The crisis has seen EU leaders make promises of support for stricken countries that they hoped never to have to fulfil and create a bailout fund they did not want to deploy
THE ATMOSPHERE was somewhere between hope, anticipation and dread. Last night’s EU summit was the second in four days, the 14th in 21 months. The question remains as to whether the final rescue package will be big and bold enough to convince the euro’s many doubters.
The pressure is at fever-pitch. EU leaders face the danger of a Black Thursday massacre on markets today if they fall short, but certainty over key parts of the plan remained elusive as they converged on Brussels.
Even as prime ministers started to drift in to the cavernous Justus Lipsius complex, last-minute talks with the world’s largest banks were still ongoing. The aim, as ever, was to demonstrate an overwhelming show of force to the sceptics. This is not without political and financial cost, placing strict limits on the bargain.
Given Europe’s tendency to prevaricate and delay, there was no little anxiety that the final plan might be too vague, with too much doubt over the fine grain.
“The European Council is not there to detail all the figures about financial technicalities and all that,” said a spokesman for the European Commission. This raised questions as to how much would actually be agreed.
The parameters are clear: a big “haircut” on Greek bonds, an expansion of Europe’s bailout fund and a large-scale recapitalisation of weak banks. At this point it’s all about the nitty-gritty. “Some of the gritty is very gritty indeed,” said a senior EU official who is deeply involved in the haggling.
No one really knew how late into the night the summit might run. Herman Van Rompuy, chairman of the talks, let it be known that he was required to be in the airport by 8am for a flight to Strasbourg to brief MEPs on the deal. While this gave him obvious scope to pressurise any wavering leaders, the sense of uncertainty still prevailed. “I have a clean shirt in the office and two bananas,” quipped a diplomat.
The leaders are grappling with questions of risk and scale. Risk, because the looming Greek default carries the clear danger of panic market; scale, because the fire-blanket must be large enough to beat down the flames of contagion.
Banks played hard in the talks, threatening to invoke credit default swaps if Europe held out for the “60 per cent or more” haircut that many euro zone countries sought. The word was that the banks were offering 40 per cent, leading to expectation that negotiators would draw a line in the middle to settle on a 50 per cent loss.
At the same time, some European officials were still making the argument that it would be better to achieve the maximum possible haircut now that such a drastic move is being undertaken.
As ever, it seemed that German chancellor Angela Merkel would have the final word. Addressing the Bundestag before she made her way to Brussels, she hinted heavily that investors were in line for a 50 per cent loss.
“The goal of the meeting tonight must be to get a result under which Greece will by 2020 have a debt to gross domestic product ratio of 120 per cent,” she said. If the EU-IMF “troika” is to be believed, this would imply a 50 per cent haircut.
In the scheme of the saga, this is quite a U-turn. Long resisted by EU leaders, the default option presents the prospect that Europe will at last confront the true implications of the Greek debt riddle.
If that represents a long- awaited moment of official candour, the danger remains that markets will seize on the initiative as a precedent. Ireland is very exposed here, no matter what Dublin says, and the coming days and weeks will seriously test the effort to stamp out contagion risk.
This underscores the push to maximise the firepower of the European Financial Stability Facility rescue fund. Its lending capacity now is €440 billion. As doubts fester over Italy and Spain, many governments believe a €2 trillion show of force is required to be credible.
They may be disappointed, however. In a nod to Germany and most of its triple-A-rated counterparts, the talks have centred for days on a rise to some €1 trillion. Officials say the eventual sum may come in higher, but nowhere near the €2 trillion. This raises the question as to whether the “wall of money” will suffice.
The same goes for a mooted €108 billion bank recapitalisation, a little more than half the money required in the eyes of the IMF. Pan-European bank regulators pinpointed the €108 billion by taking account of the market value of all sovereign bonds, the decline in some made up by the increase in other.
Whether that convinces will soon be seen. The fact remains that two previous stress tests failed to instil confidence. Furthermore, the boost for banks is part of an integrated whole. If the other elements fall flat, so too will the bank recapitalisation.
The crisis has seen EU leaders make promises of support for stricken countries that they hoped never to have to fulfil and create a bailout fund they did not want to deploy.
They are dug in deeper than ever now, with no way back and no easy road forward. They are at the outer limits of their capacity for solidarity and there’s still no telling whether the plan will work. This is a time for caution, more than optimism.
