25th Mar 2023

Euro crisis response: Pieces of the puzzle being put in place

  • Merkel. Another eurozone summit is to be held on Wednesday, where markets and foreign governments expect a comprehensive solution to the worst crisis in the EU's history (Photo: Valentina Pop)

Key elements of a ‘comprehensive’ solution to the eurozone crisis are coming together amid an unprecedented series of meetings and summits in the European capital.

Eurozone finance ministers have signed off on the delivery of the latest tranche of bail-out cash to Greece and the gulf in positions between the bloc’s two largest economies, France and Germany, is beginning to close.

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Following the Greek government’s passage of new austerity measures on Thursday defying a two-day general strike and violent protests, eurozone finance ministers meeting in Brussels gave the green light to the dispersal of €8 billion in rescue funds to Athens, a sum that should be paid out in the first two weeks in November so long as the International Monetary fund, responsible for a third of the sum, agrees.

Ministers also appear to be closing in on a figure for the scale of the recapitalisation of the bloc’s troubled banks, the subject of discussions amongst all 27 of the EU’s finance ministers on Saturday.

Europe’s banks will require a buttress of around €100 billion, according to officials, half the figure earlier mooted by the IMF but slightly up on the €80 billion estimated by the European Banking Authority.

Financial institutions must first attempt to raise capital from the markets before turning to bail-outs from national governments. Only when governments are unable to meet such a call would the eurozone’s rescue fund, the European Financial Stability Facility be tapped.

Worries remain however that in order to meet a target of increasing core tier one capital ratio to nine percent may simply tighten the bankers’ taps, already reluctant to lend in a weak economic climate.

No official announcement of the sums is expected before other crisis response issues are resolved however.

On the scale of a write-down on Greek debt, bond holders may be forced to swallow losses of between 50 and 60 percent. Without such haircuts, the country will require ever larger bail-outs from the eurozone to keep afloat.

A report on the ability of the debt-strangled country to pay back its creditors from the European Commission, the ECB and the IMF on Friday explored a series of three different options that could reduce the country’s debt pile to a more sustainable level. To bring Greece’s public debts down to 110 percent of GDP, investors would have to accept a cut of 60 percent on the value of their holdings.

However, the IMF and the ECB are at loggerheads over such an option. The report itself contained a footnote declaring the ECB to have opposed including the scenarios in the document.

The IMF is thought to favour bigger write-downs while the ECB fears the potential fall-out in the markets from the imposition of such heavy losses and is believed to be arguing instead for more severe austerity.

Meanwhile, deep divisions between Paris and Berlin over how to strengthen the region’s rescue fund, the EFSF, are closing as the number of options on the table are reduced.

France had wanted to turn the EFSF into a bank, allowing it to tap ECB funds, but Paris has begun to back down on the plan as the commission, the central bank and Berlin contended that there was no legal way such a move could be made without a treaty change.

French finance minister Francois Baroin late on Friday indicated that leveraging the EFSF via the ECB was no longer a key part of the talks.

Germany for its part favours a scaling up of the rescue fund via a type of insurance scheme in which the EFSF could guarantee perhaps 20 percent of fresh debt issues, a move that could extend the facility’s firepower by three to five times, to some €1 trillion.

Italy and Spain are thought to be opposed to such a plan, however, worried that those bonds issued with some form of EFSF guarantee would be favoured by investors over government debt products that did not require such backing.

Separately on Friday, rating agency Standard & Poor’s warned that if the eurozone tipped over into recession, it would cut the credit rating of France and four other states.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are meeting Saturday evening ahead of further talks with the EU presidents, Herman van Rompuy and Jose Manuel Barroso. EU economic and monetary affairs commissioner Olli Rehn and IMF chief Christine Lagarde will also attend the meeting expected late Saturday night.

A full EU summit of the bloc’s premiers and presidents and a eurozone summit of the single currency area’s leaders on Sunday is not expected to produce any final conclusions however, as German MPs are required to give their assent before Berlin can sign off on any new pact.

As a result of the delay, yet another eurozone summit is to be held on Wednesday, where markets and foreign governments expect a comprehensive solution to the worst crisis in the European Union’s history to be delivered lest the eurozone crisis tip the world economy over into a second recession.

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