Sunday’s much-hyped European Union summit, billed as the meeting that would finally resolve the region’s ongoing fiscal crisis, is in a crisis itself, after a follow-up summit for Wednesday was set yesterday.
Merkozy, as French President Nicolas Sarkozy and German Chancellor Angela Merkel have been dubbed in Brussels’ circles, remain in disagreement over the details of the ‘comprehensive plan’ to address Europe’s sovereign debt and banking woes. And the German Bundestag, the country’s parliament, is on the warpath, demanding it be consulted before Merkel negotiates new measures to stem the euro zone’s fiscal bleed at any summit.
Markets had been rallying in recent days on anticipation of an announcement from EU leaders on Sunday that is expected to entail a three-pronged approach to address the crisis, including scaling up the firepower of the euro zone’s bailout fund — the European Financial Stability Fund (EFSF), recapitalising the region’s struggling banks and working out a way to force private investors to take a haircut on their holdings of Greek debt.
But these expectations have been confounded by the continued inability of France and Germany — the two main architects of the rescue plan — to agree on how to beef up the Euro 440-billion EFSF.
Chary of losing its triple A credit rating should its share of EFSF financing balloon, France is pushing for turning the bailout fund into a bank which could then tap funding from the European Central Bank (ECB). But both Berlin and the ECB oppose this.
Instead, Germany is advocating the idea of using the EFSF to guarantee a portion, possibly 20-30 per cent, of potential losses on new euro zone debt as a way of restoring market confidence in Italian and Spanish bonds.
By guaranteeing only a percentage of each debt issue, the EFSF’s funds would stretch three-five times further, increasing it to around Euro 1-1.5 trillion.
The issue of how much pain private holders of Greek debt should be forced to bear also remains vexed with scant signs of consensus. Germany is apparently in favour of forcing a haircut of up to 50 per cent, up from the voluntary 21 per cent loss that had already been agreed to in July. Banks are fiercely resisting the prospect, as is the ECB, which has a large exposure to the Greek debt itself.
There is reportedly some agreement across the EU’s 27 member states regarding bank recapitalisation, with Reuters quoting an EU official as saying the bloc is in agreement that just short of Euro 100 billion is required to bolster bank balance sheets in order to protect the system against a Greek default.
The number is, however, on the lower side of estimates that have been made regarding the needs of Europe’s banking system. Goldman Sachs for example has pegged the requisite amount at Euro 300 billion.
All eyes will now be on Brussels for the next few days with a marathon round of summitry kicking off today. The 17 finance ministers of euro zone countries will meet in the afternoon, followed by a gathering of all 27 member European Union ministers on Saturday morning. On Saturday evening, Brussels will play host to yet another Merkozy tete-a-tete as a precursor to Sunday morning’s meeting of heads of state or governments of the European Union. This in turn will be succeeded by another meeting of just the euro area leaders.
And after a two-day break, they will all be back again on Wednesday for the final meta-summit where definitive plans to address the crisis will be made public.
