the transition would be discussed next month, he added.
Dijsselbloem said that in Portugal, whose bailout program ends next year, “reforms are beginning to bear fruit, but a number of longstanding challenges remain.”
“The pace of reform and fiscal consolidation must be maintained,” he said.
There has been much speculation that twice bailed-out Greece could need more help and Dijsselbloem was cautious when replying to questions at the close of the Eurogroup meeting.
Greece should have a primary fiscal surplus by the end of this year — that is, a budget surplus excluding interest payments — and the country was making progress, he said.
However, there was “no doubt the reform process has a long way to go,” he added, saying more would be known once the “troika” of Greece’s creditors — the EU, European Central Bank (ECB) and IMF — report back on their latest review mission.
With that likely in December, Dijsselbloem insisted it was too early to talk about specifics, but stressed there could be no prospect of another cut in debt for Athens.
Earlier, ECB executive board member Joerg Asmussen said Greece faced a fiscal gap next year that it had to meet — implying yet more austerity, despite Athens warning it could handle no more.
There was also a funding gap in its bailout program next year of between 5 billion and 6 billion euros (US$6.79 billion and US$8.14 billion), Asmussen said, shooting down any idea this could be covered by a bond rollover.
However, Greek Minister of Finance Yannis Stournaras said earlier that a bond rollover next year would allow Athens to meet 4.4 billion euros in loan repayments.
It was not immediately clear how the two positions could be reconciled.
Dijsselbloem said eurozone ministers also discussed the Single Supervisory Mechanism (SSM), a key step toward the bloc’s planned banking union.
“The SSM is expected to come into force in coming weeks,” Dijsselbloem said, apparently after Britain’s concerns over how it would work were satisfied.
Non-euro Britain is home to the European Banking Authority (EBA), which is supposed to draft the rules for all banks in the bloc, while the SSM is to be run by the ECB.
To ensure that the 17 eurozone members did not out-vote the 11 non-euro members also grouped in the EBA, London won agreement in December last year that there would have to be a “double majority” in both camps for any action.
A UK diplomatic source said London had won fresh assurances that this would be the case and accordingly, EU finance ministers could clear the SSM when they were to meet yesterday.
Asmussen said progress on the SSM was “really very good news ... We can [now] really speed up preparations ... [for] a banking union.”
French Minister of Finance Pierre Moscovici said the banking union was the main issue and “a priority for France.”
“We want a global banking union, complete and ambitious,” he said, confirming that the SSM would be finally cleared yesterday.
The SSM is to be complemented by a Single Resolution Mechanism to close failing banks and a Deposit Guarantee regime protect savers.
This is meant to provide a comprehensive, single regulatory framework to prevent taxpayers having to fund the disastrously expensive bailouts that led to years of austerity and recession the eurozone is only now emerging from.