Bloomberg News

G-20 Set to Push European Leaders to Deliver Crisis Solution

October 15, 2011

(See EXT4 for more on the euro-area financial crisis and GMEET <GO> for more on the G-20 meeting.)

Oct. 15 (Bloomberg) -- Group of 20 finance chiefs are pressing Europe’s leaders to deliver within the next few days a comprehensive plan that stamps out the region’s sovereign debt turmoil, according to an official from a G-20 nation.

G-20 finance ministers and central bankers will say in a statement to be released after talks in Paris today that an Oct. 23 Brussels summit of leaders must quell the threat of contagion, the official said on condition of anonymity because the communique isn’t finished. They will also urge the euro-area to maximise the firepower of its 440 billion-euro ($611 billion) bailout fund, the person said.

European governments are concentrating on a plan which would include writing down Greek bonds by as much as 50 percent and establishing a backstop for banks, people familiar with the discussions said yesterday. Worldwide stocks rose and the euro rallied the most against the dollar in more than two years this week on optimism officials are ramping up their crisis-fighting.

“The world is waiting for solutions to the European problems that have now become the world’s problems,” Brazilian Finance Minister Guido Mantega told reporters yesterday in Paris. “I am more optimistic. They are advancing.”

There was some discord among G-20 officials as those from rich nations such as the U.S., Germany and Canada questioned proposals to expand the resources of the International Monetary Fund to help it contain Europe’s woes.

‘Sufficient Funds’

“From the point of view of the Bundesbank, the IMF is currently endowed with sufficient funds,” Andreas Dombret, a member of the German central bank’s Executive Board, said in an interview today. Canadian Finance Minister Jim Flaherty told Bloomberg Television yesterday that he didn’t “think we ought to be asking the IMF to do a great deal more.”

The G-20 policy makers are preparing for a Nov. 3-4 summit of leaders in Cannes, France. Today’s talks will end with the statement’s release and press conferences at about 4:15 p.m.

The group will reiterate its aversion to excess volatility and disorderly movements in exchange rates as well as suggest emerging markets allow greater currency flexibility, officials said. The statement will also commit authorities to ensuring banks are capitalized and to preserving stability in financial markets.

Greek Unrest

Almost two years since Greece’s government announced it had underestimated its budget deficit, Europe’s latest strategy hinges on putting the Mediterranean nation on a viable path, as two years of austerity plunge it deeper into recession and provoke civil unrest that threatens political stability. Failure to curb the crisis has investors targeting larger debt-strapped nations such as Italy and is rattling global markets.

“I think they will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution to the euro zone crisis,” U.K. Chancellor of the Exchequer George Osborne told reporters today. “The Oct. 23 European Council is the moment people are expecting something quite impressive.”

In the works is a five-point plan foreseeing a solution for Greece, bolstering of the European Financial Stability Facility rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.

Bond Losses

The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people yesterday.

The crisis raged yesterday through France, the 17-nation euro area’s second-largest economy and co-anchor with Germany of the European Union. French bonds slumped, pushing the 10-year yield up 17 basis points to 3.13 percent. The week’s rise of 38 basis points was the most since the euro’s debut in 1999.

Options include tweaking a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, the people said.

Under a more aggressive proposal, investors would exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate option is a restructuring involving writedowns without collateral, they said.

Bank Aid

The bank-aid model under discussion is to set up a European-level backstop capitalized by the rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.

Such ideas are controversial in Germany, Europe’s dominant economy, which so far has called for bank recapitalization on a country-by-country basis.

What role the IMF can play in defusing the turmoil has split G-20 officials. While nations from China to Brazil are considering increasing the IMF’s lending power, policy makers from richer countries indicated reluctance to boost the lender’s coffers. U.S. Treasury Secretary Timothy F. Geithner said yesterday that the IMF currently has uncommitted resources.

Officials are considering seven ways of getting more firepower out of Europe’s temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to provide bond insurance. The ECB has all but ruled out the first method, making bond insurance more likely, the people said.

Bond Insurance

Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, the people said.

A consensus is also emerging to accelerate the setup of a permanent aid fund planned for July 2013, the European Stability Mechanism. Next week’s discussions will focus on creating it a year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block bailouts.

One proposal is to enable aid to proceed when backed by countries representing 95 percent of the fund’s capital on the basis of an assessment by the EU and ECB, the people said. Another proposal would set an 85 percent threshold.

--With assistance from Svenja O’Donnell, Mark Deen, Cheyenne Hopkins, Simon Kennedy, Gonzalo Vina, Theophilos Argitis, Toru Fujioka, Simone Meier, Rainer Buergin, Helene Fouquet and Victoria Ruan in Paris, Sandrine Rastello in Washington, Maria Petrakis in Athens, Stefan Nicola in Berlin, Jonathan Stearns and James G.Neuger in Brussels and Emma Charlton and Paul Dobson in London. Editors: Craig Stirling, Simon Kennedy

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Arnaldo Galvao in Paris at agalvao1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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