Eurozone hopes rest on summit ‘bazooka’

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European leaders achieved a breakthrough early today (27 October) to write off half of Greece's debt and seek foreign capital to double the eurozone's bailout fund to around €1 trillion. But crucial details on the fund's size were left for finance ministers to decide end of November.

Two weeks ago, British Prime Minister David Cameron called on his eurozone colleagues to make use of "the big bazooka" to end the euro crisis as a matter of urgency.

After an inconclusive summit on Sunday (see background), eurozone leaders agreed this morning what French President Nicolas Sarkozy described as "a global, an ambitious and a credible answer" to the eurozone crisis.

50% 'haircut' for Greek bondholders

First, eurozone leaders agreed on a new €100-billion package to save Greece from default, with the participation of the private sector and allowing for the ratio of Greek debt to GDP to fall to 120% by 2020. The current ratio is 165%.

This would take place under a "voluntary" agreement with private lenders, whereby they would give up 50% of their investments, amounting to €100 billion.

To achieve this, the eurozone countries agreed to mobilise €30 billion of public funds to finance guarantees for the private sector. (See: "EU cuts backroom deal on Greek debt write-down")

This appeared the most difficult decision at the summit, keeping Sarkozy and Merkel, together with IMF chief Christine Lagarde and Council President Herman Van Rompuy, in long separate talks with bankers on the sidelines of the summit.

Another "firewall" is the requirement for European banks to have core capital reserves of 9% after writing down their holdings of sovereign debt, by 30 June 2012. The total of amount needed for bank recapitalisation is estimated at €106 billion. Of this sum, a quarter is required for the recapitalisation of Spanish banks.

Boosting the EFSF

The second big decision was to increase the financial capacity of the European Financial Stability Fund (EFSF), from its initial €440 billion to €1 trillion. (Following the bailouts of Ireland and Portugal, its present level is estimated at some €250 billion).

EU leaders gave a mandate to European institutions to work more closely with the International Monetary Fund (IMF) to raise new funds.

Sarkozy made clear that this was needed to avoid the debt contagion spreading "to other eurozone countries and even further."

But crucial detail there remains to be decided, with EU finance ministers expected to come to an agreement by late November (see: 'EU chiefs to charm China on boosting bailout fund').

Eurozone becomes institution

In addition, eurozone leaders decided to meet at least twice a year, with all the countries that have adopted the currency committed to adopt "golden rule," enshrining deficit limits in their constitutions.

Eurozone leaders also decided to elect a eurozone president, a post for which Council President Herman Van Rompuy is already preparing.

Since successive crises struck Ireland, Portugal and Greece, the European Central Bank (ECB) has been buying sovereign debt on the secondary market in an attempt to keep interest rates at reasonable levels.

EU leaders are now considering an alternative mechanism, so far undefined, but the effort has been described by diplomats as extremely difficult and complex.

Doubts on bank recapitalisation persist

Doubts persist also with regards to the functioning of recapitalisation. Following the meeting of 27 EU heads of state that preceded the eurozone summit, Polish Finance Minister Jacek Rostowski said that banks in need of recapitalisation would first turn to private sources. If the banks are not capable of recapitalising, governments would then top up the capital by obtaining equity stakes in the banks.

“[Government funding] is not a gift to bank owners,” he said. In case of further difficulties, recapitalisation would take place from a guarantee mechanism among banks, in agreement with the European Banking Authority (EBA) and the European Commission, he said.

However, the statement concluding the wider summit of 27 heads of state, stipulates that in such circumstances, recapitalisation should be funded through loans from the EFSF in the case of eurozone countries.

Asked about the quantity involved for bank recapitalisation, Rostowski said that it would be “announced in due course” by the EBA.

In his statement after the eurozone meeting, European Council President Herman Van Rompuy stressed that current events had shown that "peer pressure" worked among member countries.

"Compared to eight or ten years ago, the pressure which leaders put on each other has become much more effective, as the events of the last days show.

"Today no government can afford to underestimate the possible impact of for instance public debts or housing bubbles in another eurozone country on its own economy; they would be punished by the voters, and by the markets.

"Peer pressure has become more effective, because the money of their taxpayers is at stake," Van Rompuy said.

European Commission President José Manuel Barroso said that the agreed package confirmed that Europe "will do what it takes to safeguard financial stability."

