Markets are pummelling the euro as EU finance officials make vague proclamations on strengthening EU bailouts but continue to disagree on the terms of a second Greek rescue plan.
Markets have been expecting to hear the size and substance of a second bailout for the most indebted eurozone country, Greece, as fears of contagion started hitting Spain and Italy.
But their worries were heightened as the European Central Bank (ECB) and national treasuries failed to agree on the role of the private sector in a second Greek rescue plan.
Following eight hours of talks on Monday evening (11 July), finance ministers from the 17 countries that share the common EU currency, are discussing two options in a second Greek bailout: to buy Greek bonds on the open market (bond buybacks) and to rollover Greek debt held by the private sector.
The bond buyback option resurfaced yesterday after it was thrown out earlier this year by German and Dutch opposition to increasing the exposure of their taxpayers to Greek sovereign debt. The two countries reportedly said they would reconsider their position.
But ministers kept their cards close to their chest. EU economic Commissioner Olli Rehn said that preparations on a new Greek bailout would take shape when the next tranche of aid is disbursed in September.
His instructions appear to be coming from higher ranks as the new head of the IMF, Christine Lagarde, warned yesterday that Greece needed to do more to tighten its budget deficit before a second bailout could be presented.
Euro group chief Jean Claude Juncker said he could envisage an emergency meeting of finance ministers before the summer break at the end of July.
Buybacks were reintroduced after intense infighting over the role of the private sector in a Greek rescue. France had previously proposed to roll over 70% of Greek debt maturing before the end of 2014.
Though their proposal was met by fierce opposition from the sector, the French finance minister François Baroin, said this option was still on the table.
Eurogroup president Junker said “there will be private sector involvement” in Greece’s next bailout and added that the details would be worked out shortly.
The ECB is also against any form of private sector involvement for fear that this would lead credit rating agencies to declare Greece bankrupt.
The central bank is growing tired of buying Greek debt at a low interest rate to keep the economy from going under. Their policy of buying Greek sovereign debt has little backing in the EU. Germany which has a 27% stake in the ECB is particularly upset.
Enhancing the scope of the EFSF
Nevertheless, conclusions from yesterday’s talks were left vague as officials agreed to enhance the scope of the temporary rescue facility currently footing a Greek and Irish bailout, the European Financial Stability Facility (EFSF).
“Ministers stand ready to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk,” Junker said after the meeting.
He added that ministers would soon receive proposals to improve the functioning of the EFSF such as lengthening maturity of loans and lowering interest rates.
Suggestions that officials would double the size of the €440bn EFSF were thrown out by the German finance minister.
“These are the usual rumours that have nothing to do with reality,” Wolfgang Schäuble told reporters.
Meanwhile, Greece has sunk further into recession as the central government’s deficit widened by almost one third, setting the country off course to hit an interim budget target laid out by the EU and the IMF.
The EU’s bid to avert contagion seems to come a little late as Italy, Spain and even Belgian bond yields rose further amid uncertainty over the euro.
Italy, which has been taking a sustained beating on markets since Saturday, is of particular worry because it has the biggest debt mountain in the euro zone next to Greece.
Observers say Germany would reluctantly foot an Italian bailout whose economy is twice as big as crisis-hit Greece, Portugal and Ireland combined.
To tackle the possibility of further bailouts, the EU yesterday undersigned a permanent rescue facility to take over form the EFSF called the European Stability Mechanism.
The fund, which would have a maximum lending capacity of €700bn, is due to come into force by 1 July 2013.