Europe reports progress in financial crisis talks, but key issues unresolved
By Howard Schneider,
BRUSSELS — European leaders have agreed to order banks to raise about $140 billion in new capital and ask Greek bondholders to accept losses of as much as 60 percent, as work continued on a plan to resolve a lingering financial crisis.
After three days of meetings, however, debate continued Sunday on perhaps the most contentious issue: how to increase the power of a bailout fund whose $600 billion size is widely considered inadequate to persuade world markets that it can backstop nations the size of Spain and Italy.
The option favored by many euro-zone countries and pushed by the United States is to have the European Central Bank act as the financier of the new European Financial Stability Facility. That would let the ECB lend virtually unlimited sums to the bailout program.
But Germany and the ECB have ruled that out. They fear it would undermine the bank’s main mandate of fighting inflation and possibly violate the basic treaties that created the euro.
Other options, including insurance schemes that would allow the bailout fund to support perhaps $1 trillion or more in bond sales by European governments, are among the alternatives the leaders of the 17 euro-zone nations were debating Sunday night.
They are operating under a tight timetable and tight constraints. They have promised a decision by Wednesday. If the plans to “leverage” the bailout fund are too small, markets will dismiss them as inadequate; if they are too ambitious, they may face opposition from German lawmakers who have demanded that Chancellor Angela Merkel brief them this week before a follow-up summit on Wednesday.
Investors and analysts also will be looking at whether the amounts of new capital being requested of the banks are enough to restore faith in the European banking system and whether the plan for Greece will finally put the country on a stable path to recovery.
Still, the marathon round of meetings that formally began Friday made enough progress that European leaders said they were confident of delivering Wednesday the comprehensive plan that has been demanded by the United States, China and even European nations that don’t use the euro.
British Prime Minister David Cameron said that the rest of Europe intends to keep the pressure on.
“The crisis in the euro zone is having a chilling effect,” Cameron said. “They need to come together and take responsibility for their currency.”
The meetings have made for tense dynamics. Italian Prime Minister Silvio Berlusconi came under particular pressure as European leaders pushed him in small meetings and in phone calls to speed economic reform and deficit-cutting in his country. Italy is considered the key to Europe’s success in battling the crisis because its trillions of dollars in outstanding debt make it too big to fail.
Berlusconi lost trust in August when he proposed reforms and then tried to rescind them. Other European leaders since then have said any new agreement must include ironclad ways to ensure that Italy follows through on reforming its slow-growing and inefficient economy.
“We asked for more detail” from Berlusconi, European Council President Herman Van Rompuy said. “We asked for some time frames. We want to be sure everything will be implemented.”
New studies from the European Commission and the International Monetary Fund set the tone for the weekend, painting a bleak outlook for Greece. The country’s decaying finances left European ministers with the choice of asking private bondholders to accept massive losses on their loans to Greece or putting up hundreds of billions of dollars of their own taxpayers’ money — beyond already approved bailouts — to keep the country afloat.
Despite warnings from the banks and opposition from the ECB, the group asked Italian Finance Minister Vittorio Grilli to open talks with investors this week and try to conclude a deal before the Wednesday summit.
The hope is that banks will voluntarily agree to accept losses, rather than risk losing their whole investment in a general default.
Banks and other investors agreed to losses in July of about 21 percent and have opposed reopening that deal.
European officials also will ask banks to increase their capital holdings to 9 percent of their total assets, well above the 5 percent used in earlier assessments of the banking system’s health. According to a European official familiar with the plan, it includes a demand that banks lower the value of their Greek bond holdings but not that of other countries that have lost the confidence of the market.
That could lead to criticism that the plan is inadequate. The IMF in a recent study estimated that the declining value of bonds issued by a half-dozen euro-zone countries has cost banks perhaps $300 billion.
Banking officials say they should not have to post those losses or raise capital as a buffer against them, because they think those countries will pay them back.