Bloomberg News

Europe Divided on Greek Writedowns That Juncker Says May Top 60%

October 11, 2011

(See EXT4 for more on the euro-area financial crisis.)

Oct. 11 (Bloomberg) -- European leaders pushed back a debt- crisis summit amid opposition to Germany’s drive for deeper- than-planned Greek bond writedowns that Luxembourg’s Jean-Claude Juncker says may exceed 60 percent.

When asked on Austrian television late yesterday to comment on speculation investors may lose between 50 percent and 60 percent of the value of their holdings, Luxembourg’s prime minister, said “we’re talking about even more.” He didn’t comment further.

The Oct. 18 meeting was postponed to Oct. 23 as Europe gropes toward a master plan for dealing with Greece’s oversized debt, insulating the Spanish and Italian markets, and shielding banks from the fallout.

Europe needs a strategy for shoring up banks before unstitching a July accord to cut Greek bond values by an average of 21 percent, Belgian Prime Minister Yves Leterme said.

“It is a very sensitive item,” Leterme said in a Bloomberg Television interview at his Brussels residence yesterday. “You can’t at every European Council change the percentages and bring supplementary problems to banks.”

Germany and France, Europe’s dominant tandem, this week pledged a crisis-management breakthrough in time for a Nov. 3 meeting of Group of 20 leaders, the informal steering committee for the world economy.

Opposition to bigger Greek debt writedowns is coming from the European Central Bank, which is against any backsliding from the July 21 accord on a second Greek bailout, a central bank official said yesterday. An appeal to “fully implement all aspects” of the July roadmap was inserted into last week’s monthly policy statement as a warning to Germany, the official said under condition of anonymity.

Economic-Review Mission

For Greece, the endgame drew nearer with an announcement that European Union, International Monetary Fund and ECB experts are likely to complete their economic-review mission today. Some “technical issues” remain to be sorted, Greek Finance Minister Evangelos Venizelos said in a statement yesterday.

“It is looking as if the July 21 agreement just isn’t sufficient and that’s been increasingly recognized in Greece and the rest of Europe,” Julian Callow, chief European economist at Barclays Capital in London, said yesterday on Bloomberg Television’s On the Move with Francine Lacqua.

German Chancellor Angela Merkel and French President Nicolas Sarkozy put bank recapitalization at the top of the priority list in an Oct. 9 declaration in Berlin that triggered a flurry of consultations in European capitals.

The German and French leaders each called for a “lasting” solution to the 19-month crisis, echoing language the EU used in March when it unwrapped what it labeled a “comprehensive” package to restore economic order.

Upgraded Strategy

The upgraded strategy hinges on finding a way to get more out of the 440 billion-euro ($602 billion) rescue fund.

“Further elements are needed to address the situation in Greece, the bank recapitalization and the enhanced efficiency of stabilization tools,” EU President Herman Van Rompuy said in setting the new summit date yesterday.

The summit, now slated for a Sunday when the U.S. and European markets are closed, will be preceded by a meeting of finance ministers on a date to be determined. Europe has traditionally chosen weekends for market-sensitive crisis management, as when the euro area created the rescue fund in May 2010.

A planned reinforcement of the fund, known as the European Financial Stability Facility, faces its final test today with a vote in Slovakia’s parliament. One party in the governing coalition is holding out against approval.

Political jousting in Slovakia, a euro user since 2009, showed how Europe’s unanimous decision-making principle makes the emergency response hostage to local politics.

Slovak Ratification

Slovak Prime Minister Iveta Radicova’s party is seeking to pressure rebel lawmakers by tying the EFSF ratification to a no- confidence motion, two government officials said under condition of anonymity yesterday.

Belgium’s Leterme said a veto shouldn’t derail the fund. He called on the remaining 16 euro governments “to take over the burden and we’ll have to defend the euro” in case Slovakia balks at ratification.

The strengthened fund will gain the power to buy bonds in the primary and secondary markets, offer IMF-style precautionary credit lines and enable the bolstering of bank capital.

EFSF Firepower

Officials are working out how to scale up the EFSF’s firepower without requiring another round of parliamentary approvals or dipping into the balance sheet of the ECB. The central bank has ruled out granting the EFSF a banking license.

Under a workaround floated yesterday, the governments could use the EFSF to insure a portion of new bonds sold by debt- strapped nations, automatically extending the fund’s coverage.

EFSF resources “should be dedicated to enhance sovereign debt new issuance of securities, thus multiplying their effect,” ECB Vice President Vitor Constancio said in Milan yesterday.

--With assistance from Jeff Black in Frankfurt, Radoslav Tomek in Bratislava, Peter Laca in Prague, James Hertling in Paris and Jonathan Tirone in Vienna. Editors: James Hertling, Jones Hayden

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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