Germany said on Monday that a summit of EU leaders next Sunday (23 October) would not produce a “definitive solution” for the euro zone’s sovereign debt crisis amid resistance from banks to accept bigger losses on their Greek holdings.
German Finance Minister Wolfgang Schaeuble told a conference in Duesseldorf that European governments would adopt a five-point plan at the Brussels meeting.
This is expected to include a plan to recapitalise banks and reduce Greece’s debt mountain by asking the country’s private creditors to accept steeper writedowns on their holdings than the 21% losses agreed last July.
But Schaeuble cautioned that the meeting would not yield a “definitive solution” for the crisis that started in Greece two years ago and has since spread across the 17-nation bloc, leading some experts to predict a breakup.
Greece’s overall debt is forecast to climb to €357 billion this year, or 162% of annual economic output – a level economists agree is unsustainable.
To reduce this mountain, euro zone leaders are racing to convince banks to accept “voluntary” writedowns of up to 50% on their sovereign holdings. At the same time, they are trying to agree on a blueprint for recapitalising financial institutions at risk from the deepening crisis.
“Determining how the writedowns will be applied and the source of funds to recapitalise the banks will require arduous negotiations between now and the deadlines the EU has set for itself,” said Dan Morris, global strategist at J.P. Morgan Asset Management.
“We remain optimistic an agreement will be found but returns have been so strong over the last few weeks there is a risk of disappointment if it takes longer to work out the details than investors expect.”
Banks have little choice
Charles Dallara of the Institute of International Finance (IIF), a lead negotiator for the banks, said a bigger writedowns could only happen if policymakers addressed broader sovereign debt issues in Europe.
“If the official community is interested in asking the private sector to take another look at Greece then it will have to be only as part of a broader process of addressing the full range of sovereign debt issues in Europe,” Dallara said.
Privately, bankers say addressing Greece’s problems alone will accomplish little. They are pushing policymakers to come up with a stronger plan for addressing the woes of the entire euro zone, fearful that governments might come back with new demands in a matter of months if their latest steps fail.
One solution under discussion is leveraging the bloc’s €440 billion rescue fund – the European Financial Stability Facility (EFSF) – to give it more firepower. But it is unclear whether Germany and other northern European members of the currency bloc will agree to this.
EU officials say the banks have little choice but to accept “voluntarily” the losses requested by governments, since the alternative would be a disorderly default that would trigger wider financial market chaos and bigger writedowns.
Recapitalisation plan resisted
European finance ministers will meet on Friday to prepare the EU summit. Sources said they would consider a three-pronged plan for shoring up banks, which have restricted interbank lending in the crisis, exacerbating market worries.
The plan foresees a higher minimum capital requirement for banks, an additional temporary buffer for those exposed to troubled euro debt, and a requirement that banks have adequate “term” funding, even if this means state-backed guarantees.
Leading German and French banks have said they will resist forced recapitalisations, but the French government made clear on Monday that this is what policymakers wanted.
“French banks will be recapitalised even though they are solid because we are in a climate of extreme nervousness, extreme tension and lack of confidence so we must strengthen all the banks,” French government spokeswoman Valerie Pecresse said on French radio.
“We are going towards a collective European solution,” she added. “We will ask all European banks to have 9% capital ratios by 2013 to be more solid to face risk.”
The deadline Pecresse mentioned was much later than EU officials have suggested. They want banks to be given three to six months to reach the target.
Germany working ‘intensively’ on bank’s participation
German Chancellor Angela Merkel’s spokesman said the government was working “intensively” to define how German banks would participate in a second rescue package for Greece and how to make best use of the EFSF.
But like Schaeuble, he cautioned against high expectations. Merkel and French President Nicolas Sarkozy promised last week that they would unveil a new comprehensive plan by the end of the month, boosting investor hopes.
“The chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled,” spokesman Steffen Seibert said.