Bloomberg News

France Retreats in German Clash Over Bailout Fund Leverage

November 02, 2011

(Adds comments from De Jager in second paragraph. For more on the European debt crisis, see EXT4.)

Oct. 22 (Bloomberg) -- France retreated in a clash with Germany over how to expand the power of Europe’s bailout fund as finance ministers entered the second of a six-day marathon to stave off a Greek default and shield banks from the fallout.

The French proposal that the fund, the European Financial Stability Facility, should get a banking license enabling it to borrow from the European Central Bank, “is no longer an option” said Dutch Finance Minister Jan Kees de Jager told reporters today in Brussels. He said two options were under consideration, declining to discuss them further. Still, there are “big differences” among countries, he said.

The French flexibility indicated progress toward easing the threat to the global economy stemming from Greece. As they began their consultations yesterday, the euro-area finance chiefs received an assessment from auditors that Greek finances have taken a “turn for the worse,” requiring more official aid and deeper investor writedowns.

Stocks and the euro rallied on signs that policy makers may heed prodding from global leaders including President Barack Obama to calm global markets. Officials are also considering unleashing as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, almost double the current ceiling, by combining the 440 billion-euro EFSF and its planned successor, the European Stability Mechanism.

Bank Recapitalization

The 27 European Union finance ministers today are addressing the framework for bank recapitalizations, De Jager said. French President Nicolas Sarkozy and German Chancellor Angela Merkel were set to meet later before a summit tomorrow and a follow-up gathering on Oct. 26 to nail down what they have called a “comprehensive” plan.

Luxembourg’s Jean-Claude Juncker said today that no decisions were likely until then.

Aid of 256 billion euros for Greece, Ireland and Portugal has failed to stabilize markets or prevent the turmoil from spreading to France, co-anchor with Germany of the European economy. French bank shares have tumbled on concern they are vulnerable to losses around Europe’s periphery.

With French bond premiums against Germany at euro-era highs, France yielded to opposition from both the ECB and its neighbor and largest trading partner.

The Franco-German split centered on how to leverage the EFSF. While Germany endorsed enabling it to insure a portion of cash-strapped nations’ bond sales, France wanted to turn it into a bank that could tap the ECB.

‘Everyone Knows’

“Everyone knows the reticence of the central bank and everyone also knows of the reticence of the German position,” French Finance Minister Francois Baroin said on Oct. 19. “For us it is and will remain the most effective position. The Americans do it, the British do it.”

After the first round of talks yesterday, Baroin said that “is not a definitive point of discussion for us.”

“What matters is what works,” he said.

The start of yesterday’s meeting was overshadowed by the report by the European Commission, the ECB and the International Monetary Fund on Greece that highlighted the scope of fixing Greece’s finances without sending shockwaves through the banking system.

Officials are considering five scenarios to update a July agreement that foresaw 21 percent losses on Greek debt for private bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so- called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.

Bank Talks

“We have to discuss with the private sector and see what is suitable,” Spain’s Elena Salgado told reporters. Ministers discussed investor losses of “more than 21 percent,” she said.

Talks on investor losses in Greek holdings won’t be addressed by the 27 ministers today as they were a topic for the 17 euro countries.

Divisions over the handling of Greece were thrown into relief by the report, which was obtained by Bloomberg News. It contained a footnote that the ECB, which has lobbied against writedowns, “does not agree” with the inclusion of the bond- loss scenarios.

The ministers yesterday signed off on the payout of its 5.8 billion-euro share of an 8 billion-euro loan to Greece. It’s the sixth installment of a 110 billion-euro package awarded in May 2010.

A deepening recession and delays in enacting budget cuts have raised Greece’s financing needs by at least 20 billion euros since July, when euro leaders hammered out a 159 billion- euro package, the people said.

Greek Needs

“Given still-delayed market access, large-scale additional official financing requirements would remain, estimated at some 114 billion euros,” according to the auditors’ report, dated yesterday. “To get the debt down further would require a larger private-sector contribution” of at least 60 percent to reduce debt below 110 percent of gross domestic product by 2020.

The government in Athens forecasts the debt load next year at about 172 percent of GDP.

Greece has said it has the cash to operate until mid- November after a scheduled review of the country’s progress in meeting fiscal targets was suspended for about two weeks last month.

--With assistance from Mark Deen, Jonathan Stearns, Thomas Penny, Stephanie Bodoni, Anabela Reis and Chiara Vasarri in Brussels. Editors: James Hertling, Jones Hayden

To contact the reporters on this story: Tony Czuczka in Brussels at; Fred Pals in Brussels at

To contact the editor responsible for this story: James Hertling at

Toyota's Hydrogen Man
blog comments powered by Disqus