Duesseldorf/London - Germany lowered expectations of a breakthrough in the eurozone’s sovereign debt crisis next weekend, saying Sunday’s EU summit will not procude a final solution, and kept up pressure on banks to accept bigger writedowns on Greek debt.
Financial markets have risen in the last week on hopes that
the 27 European Union leaders will agree on a comprehensive plan to draw a line
under the two-year-old crisis, which is weighing on the world economy.
But German Finance Minister Wolfgang Schaeuble said in a
speech in Duesseldorf on Monday that while European governments would adopt a
five-point platform to address the turmoil, it was wrong to expect “a
definitive solution” at the summit.
Schaeuble said the plan would have to include a reduction in
Greece’s debt mountain. He repeated at the weekend that private bondholders
would have to accept steeper voluntary write-downs on their Greek holdings than
the 21% agreed last July.
A lead negotiator for the banks said this could only happen
if policymakers addressed the “full range” of sovereign debt issues in Europe.
Charles Dallara of the Institute of International Finance (IIF) declined
comment on reports that the private sector might have to take a 50% loss.
On Monday the euro rose to a new one-month high against the
dollar and European shares hit a 10-week peak on optimism about the October 23
summit, which G20 finance chiefs called a decisive moment. But European stocks
gave back some gains and German bonds rose after Schaeuble’s remarks.
Meeting those high expectations will be difficult. Eurozone leaders are in a race against time to convince banks to accept “voluntary” writedowns of up to 50% on their Greek debt. They are also 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 JP 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.”
Pre-summit talks are taking place amid renewed social unrest
in Greece. Much of the country is expected to be shut down by a 48-hour strike
that will peak on Thursday, just as parliament votes on controversial new
austerity measures.
Merkel’s spokesperson 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 the bloc’s €440bn rescue
fund, the European Financial Stability Facility (EFSF).
Leaders hoped to take a “big step” forward in addressing the
crisis, he said, warning that expectations for the summit had gotten out of
hand.
“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,” Steffen Seibert said.
Banks push back
Dallara, managing director of the IIF, told Reuters that private holders of Greek bonds were prepared to discuss changes in how they might participate in future Greek debt relief.
EU officials say the bankers have little choice, since the
alternative would be a disorderly default that would trigger wider financial
market chaos and bigger losses.
But in a sign of growing frustration with policymakers, who have changed their crisis strategy repeatedly as Greece’s woes have deepened, Dallara said a broader discussion was needed.
Privately, bankers say addressing Greece’s woes alone will accomplish little. They are pushing policymakers to come up with a stronger plan for addressing the woes of the entire eurozone.
One solution under discussion is leveraging the EFSF to give it more firepower, but it is unclear whether a solution can be found that satisfies Germany and other northern European members of the currency bloc.
“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 told Reuters.
“And it will have to be on the basis of an open and
transparent discussion about the Greek economic adjustment programme and the
associated issues of debt sustainability.”
Greece’s overall debt mountain is forecast to climb to €357bn this year, or 162% of annual economic output - a level economists agree is unsustainable.
How to recapitalise banks is another source of conflict. The
European Banking Authority (EBA), which is assessing bank capital needs, is
expected to mark down the value of their sovereign debt holdings and require a
9% core Tier 1 capital ratio.
This would force banks to raise billions of euros. 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 spokesperson 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 2013 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.