EU leaders tackle new rescue fund plans
15. December 2010. | 06:44
Source: EU Business.com
European leaders tackle plans to set up a permanent financial rescue system at a two-day summit this week as the European Central Bank upped the stakes Tuesday, calling for them to do much more.
- European leaders tackle plans to set up a permanent financial rescue system at a two-day summit this week as the European Central Bank upped the stakes Tuesday, calling for them to do much more.
The ECB, which has so far bought eurozone government bonds worth 72 billion euros to help commercial banks, wants the politicians to take the difficult measures needed to tame a debt and deficit crisis which has forced bailouts on Greece and Ireland.
"We are calling for maximum flexibility, and I would say maximum capacity, quantitatively and qualitatively," for the European Financial Stability Facility (EFSF), ECB chairman Jean-Claude Trichet told media in Frankfurt.
The three-year EFSF, worth one trillion dollars in all when combined with other instruments, was put in place after the Greek bailout but analysts warn that it will not be enough if Portugal and possibly Spain require help.
EU leaders meeting Thursday and Friday are hoping to get a new system ready for January 1, 2013, with the biggest contributors hoping that in itself will ease tensions on the markets. To do that, revisions to the year-old Lisbon Treaty have first to be agreed to allow the mechanism to be made permanent.
Trichet said recent developments "call for all of us in Europe to reflect intensively on what should be done" and urged EU leaders to do more than they have offered to so far.
"We are not completely satisfied with the proposals put forward by the (EU) Commission and the European Council Task Force that should aim at strengthening the system of economic governance in Europe," an ECB statement said.
After the major political problems that dogged ratification of the Lisbon Treaty, EU leaders, however, will likely want to avoid anything with the potential to cause fresh difficulties.
The way forward would be to implement a "simplified" treaty change, rather than risk sending it back for complete re-negotiation -- a fraught and uncertain process.
Diplomats say that given differing opinions, leaders may steer clear of calls -- despite Trichet's comments -- to increase the EFSF because some key players feel it is adequate for the moment.
Germany, Europe's paymaster and most powerful economy, along with other influential supporters consider there is enough left in the existing pot to avoid being bounced into increasing its size at the moment, they said.
"The general feeling is that it has barely been touched," one diplomatic source said.
EU leaders will also look at proposals that private sector investors in government bonds will have to bear some of the pain if the debt has to be restructured at a later date.
The proposal is hugely controversial because bond markets work on the principle that government bonds are a cast-iron investment, with minimal risk.
If they face potential losses on restructuring, they will demand higher initial rates of return -- a twist in the market which has only added to the recent pressure on weaker eurozone member states.
Another idea -- to issue joint eurozone bonds -- is off the table after German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected the idea.
Such a plan could reduce borrowing costs for weaker eurozone states but conversely increase them for stronger members, above all Germany, making it totally unacceptable in Berlin.