Jock Fistick
European leaders have agreed on the broad outline of a €1-trillion plan to end the continent's two-year-old financial crisis. But they remained deadlocked on crucial aspects of how the plan will work, when it will happen and what it will truly cost.
At a Brussels summit that was billed as a last chance to resolve the crisis, heads of state from the European Union produced a deal to increase the size of a rescue fund for member countries that are buried under government debt. The fund, equipped with €440-billion, will grow to more than twice that size, theoretically giving it enough firepower to save a country as large as Spain if, like Greece, it were to find it impossibly expensive to borrow fresh money.
The meetings ended early Thursday morning with declarations of success. But it still remains to be seen how and when they will boost the capital of banks that will take larger losses on their Greek bond holding, while reducing the debts that have crippled Greece and threaten other nations.
The final plan may even require help from China, among others. French President Nicolas Sarkozy said he plans to ask Chinese leader Ju Jintao if his government would put money into an investment vehicle that would buy the bonds of troubled EU countries, according to various reports.
Wednesday's meeting was the second emergency summit since Sunday and the 14th in the past 21 months, as rising European debt went from a problem that most leaders expected to politely disappear to one that now threatens to tear the euro zone apart.
The leaders of the union's 27 countries, including the 17 that share the euro, were supposed to unveil the ultimate solution to the crisis, but expectations had been falling since the weekend. "Today is supposedly the day where the problems of the euro zone get resolved once and for all," said hedge fund strategist Marshall Auerback of Madison Street Partners, an investment firm. "And where have we heard that before?"
According to draft statements released late in the evening, a comprehensive plan is now expected to be finalized by finance ministers in November.
The central part of the debt-fighting plan – the enlargement of the rescue fund known as the European Financial Stability Facility to €1-trillion (about $1.4-trillion) – was agreed in principle, but without accord on how that is to be done.
Two scenarios were presented to ramp up the fund. The first would see it act as an insurer by guaranteeing some of the losses of new bonds sold by the deeply indebted countries. (This would lower the bonds' risk, making them more attractive to investors. ) The second would create a special vehicle funded by private and sovereign investors, such as Chinese and Middle East sovereign wealth funds, to invest in the bonds of cash-strapped countries.
Before the start of the summit, German Chancellor Angela Merkel said Germany had an "historic obligation" to defend the euro. "The world is watching Europe and Germany," she said in a speech to the Bundestag, the lower house of parliament, calling the situation "Europe's deepest crisis since the end of World War II."
But Greece, which is at the centre of the crisis, continued to pose complications. Its national debt load, which is expected to reach 190 per cent of gross domestic product (GDP) by 2013, is suffocating the country's economy. In the morning, Ms. Merkel said the goal was to reduce Greece's national debt load to 120 per cent of GDP by 2020.
That requires existing holders of Greek debt to take big losses on those investments – one of the most difficult issues to solve. The list of Greece's largest creditors includes major banks in both France and Germany, the two largest economies in the euro zone.
Cutting Greece's debt to 120 per cent of GDP implies a reduction of about 65 per cent in the value of its bonds. Late Wednesday, Ms. Merkel said she expected the haircut on Greek bonds would come to about 50 per cent.
The Greek debt writedown is a pivot-point of the crisis-fighting package. If the banks take large losses, Greece will be able to repair its finances more quickly. On the other hand, banks will then require bigger injections of fresh capital to make up for their losses.
In a statement released earlier Wednesday, the EU leaders said banks should raise their so-called Tier 1 capital – a key measure of bank's financial health – to the equivalent of 9 per cent of assets. Late Wednesday, the leaders said they had agreed on a plan that would raise the capital of some of the most exposed banks by €106-billion. How much money the banks will have to raise to meet that threshold, however, remains in doubt.
Eric Reguly