6th Oct 2022

Divisions remain ahead of EU debt summit

  • Merkel will attend the euro-summit only 'if there is an outcome' (Photo:

Uncertainty over whether the EU will be able to agree the terms of a second bailout for Greece in the coming days rose over the weekend as fundamental differences between key players were highlighted once more.

In an interview published Monday (18 July) with the Financial Times Deutschland, European Central Bank chief Jean-Claude Trichet said that he would not accept defaulted Greek bonds as collateral and that governments would have to step in and take measures if Greek government debt were given a default rating.

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"If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral," he said.

"The governments would then have to step in themselves to put things right ... the governments would have to take care the Eurosystem is presented with collateral that it could accept."

"It is unacceptable to us to jeopardise our role as an anchor for stability and trust in the eurozone and Europe."

His comments, coming just ahead of an emergency EU summit on Thursday (21 July), put him in stark opposition to Berlin which has been insisting that in order for Greece to get a second bailout, expected to be around €115 billion, the private sector has to be involved.

Chancellor Angela Merkel repeated her views in an interview with ARD television on Sunday. "The more we get private investors voluntarily involved now, the less likely we will have to take further steps," she said adding she would only go to the summit "if there's an outcome".

Ratings agencies have repeatedly warned that current plans to involve the private sector, which include obliging bondholders to stay exposed to Greek debt, would be regarded as a selective default.

EU leaders on Thursday are also expected to have difficulty agreeing on how to make the European Financial Stability Facility more flexible.

An option mooted by some is that it issues eurobonds guaranteed by eurozone states. But others say this would essentially mean the beginning of a transfer union, something opposed by Germany.

Jens Weidmann, head of Germany's central bank, criticised the idea strongly in an interview Sunday with mass-selling newspaper Bild.

"Nothing would destroy more quickly and in a more lasting fashion incentives for a solid budget policy that joint guarantees for sovereign debt," he said.

"The result would be European taxpayers, and first and foremost German ones, vouching for Greece's entire national debt. It would be a step towards a transfer union, something which Germany has correctly opposed thus far."

Greece received a €110 billion loan last year but it became clear earlier this year that the debt-ridden state would need a fresh loan in order to meet repayment obligations further down the line. Since then, governments have been divided over a German-led push to involve the private sector.

EU finance ministers at a meeting earlier this month agreed Greece would be helped but the lack of details spooked markets prompting fears that the eurozone crisis could also engulf Italy and Spain. This week's summit is intended to draw a line under these fears.

"Our agenda will be the financial stability of the Euro area as a whole and the future financing of the Greek programme," said EU council president Herman Van Rompuy, who called the meeting.

According to Trichet, despite the talk of eurozone crisis, a solution will be found.

"Of course the Europeans can master this situation," he told FTD. "This is not about technical issues, but about will and determination."

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