Euro debt crisis solution looks increasingly unlikely

Wednesday, 26 October 2011 10:28

Finding an agreement on how to fund an increase in the bailout facility for the euro debt crisis is likely to be the most difficult task facing European leaders at an emergency summit in Brussels today.

The European Financial Stability Facility (EFSF) has an agreed bailout fund of €440 billion but all sides admit that this needs to be increased further. The problem is how to achieve this and who will pay for it.

Leaders will also be discussing and trying to agree the scale of the write-off of Greek debt and the recapitalisation of the banks that will be required to help the banks cope with the losses as a result of the Greek writedowns. The level of write-off currently agreed is 21 per cent, but investors will have to accept bigger losses, probably 50 per cent.

There are doubts that all of the issues can be agreed ahead of the summit. Once again, German Chancellor Angela Merkel faces a key vote in the German parliament on increasing the size of the euro bailout fund without using any extra money from the German taxpayer.

Meanwhile, Italian Prime Minister, Silvio Berlusconi is fighting for his political life and to stave off the collapse of his coalition government in Italy. Mr Berlusconi is unable to get the coalition to agree to austerity measures and economic reforms that are a pre-requisite for a deal with the European Union (EU). He has been asked to provide details of the reforms at today’s meeting and is reported to have reached a limited agreement on some key measures including raising the retirement age to 67.

A further issue that needs to be agreed upon is how the increased EFSF bailout facility will be funded. France had hoped that the European Central Bank (ECB) would provide loans to increase its capacity to the € 2-3 trillion that it needs but Germany opposed this plan. It looks likely that the agreement will take the form of a partial guarantee to banks and investors that lend the EFSF more money, but it is not certain if this will raise the required funds.

This means that, as the governor of the Bank of England, Mervyn King said yesterday, it may only buy the euro time, and the fewer funds agreed for the bailout facility the less time available to make fundamental reforms to the single currency.

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