Bloomberg News

Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

November 02, 2011

(Adds leaders’ meeting with Dallara in 16th paragraph. For more on the European debt crisis, see EXT4.)

Oct. 27 (Bloomberg) -- European Union talks with banks on bondholder losses as part of a second Greek bailout ran aground, dimming the chances for a comprehensive strategy at a summit to stamp out the debt crisis.

A statement issued close to midnight in Brussels by the Institute of International Finance, the bank lobby, said there was no agreement “on any element of a deal.”

“Work’s not been done yet, but everyone’s coming here today with the goal to progress quite a bit,” German Chancellor Angela Merkel told reporters as she arrived for the summit yesterday at about 5 p.m.

The Greek stalemate darkens the summit’s prospects, since a deal struck at an earlier meeting yesterday on recapitalizing banks and later talks on bolstering the euro area’s 440 billion- euro ($608 billion) rescue fund hinge on steering debt-laden Greece toward financial health.

While policy makers and bondholders were converging on a 50 percent writedown of Greek debt, clashes over collateral to underpin the transaction will limit the summit to issuing a mandate for further talks, an EU official said in Brussels on condition of anonymity.

European leaders convened for the second summit in four days -- and the 14th in 21 months -- amid mounting global exasperation over their failure to extinguish the two-year-old crisis that now threatens to ravage Italy and France and brake the world economy.

Stocks Gain

U.S. stocks gained and the euro erased declines on hopes for progress. The Standard & Poor’s 500 Index added 1.1 percent in New York trading. The euro slid 0.1 percent to $1.3891 at 12:50 a.m. in Brussels.

The outlines of a deal to safeguard banks emerged, centering on a June 30, 2012 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings, according to a statement after all 27 EU leaders met.

A group of 70 European banks will need to raise 106 billion euros in the next eight months to meet the goal, the European Banking Authority, the banking regulator, said. Greek banks need 30 billion euros; those in Spain need 26.2 billion euros. In France, the need totals 8.8 billion euros and in Italy, it’s 14.8 billion euros.

Dividends, Bonuses

Institutions falling below the target would face “constraints” on paying dividends and awarding bonuses. The leaders showed little appetite for an EU-run plan, bowing to German calls to make European money available only as a last resort.

Details need to be worked out by EU finance ministers, EU President Herman Van Rompuy said in a statement without announcing when that will be done.

The bank-aid program “will only go ahead when the other parts of a full package go ahead and further progress on that needs to happen tonight,” U.K. Prime Minister David Cameron told reporters after he left and the heads of euro states continued their deliberations.

Euro leaders won’t rule out a forced Greek writedown, while continuing to pursue a “voluntary” solution that would scale up a July accord that foresaw 21 percent losses for bondholders, the EU official said.

Bank Lobbying

The IIF, which lobbies on behalf of 450 financial firms, sweetened its offer yesterday, proposing to go beyond the 40 percent losses it mooted last week, said two people with knowledge of the talks.

“We remain open to a dialogue in search of a voluntary agreement,” Charles Dallara, the IIF’s managing director, who was in Brussels, said in the statement. He said there was no deal on the details of any transaction or the size of the writedown.

Merkel and French President Nicolas Sarkozy, leaders of Europe’s two biggest economies, peeled away to meet Dallara, Van Rompuy and International Monetary Fund Managing Director Christine Lagarde in an effort to break the deadlock. The summit reconvened at about 12:45 a.m.

Leaders weighed two options for extending the reach of the fund: using it to insure bond sales and to finance a special investment vehicle that would court outside money, including from the IMF.

Sarkozy plans to call Chinese leader Hu Jintao today to discuss China contributing, said a person familiar with the matter.

While markets clamor for a signal that the euro area will devote 1 trillion euros or more to combating the crisis, the EU won’t be able to produce a number until late November, the EU official said.

--With assistance from Gonzalo Vina, Helene Fouquet, Tony Czuczka, Ewa Krukowska, Jim Brunsden, Jonathan Stearns, Chiara Vasarri, Stephanie Bodoni, Jurjen van de Pol and Angeline Benoit in Brussels, Katya Andrusz in Warsaw and Lorenzo Totaro and Flavia Rotondi in Rome. Editors: James Hertling, Patrick Henry

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Aaron Kirchfeld in Brussels at akirchfeld@bloomberg.net

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


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