"I have said it before and I will say it again: this is a marathon, not a sprint. The technical work needed to finalise certain aspects of this package will be completed by the relevant authorities in the coming weeks. And the Commission will make further proposals for a Community way out of this crisis.

"Next week, we will be able to show our partners in the G20 that Europe is able to do that: an agreement to conclude measures to restore confidence in the European banking sector; ensuring the adequate firewalls; accelerating our ambitious agenda for growth; and further strengthening economic surveillance and coordination. To show our partners and our citizens that we are ready to complete our monetary union with a true economic union," he said.

President of the European Parliament Jerzy Buzeksaid in a press release: "The agreed measures inspire hope that the sovereign debt crisis will be contained and another recession avoided. However, crucial, technical details should be agreed as soon as possible."

He added that "despite the increase of euroscepticism in some countries," there remained public support for sharing a part of member states’ debt, citing a recent Eurobarometer poll.

The President of Italy Giorgio Napolitano said in a speech at Brugge’s College of Europe that in the face of the sovereign debt crisis "It is clear that each eurozone member state must play its part, must fully assume its responsibilities."

"And these most certainly include Italy: a culture of financial stability has had authoritative and coherent supporters in our country in the exercise of their public functions but for many years now that culture has not prevailed," he said.

Napolitano concluded by citing the examples of the "qualitative leaps" that were the Maastricht Treaty and the euro: "It is now time to make another, and even more decisive, one."

During the following day’s debate (27 October) in the European Parliament with the presidents of the European Commission and Council, Czech MEP and leader of the European Conservatives and Reformists group Jan Zahradil condemned the compromise deal and said non-eurozone members should have the right to reconsider whether they join the bloc.

"[A] vast amount of both private and public funds will be poured into the debt bail out. Other debts will simply be written off and a bond union will be created. We are at the beginning of massive fiscal transfers that we have never seen before in our history," he said.

MEPs and co-presidents of the Greens/EFA group Rebecca Harms (GermanYy and Daniel Cohn-Bendit (France) said last night’s deal "will likely be enough to pull the Eurozone back from the brink for now but it has again failed to provide a definitive answer and draw a line under the crisis".

They added that Europe’s medium-term recovery required measures other than "the failed cocktail of unbalanced austerity measures". "Instead, we need strong measures to combat tax evasion, ambitious tax harmonisation and revenue-side measures, as well as this ad hoc fire-fighting," they said.

German MEP and leader of leftist GUE/NGL group Lothar Bisky said in press release that EU leaders had "capitulated to speculators" and called for state control of recapitalised banks.

"The 50% haircut agreed should be welcomed however it does not reverse the downward spiral of the Greek economy and its devastating social impact on citizens," Bisky said.

 

Bernadette Ségol, secretary-general of the European Trade Union Confederation (ETUC) said in press release that the European Council had decided to "continue to tolerate the diktats of the financial markets".

"Unless the European Central Bank acts as lender of last resort and declares that it is determined to buy EU government debt without limit, financial markets will again test the sustainability and resilience of the decisions made last night, most likely by attacking Italy and France next," she said.

EU leaders gathered in Brussels at 6 p.m. on 26 October, following an inconclusive summit on Sunday, chiefly memorable for the public humiliation meted out on Italian Prime Minister Silvio Berlusconi by French President Nicolas Sarkozy.

Eurozone leaders had to agree specifically on a Greek debt reduction – required to save the country from default – on increasing the firepower of the European Financial Stability Fund (EFSF) and on recapitalising banks across Europe.

The reason for holding another summit at such short notice was that German Chancellor Angela Merkel needed a mandate from the Bundestag to engage in negotiations on increasing the firepower of EFSF. She declared in Parliament that Europe was living through its most dramatic times since World War II.

Merkel also disclosed plans for a substantial write-down of Greece’s debt that implied a 50%  "haircut" for private investors.

By lunchtime on Wednesday the Bundestag had passed the EFSF motion with a large majority. It stated that the European Central Bank will no longer need to buy bonds on the secondary markets, confirming that the rescue fund cannot be financed through the ECB.

  • 3-4 Nov.: G20 summit in Cannes, France
  • By end Nov.: Final agreement expected on future size of EFSF.

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