Euro bailout plan delayed by Berlin-Paris row

Merkel and Sarkozy at loggerheads over French proposal for bailout fund to become $2tn ‘bank’ overseen by ECB Europe was thrown into fresh chaos on Thursday after a failure to resolve deep differences between France and Germany forced the postponement of a new plan to save the single currency. A joint statement from the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, admitted that a deal at the weekend was now unachievable and that talks in Brussels on Sunday would be followed by a second summit next Wednesday. Financial markets have rallied strongly in recent weeks amid hopes of a breakthrough agreement this weekend that would recapitalise Europe’s weak banks, write off part of Greece’s debts and – crucially – increase the firepower of the eurozone’s bailout fund to protect Italy and Spain from speculative attack. It emerged , however, that Berlin and Paris still differ over the size of the European financial stability facility (EFSF) with Germany resisting French calls for it to resemble a bank capable of issuing €2tn (£1.75tn) of loans. Merkel is also opposed to Sarkozy’s plan to put the European Central Bank (ECB) at the heart of the plan. “The president and the chancellor will meet Saturday night in Brussels ahead of the European council summit in the euro area on Sunday,” the statement said. “France and Germany have agreed that all elements of this ambitious and comprehensive response will be discussed in depth at the summit on Sunday in order to be finally adopted by the heads of state and government at a second meeting no later than Wednesday.” One of the sticking points holding up a deal is that Merkel needs the backing of German MPs before agreeing to an enhanced bailout fund. Officials said delays in the talks prevented the chancellor from achieving it before the weekend, but at Sarkozy’s insistence Sunday’s summit would go ahead as planned. Bond markets were the first to react to fears that a deal would fail to materialise, sending the interest rate on Italian debt back above 6%. Spanish yields rose above 5.5%. Both countries already depend on the ECB for short-term money, though both held successful bond auctions in the morning, before news of the delay. Contradictory reports of the progress made ahead of the weekend talks were reflected in briefings by Brussels officials. One well-placed EU diplomat insisted a sense of urgency could enable Sunday’s eurozone summit to deliver a political agreement. The source said divergences between France and Germany were “exaggerated.” Another official said the gap between France and Germany was significant, though resolvable. “Sunday’s summit is unlikely to produce any real decisions; the real stuff will have to be done on Wednesday or even Friday,” he said. Sarkozy and Merkel said the full details of a “global and ambitious” response to the crisis would be definitively adopted at a second summit “no later than Wednesday”. The pair are to meet in Brussels on Saturday evening. This weekend’s series of meetings and a second summit are also due to endorse the payout of a further €8bn to Greece early next month to save it from bankruptcy. But Athens’ debts are said by international inspectors to be unsustainable even with the second €109bn bailout agreed only last July. EU leaders are acutely aware that markets when they open on Monday are expecting a three-pronged deal on Greek debt “haircuts”, bank recapitalisation – already agreed at €90bn overall – and boosting the firepower of the EFSF. This was acknowledged in a statement last night from Sarkozy’s Élysée Palace. It said Greece had to make “ambitious” pledges to restore its economy on the basis of a new programme – indicating that the €109bn second bailout agreed only in July was inadequate. Merkel and Sarkozy demanded that talks begin with private creditors “to find an agreement that will reinforce the sustainability of Greek debt” – longhand for accepting far larger losses. In July the losses to be borne voluntarily by bondholders such as banks were agreed at 21% but these are now likely to be at least 30%. High-ranking eurozone officials admit that a huge amount of work remains to be done before Sunday’s summit to agree on how and by how much to raise the EFSF’s lending capacity from its current €440bn. Merkel, beset by splits within her coalition government and pressure for parliamentary approval of any EFSF deal, will only be able to agree in principle on Sunday and get the detailed, technical issues resolved by finance ministers before being signed off at another time. She called off Friday’s planned speech to the Bundestag on the topic. Wolfgang Schäuble, her embattled finance minister, boosted hopes on Thursday by saying France and Germany had reached an “outline” deal to increase EFSF firepower. “Germany and France are in complete agreement on this question but we know this is not the same as a European solution,” he said. His upbeat comments came less than 24 hours after Sarkozy in effect gate-crashed an opulent farewell in Frankfurt for outgoing European Central Bank president, Jean-Claude Trichet, to hold emergency talks with Merkel on the issue. Earlier, senior EU financial officials said late doubts had emerged about a German plan to turn the EFSF into an insurer in effect able to offer credit default swaps on, say, the first 20% of losses. This could boost its firepower to just over €1tn – or short of the €2tn demanded by the markets, US and UK. But the plan is said to resemble too closely the arrangement that helped bring down Lehman Brothers in 2008, triggering the worst of the financial crisis and recession. So far Germany and the ECB have rejected French ideas of making the EFSF a bank. Sunday’s summit will clearly fail to set the new, higher “haircuts” for private creditors exposed to Greek debt after the International Monetary Fund reportedly fell out with the European commission (EC) and ECB over the scale of that debt. The creditors, marshalled by Deutsche Bank’s outgoing chief, Josef Ackermann, now accept the haircuts could be even higher. A leaked draft report from the “troika” of IMF, ECB and EC said details of Greece’s debt sustainability would be given to the eurogroup of finance ministers who meet on Friday(fri). The report said the country’s debt dynamics were “extremely worrying” after a deeper than expected economic contraction – 5.5% this year and likely to be 2.75% in 2012. One source of relief for worried EU and eurozone leaders is that the draft communiqué for the eurozone summit says both Spain and Italy will give fresh commitments on fiscal consolidation and structural reforms. Senior EU diplomats confirmed that Madrid and Rome would put forward fresh proposals on Sunday. What would the deal look like? The new financial bailout plan is expected to cover debt reduction for Greece, new capital for ailing banks that might take losses from Greek bonds, and enhanced financial firepower for the bailout fund to stabilise markets. The European financial stability facility has recently been expanded to €440bn (£384bn). But it may need at least €1.5

Posted by on October 21, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.