Eurozone leaders eye 1 trillion euro bailout fund

27th October 2011, Comments 0 comments

Eurozone leaders mulled boosting a bailout fund to one trillion euros to contain the debt crisis Thursday as the leaders of Germany and France scrambled to convince banks to lose big on Greek bonds.

The 10-digit figure is expected to appear in the final declaration the eurozone's 17 leaders are to adopt at the close of a marathon summit that began Wednesday and was running well past midnight, a diplomat said.

Boosting the bailout fund is a key element in the crisis response eurozone leaders have promised, along with making banks agree to write down billions in Greek debt and recapitalising the banking sector so it can absorb the hit.

Under the plan, the eurozone would use clever financial footwork to "leverage" up the 440-billion-euro European Financial Stability Facility (EFSF) without increasing guarantees provided by governments.

The bailout fund, the main weapon against the crisis, has already flown to the rescue of Portugal and Ireland, and would be tapped in a new Greek bailout. But it would be too small to rescue bigger endangered economies, such as Italy and Spain.

"We are heading towards the one trillion euro ($1.39 trillion) figure," another diplomat said.

With negotiations deadlocked on a bid to get banks to share the pain on Greek debt, French President Nicolas Sarkozy, German Chancellor Angela Merkel and IMF chief Christine Lagarde met with the head of the banking lobby on the sidelines of the summit, according to diplomatic sources.

While governments want the banks to accept a 50-percent "haircut," the lenders are offering 40 percent as part of efforts to cut Greece's 350 billion euro debt mountain.

"We remain open to a dialogue in search of a voluntary agreement. There is no agreement on any element of a deal," said Charles Dallara, head of bank lobby, the Institute of International Finance.

With fears growing that the eurozone debt drama will turn into a banking system meltdown, European leaders struck a deal to force banks to raise their capital buffers at a summit of the 27-nation EU, which preceded the eurozone talks.

"We made good progress on the bank recapitalisation, that wasn't watered down, it now has been agreed," said British Prime Minister David Cameron.

Cameron added that the deal "will only go ahead when the other parts of the full package go ahead, and further progress on that needs to happen tonight."

The European Banking Authority said banks would need 106 billion euros to fulfill the requirements.

The gathering of EU leaders was their second summit in three days as markets and world leaders called on them to produce the watertight deal needed to defuse fears the crisis will trigger global recession.

"Everyone is impatiently awaiting the details but it's not the devil that's in the details, it's all of hell," said Polish Prime Minister Donald Tusk.

"Will we know the details tonight? I'm prudent, not to say sceptical."

After Greece, Ireland and Portugal were bailed out in the past year, EU leaders put pressure on embattled Italian premier Silvio Berlusconi to bring proof of his resolve to prevent his country from drowning in debt.

Tusk said Berlusconi had made a "good impression" at the EU summit with a letter outlining plans to tackle EU concerns over Rome's giant debts by November 15.

But it remained to be seen whether he convinced his 16 eurozone peers.

Europe has demanded that Italy slash its 1.9-trillion-euro debt pile, equal to 120 percent of GDP, and also enact structural reforms -- including raising its retirement age.

A bigger EFSF could help to ease pressure on Italy, but leaders needed to agree on ways to boost its firewpoer.

With the world on tenterhooks, emerging powers China and Russia waded in with offers to help Europe safeguard the global economy by contributing to the eurozone rescue fund.

The development came as global powers, from the United States to Japan and China, pressed European leaders to come up with a lasting solution to the debt crisis before a G20 summit in France on November 3 and 4.

Europe's leaders are examining two options to boost the EFSF without increasing guarantees from member states as taxpayers in countries such as Germany are fed up with pouring money down what they see as a bottomless hole.

The EFSF's firepower could be multiplied around fourfold by agreeing that the bailout fund could guarantee around 20 percent of debt issued by fragile states such as Italy and Spain.

A second fund, which would likely be linked to the EFSF, would also be created to attract private and public investors, including countries outside the eurozone such as China and Russia.

The second fund could also be linked to the International Monetary Fund, an idea Russia has said it prefers.

© 2011 AFP

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