GERMANY AND FRANCE have moved to shore up Europe’s ailing bailout of Greece but an upsurge of turmoil in the debt emergency has led to fresh warnings of a “systemic” crisis in the bank sector.
With markets on edge over a credit rating downgrade of French banks, a committee of senior advisers has told EU finance ministers that the debacle threatens to create a “vicious circle” between sovereign debt, bank funding and negative growth.
In the face of rising doubt about the viability of the Greek rescue, and fears that the country faces the prospect of a sovereign default, the French and German leaders last night said the rescue programme laid down in its bailout was “indispensable” to ensure the country’s economic recovery.
German Chancellor Angela Merkel and French president Nicolas Sarkozy insisted Greece’s future lay within the euro zone, but they announced no new initiatives.
Europe’s leaders are now confronted with the danger that the two-year long sovereign debt saga may trigger a new international banking crisis.
Finance minsters travelling to a meeting in Poland tomorrow morning have been warned by the Economic and Financial Committee, which comprises high-level finance ministry officials in member states that the crisis is worsening.
“While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic,” the committee said, according to Reuters.
In a teleconference last evening, Dr Merkel and Mr Sarkozy urged Greek prime minister George Papandreou to fully execute the austerity measures needed to secure an €8 billion rescue loan.
As Greece runs out of cash, investors are gripped by increasing fear of a default and the risk of a consequent shock to the global financial system. This flows from anxiety over threats to the country that its next loan will be withheld if it fails to deliver promised reforms.
Although it would be open to euro zone leaders to release the money anyway, such a move would compromise their power and exert further pressure on the Greek authorities.
A French government spokeswoman said Paris wanted “guarantees” from Athens on its recovery and drew a contrast with Ireland’s delivery of its bailout plan.
“Let’s remember what happened in Ireland. At the beginning, Ireland’s recovery plan was said to be too tough, too difficult to implement,” she said. “Today, Ireland is out of the woods. Ireland has implemented its plan.”
Despite the continued turmoil, the Government received good news yesterday when the European Commission agreed to provide its portion of Ireland’s bailout loans at cost price. It is estimated this will lead to further annual savings of €200 million, bringing the total benefit of the cut in the interest rate on the bailout to between €1 billion and €1.1 billion.
The crisis has brought Dr Merkel to the fore in the increasingly tense battle to restore order in the euro zone. Criticised by European officials for her perceived lack of leadership, the chancellor is coming under pressure to drop her resistance to commonly issued eurobonds.
The euro and European shares regained some ground yesterday after European Commission president José Manuel Barroso told MEPs in Strasbourg that the EU’s executive is preparing a proposal for the introduction of such bonds.
“But we must be honest: this will not bring an immediate solution for all the problems we face and it will come as an element of a comprehensive approach to further economic and political integration,” Mr Barroso said.
The Government welcomed the eurobond proposal. “The solidarity involved in a eurobond system would go a long way to stabilising the markets and ensuring the survival of the euro currency,” said Minister of State for Europe Lucinda Creighton.
