Europe tackles 'disastrous' debt divisions

21st October 2011, Comments 0 comments

European finance ministers squared up Friday to "disastrous" divisions over how to solve a debt crisis that began in Greece but now threatens the wider eurozone and a fresh global recession.

Eurozone governments started laying the groundwork for back-to-back summits as China weighed in following emergency overnight talks between US President Barack Obama, British Prime Minister David Cameron and the key duo of German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Ministers were trying to keep the fallout from Greece and its potential default from bringing down the eurozone as whole in a "serious" crisis which German Finance Minister Wolfgang Schaeuble said threatened all.

"We have a great responsibility, we all know it ... to Europe, to the eurozone but naturally also to the world economy," he said.

International Monetary Fund chief Christine Lagarde said the Washington-based world lender of last resort "will do all it can" to help Europe find a lasting solution.

The immediate issue is whether to give Greece its next tranche of debt funding worth 8.0 billion euros ($11 billion), blocked for months by EU, IMF and European Central Bank auditors.

The crunch question however is how much of Greece's debt mountain of 350 billion euros can be written off without causing havoc, especially to banks holding its government bonds.

Eurozone chief Jean-Claude Juncker warned as he arrived to chair the first round of discussions that persistent disputes on the way forward were sending all the wrong signals.

"The external impact is disastrous" for Europe, the Luxembourg prime minister said. "We are not really showing a properly functioning leadership."

Economic and Monetary Affairs Commissioner Olli Rehn said the EU would need to settle Greece's financial future, agree a big boost to existing rescue funding and recapitalise banks caught in the eye of the storm.

Finland's hardline finance minister, Jutta Urpilainen, said the meeting would be "difficult," with many member states balking at having to use their taxpayers' money to bail out others who have flaunted EU fiscal rules.

The ministerial talks culminate in summits of EU leaders Sunday and then Wednesday, paving the way for a G20 summit in France in early November.

"The key to solving the problem lies in fundamental institutional reforms on the fiscal and financial fronts," China's Premier Wen Jiabao told EU president Herman Van Rompuy in a telephone conversation Friday.

Pressure on France and Germany to resolve their differences also came from the United States and Britain who have both stressed the dangers another failure could have on the global economy.

The White House said after the video conference that Merkel and Sarkozy "fully understand the urgency of the issues in the eurozone" and are "working diligently" towards a "politically sustainable" solution.

Britain's finance minister George Osborne said the next few days would be "critical for resolving the crisis in the eurozone."

Resolving the crisis would be "the biggest boost to growth in Britain and around the world," the minister added.

European Union partners meanwhile put fresh pressure on Italy to spell out new budget cuts and economic reforms, precisely to cover the risk that a messy Athens default could undercut Rome.

Rehn's spokesman Amadeu Altafaj said Friday that Italy must present a new raft of cuts and reforms "as a matter of urgency (to) ... further reinforce confidence in the capacity of the Italian economy to overcome the present challenges."

According to a one diplomat, "it's all very well coming up with a five-point plan to address the debt crisis but markets will only believe it when they see the colour of Italian money on the table."

He said that also went for other eurozone economies "in focus," which would include Spain, Belgium and perhaps even France.

Leaders also want new rules for pan-eurozone economic policy and EU-wide measures to stimulate economic growth to round out a complete package.

A senior EU official confirmed that governments were still trying to get banks to accept a "50-percent" write-down of Greek debts.

Earlier, Commmerzbank chief Martin Blessing warned that eurozone leaders' hopes of a "voluntary" write-down by private creditors would only come to fruition "if Greece declares itself insolvent."

Increased German parliamentary scrutiny -- a condition of ratifying a boost of Europe's rescue fund, the 440-billion European Financial Stability Facility -- is also complicating the negotiations and reminding leaders of their restless and concerned publics.

© 2011 AFP

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