Paris/Brussels - Finance chiefs of the eurozone's four
biggest economies will hold last-minute talks in Paris on Tuesday evening to
try to narrow differences on the currency area's future after Cyprus became the
fifth country to request a bailout.
Ministers from Germany, France, Italy and Spain will discuss
how to manage the crisis in the short term and proposals for closer long-term
fiscal and banking integration to prepare for a European Union summit starting
Financial markets are on edge and international pressure for
decisive action is rising but the summit, the 20th since the bloc's debt
problems began in early 2010, is not expected to produce a lasting solution to
European Commission president Jose Manuel Barroso underlined
just how much was at stake.
"It is not only economic integration, it is also the
overall economic confidence in the euro area, and indeed, our commitment to the
European project," he said in a speech in Brussels.
"This is why we need to be bold and define the way
A report prepared by the EU's top four officials suggests
the eurozone could create a treasury for the single currency and jointly issue
euro bonds in the medium term as the final stage of a fiscal union.
However, German Chancellor Merkel, who leads Europe's
biggest economy and the main contributor to its bailout funds, again on Monday
ruled out any sharing of debt or bank liabilities as "economically wrong
The finance ministers' session was called at such short
notice - in an apparent rush to repair damage from a public rift between Merkel
and leaders of the other three states when they met in Rome last Friday - that
one finance minister's press staff only learned of the invitation on Tuesday
The four finance chiefs are expected to try to paper over
those differences before Merkel and French President Francois Hollande hold a
pre-summit meeting on Wednesday.
Cyprus, the 17-nation currency area's third-smallest economy
with just 1 million residents, added drama to a fraught week by applying for
rescue loans on Monday.
Half its economy
Two eurozone sources said the east Mediterranean island,
with an outsize financial sector heavily exposed to neighbouring Greece, may
need up to €10bn in emergency financing, more than half its €17.3bn annual
While the sum is easily within the range of the European
Financial Stability Facility (EFSF) bailout fund, it sets an awkward precedent
and may lead to demands for collateral or for private bondholders to take a
write-down as they did in Greece.
Cyprus needs to plug a €1.8bn capital shortfall in its
second-largest lender by June 30. Potential aid could be more comprehensive to
cover fiscal requirements, Finance Minister Vassos Shiarly told Reuters.
Nicosia is believed to have applied to the EU for aid after
exhausting attempts to secure loans from either China or Russia, a close ally,
in an apparent effort to avoid the tough conditions and intrusive monitoring of
an EU/International Monetary Fund (IMF) programme.
"The exact number has not been decided yet. It was to
be €6bn for the state financing and €2bn for the banks but that is optimistic -
it is more likely to be 7 and 3 - up to €10bn euros in total," one
eurozone official said.
On Monday, Spain formally requested up to €100bn euros in
rescue loans to recapitalise a banking sector that is weighed down by bad loans
from a burst real estate bubble.
It is seeking to avoid the political humiliation and partial
loss of sovereignty involved in a full state bailout programme of the kind
granted to Greece, Ireland and Portugal, even though the IMF and EU authorities
will still have to monitor the aid.
Spanish and Italian bond yields rose again on Tuesday as
scepticism set in before the EU summit. Spain had to pay the highest yields
since last November to sell €3.08bn in short-term debt as demand from its
ailing banks dwindled.
The euro weakened marginally against the dollar.
Investors want to see bold moves to underpin the European
currency union and halt the inexorable contagion from one debt-stricken country
to another. But with 27 EU countries and 17 in the eurozone, quick steps are
one thing Europe can't take.
The Brussels summit is expected to agree on a growth package
pushed by France worth around €130bn ($162bn) in infrastructure project bonds,
reallocated regional aid funds and European Investment Bank loans.
Leaders will also discuss proposals for a banking union but
while they are likely to agree to give the European Central Bank power to
supervise big cross-border banks, Merkel is resisting any joint deposit guarantee or common bank
In Washington, US Treasury Under Secretary Lael Brainard,
who has been handling financial diplomacy with Europe, urged EU leaders to put
"more flesh on the bones" of their plans for tackling the debt crisis
at this week's summit.
"The particulars on how they go forward and how they
design their firewall, how they design their policies, those are things that at
the end of the day sit with those European leaders," she said in an
interview with Reuters. "We're all looking forward to seeing some of the
Jim O’Neill, chairperson of Goldman Sachs Asset Management,
told Reuters the eurozone crisis could be solved easily if Merkel and other
leaders showed the political will.
"The euro crisis is in some ways mind-bogglingly simple
to solve... because it isn't economics, it's politics," O'Neill told
Reuters in an interview.
"If Angela Merkel and her colleagues stood there
together with the rest of the euro area... and if they behaved as a true union
this crisis would be finished this weekend," he said.
The euro area had no current account deficit with the rest
of the world, did not need external financing, had a lower debt- and
deficit-to-gross domestic product ratio than the United States or Japan, he
"And yet we have this almighty mess."
The EU's top four officials - European Council President
Herman Van Rompuy, Barroso, European Central Bank president Mario Draghi and
Eurogroup chairperson Jean-Claude Juncker - circulated proposals to eurozone leaders ahead of the summit.
"In a medium-term perspective, the issuance of common
debt could be explored as an element of such a fiscal union and subject to
progress on fiscal integration," said the report, obtained by Reuters.
"Steps towards the introduction of joint and several
sovereign liabilities could be considered, as long as a robust framework for
budgetary discipline and competitiveness is in place to avoid moral hazard and
foster responsibility and compliance," it said.
The EU officials proposed a "criteria-based and
phased" approach towards issuing common debt, in which progress in the
pooling of decisions on budgets would be accompanied with commensurate steps
towards the pooling of risks.
"Several options for partial common debt issuance have
been proposed, such as the pooling of some short-term funding instruments on a
limited and conditional basis, or the gradual roll-over into a redemption
fund," it said.