Europe identified Saturday a €108 billion hole in banks’ cash buffers after warning lenders they faced massive hits on Greek debt under a new eurozone rescue plan.
Europe and the IMF would only proceed with a second planned Greek bailout if banks accepted losses of ‘at least 50 per cent’ on their debt holdings
Amid dire warnings that Europe’s debt crisis threatens global recession, plans to recapitalise came after ministers put the squeeze on banks to accept write-downs of “at least 50 per cent” to allow a new bailout for Athens to go ahead.
But a drive for the eurozone’s wider rescue fund to tap into unlimited European Central Bank funds hit the rocks, as German Chancellor Angela Merkel and French President Nicolas Sarkozy flew in for crunch talks before back-to-back EU summits Sunday and Wednesday.
Greek Prime Minister George Papandreou, also in town early, said these differences had to be resolved in the coming days “not only for the future of Europe but for the existence of Europe.”
Polish Finance Minister Jacek Rostowski said plans for the banks would only work as “part of a comprehensive package” including “the creation of a large and credible firewall in terms of preventing contagion spreading from one sovereign to another.”
In an intriguing development with longer-term ramifications, Germany suggested a radical overhaul of the EU’s treaty rule-book, enabling European Court of Justice action against states that break public finance obligations to EU partners.
Progress on bank recapitalisation emerged on the eve of back-to-back EU summits today and Wednesday, under pressure to fend off Chinese, American and other big international rivals.
National treasuries across the European Union would pump in “107-108 billion euros” to bring lenders’ core cash reserves up to a newly raised nine percent of holdings should leaders back the new banking bailouts when they assemble in Brussels, a diplomat told AFP.
In a sign of domestic political difficulties as well as stretched finances, another diplomat said Spain, Italy and Portugal each had to be taken for separate “little huddles” with the European Banking Authority and the European Central Bank to “explain the reasons.”
British finance minister George Osborne said “real progress” had been made, but that London “will be keeping up the pressure over the next couple of days” to craft a lasting, overall solution to the crisis.
A final deal Merkel said was attainable “by Wednesday” is largely dependent on parallel, but separate talks on a write-down of reportedly at least 50 per cent of the Greek debt held by banks.
In exchange for “voluntary” agreement, so as not to trigger default insurance contracts, Greece would get new rescue loans from eurozone and EU partners, plus the International Monetary Fund.
Europe and the IMF would only proceed with a second planned Greek bailout of €109 billion if banks accepted losses of “at least 50 per cent” on their debt holdings, diplomats said.
Many Italian and Spanish banks, like the French, have seen their credit rating downgraded in recent weeks as fears rise over their exposure to sovereign debt.
Governments nonetheless remained miles apart on how to boost the firepower of the 440-billion-euro European Financial Stability Facility (EFSF), Dutch Finance Minister Jan Kees De Jager said.
A plan long championed by Sarkozy to turn the EFSF into a bank that could draw money from the European Central Bank (ECB) “is no longer an option,” De Jager said.
Merkel and the ECB opposed the idea, and the talks with Sarkozy were expected to focus on two alternative scenarios: using the EFSF to insure partial losses on future eurozone bonds, and proposals for the IMF to create a special fund topped up by emerging economies.
“Big differences” though remain on which road to take, De Jager added.