Euro Zone Crisis: European Leaders Unlikely to Reach an Agreement

NEW YORK | Wednesday, October 26th, 2011 2:02am EDT

Eurozone leaders were struggling on Tuesday to reach agreement on a much-anticipated deal to reverse their spiralling debt crisis amid mounting signals a definitive agreement would not be reached at a key summit on Wednesday night.

Euro Zone Crisis European Leaders Unlikely to Reach an Agreement 01

Rows between Europe’s leaders threatened to undermine attempts to rescue the eurozone as it emerged that a make-or-break summit will not address key aspects of the deepening crisis. Photo: Kancelaria Prezesa Rady Ministrów/Flickr

A European official says there is now serious doubt that EU heads of government will agree on a broad package of financial measures at a summit meeting in Brussels on Wednesday.

The official says the 10 EU members who don’t use the euro do not want to agree to a bank recapitalization plan unless there’s also agreement on increasing the firepower of the EFSF, the EU’s bailout fund.

EU officials and European diplomats are now lowering expectations of a breakthrough when the 17 euro zone leaders meet, despite Franco-German assurances only weeks ago that a “comprehensive solution” to more than two years of debt and economic turmoil would be found by the end of the month.

EU leaders have said a summit tonight will outline plans to cut Greece’s crippling debt burden and expand a bail-out fund meant to support larger EU economies such as Italy and Spain.

Yet leaders last night appeared to be little closer to settling their long-standing differences on those issues.

While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there is little clarity on either of the other two critical parts of the plan.

One element involves scaling up the region’s 440 billion euro bailout fund, known as the European Financial Stability Facility, and the other is focused on reducing Greece’s debt burden by deepening the losses private investors – major banks and insurance companies – must take on their Greek bonds.

The ECB’s bond-buying programme is unpopular in Germany, where critics fear it will compromise the central bank’s independence and its ability to control inflation.

Angela Merkel, the German chancellor who is facing fierce domestic opposition to the rescue deal, yesterday publicly rejected the draft as “not acceptable to Germany”.

The gloomy outlook worried financial markets. The FTSE 100 index closed down at 5525, and shares in Germany, France and the US all fell.

Meanwhile, there were fears that the Italian government of Silvio Berlusconi could collapse over a dispute about austerity measures demanded by other EU governments.

In Brussels, the European Commission insisted that Mr Berlusconi must do more to balance his country’s budget. Italy still needs to back up Mr Berlusconi’s promises with “specific actions” taken with “clear timing,” the commission said.

Italy’s inability to deliver a substantive plan for reforming its pensions system has raised doubts about Prime Minister Silvio Berlusconi’s seriousness in tackling a crisis that threatens the euro zone’s third largest economy.

Italy has the euro zone’s largest sovereign bond market, with a public debt of 1.8 trillion euros, 120 percent of GDP. EU leaders fear that failure to make its debts more sustainable will mean it goes the same way as Greece, Ireland and Portugal, which have had to accept EU/IMF financial aid programs.

“The numbers are not yet finalized – you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number,” one EU official said, adding that discussions would continue on Wednesday to forge a pre-summit consensus.

“The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging — it will be very difficult to agree on everything.”

The summit tonight is also intended to agree on ways to boost the financial power of bail-out funds meant to underwrite governments in Italy and Spain if they struggle to raise money on international markets. One option is a Special Investment Vehicle, a fund that raises money from investors including wealthy governments and the IMF.

EU diplomats said the outcome was uncertain, but some forecast a last-minute deal on a 50 percent write-down – an outcome backed by Jean-Claude Juncker, the chairman of euro zone finance ministers.

Greek Prime Minister George Papandreou said: “I hope that tomorrow we will come to decisions, this is our partners’ will.

“Tomorrow we want to put an end, turn a page, in order for the country to move forward.” [via Reuters, The Telegraph, Financial Times and CNBC]

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