EUROPE IS poised to proceed with a risky manoeuvre to allow Greece default on its debt but serious doubt remains over the willingness of major global banks to participate in the initiative.
As euro zone leaders gathered last night for an emergency summit in Brussels, their second in four days, they sought to play down expectation that they would to finalise all parts of a new plan to settle the debt debacle.
While signalling they were on the cusp of a new “political agreement” to assert control over the crisis, the leaders made it clear that considerable technical work remained to be done. They were still talking at midnight.
The deal would see Greece’s private creditors taking a 50 per cent loss on their investment. In question, however, is whether the banks who hold its sovereign bonds will participate in the initiative.
Fearful of the risk of panic in markets, the leaders of the 17 euro zone countries are still insisting that the effort to drastically reduce Greece’s national debt should be strictly voluntary.
The banks’ lobby group — the Institute of International Finance — said it had made a “significant” new offer to the European authorities for a voluntary debt exchange. The problem the leaders face, however, is that they do not know how many banks will take part.
This will determine both the actual cut in Greece’s debt and its need for future bailout aid from its sponsors in the euro zone and the IMF.
A source briefed on the summit said this meant the leaders would not be able to finalise the rescue package. In defiance of hopes that the meeting would deliver the final word on the new rescue package, the leaders deliberately sought to downplay the expected deal last night.
Amid fear of a new global recession, they have come under strenuous pressure from world leaders to finally stamp out the debt crisis before a G-20 summit next week in Cannes.
“We have to take resilient decisions today. It probably won’t be possible to formulate every issue to the very last detail, but the overall direction has to be ultra-clear by tonight,” said euro group president Jean-Claude Juncker.
Such remarks, echoed by other leaders, illustrate the difficulty EU leaders face as they try to reduce the burden of Greece’s debt without triggering contagion on markets.
Diminished expectations from the summit prompted incoming European Central Bank chief Mario Draghi to signal that the bank will continue its contentious bond-buying campaign.
The ECB is keen to stop its interventions in sovereign debt markets, saying this is a responsibility which should be taken over by Europe’s bailout fund.
Euro zone leaders are set to increase the firepower of the fund — known as the European Financial Stability Facility — but doubt surfaced last night about that initiative.
The source who was following the talks said some of the smaller euro zone countries had expressed concern about their increased exposure to any losses incurred by the fund after its assets are “leveraged” to expand its power to help stricken governments.
This crucial element of the rescue package is designed to minimise the risk of any market contagion undermining confidence in weakened euro zone countries like Ireland when the Greek default goes ahead.
In a further effort to prevent contagion, EU leaders agreed last night to to provide €108 billion in new capital to weakened banks.
Irish banks will not need new capital. In Berlin yesterday, German chancellor Angela Merkel praised the Government’s execution of the bailout. “Ireland — more than anywhere — is once again on a good way,” she said.
Before leaving for Brussels, Taoiseach Enda Kenny insisted in the Dáil that the Government would not follow Greece into default. Any repudiation of the national debt would undermine Irish living standards for a generation, he said. “I cannot say it often enough or strongly enough; we will not be going down the same road.”
Hostilities within the Italian government over a new austerity plan have added to the pressure on EU leaders, who have been pressing prime minister Silvio Berlusconi to substantiate a big austerity plan.
Mr Berlusconi presented EU leaders with a 14-page “letter of intent”, but tensions over the plan broke into the open in Italy’s parliament. A sitting was suspended after a fist fight broke out between opposition and government deputies.
Mr Draghi said ideas outlined in the letter were “very important” but must be implemented rapidly. The situation in Italy was “confused and dramatic”, he said.
