The EU summit in just over a week is looking like a 'make or break' meeting to resolve the euro crisis, writes ARTHUR BEESLEY
EUROPE’S DIVIDED leaders are inching towards a new deal to finally settle the euro zone debt crisis. For Taoiseach Enda Kenny, the talks carry potential threats to the Republic’s recovery and opportunities.
The leaders of the 27 EU states are due in Brussels for a delayed summit on Sunday week. As the build-up to this gathering intensifies, the leaders are trying to resolve a series of awkward dilemmas which have bedevilled them in almost two years of turmoil.
Despite their protests to the contrary, Germany and France remain at loggerheads over fundamental elements of the package.
In the broadest sense, however, the parameters of the deal are clear. It will embrace new arrangements for a second Greek bailout, an expansion of Europe’s bailout fund and a strengthening of the weakest banks. Tougher budget rules also loom, raising the prospect of a change to the EU treaties and another difficult referendum in Ireland.
The key details are still unclear, but the sequencing of events is more evident. In the days before leaders gather in Brussels, finance ministers and bank regulators will try to pin down the nitty-gritty. Still to be decided is when, and by what criteria, vulnerable banks are recapitalised, by how much and by whom. As much as €200 billion may be required, with European taxpayers footing most of the bill.
On the plus side for Mr Kenny, execution of the EU-International Monetary Fund bailout plan continues to win plaudits in Europe. While he faces the danger that the new Greek rescue could derail the Republic’s recovery, new powers for the bailout fund might lessen the cost of rescuing Irish banks.
At issue in the Greek case is the size of the “voluntary” loss the country’s bondholders should bear in a second rescue package. When EU leaders agreed to a second bailout last July, the deal included a 21 per cent loss for investors. The plight of Greece has worsened since then, leading to pressure in Germany and other countries for a loss of up to 50 per cent.
How this question plays out will have a key bearing on the other parts of the deal. For example, the bigger the loss imposed on Greek debt the bigger the consequent requirement for new capital in the banks which hold the country’s bonds.
Crucial to the determination of the “haircut” is a looming analysis of Greece’s debt sustainability by the EU-IMF troika. This report, expected next Thursday or Friday, will be pivotal. European finance ministers are expected to gather for a pre-summit meeting next Friday to consider whether the haircut borne by Greek investors should rise. That increases the prospect of a sovereign default, although Europe’s leaders are not inclined to use that expression when describing the situation in Greece.
The risk here for Kenny is that any significant increase in the Greek haircut could be viewed in the eyes of markets to be precedent-setting for the likes of the Republic. The thrust of Government policy is to decouple the Republic from Greece, something it has largely succeeded in doing.
However, the State’s return to the markets would be made much more difficult if investors determined it was in line for the same treatment as Greece. This explains Kenny’s emphasis in Brussels on the “exclusivity and uniqueness” of private sector involvement in the Greek rescue.
For good reason, Kenny’s message is that the State will not default. This is particularly so in a scene in which the introduction of the European Stability Mechanism permanent bailout fund may now be advanced by a year to mid-2012. Aid from the ESM is conditional on private investors making a contribution.
Then there is the proposed reform of Europe’s temporary rescue fund, the European Financial Stability Facility. This remains deeply contentious.
Germany is resisting moves to “leverage” the fund’s assets, which would increase its financial fire-power. Furthermore, France wants the freedom to use money from the fund to recapitalise its banks before state aid is deployed. This continues to stoke tension with Berlin.
For Kenny, however, the expansion of the fund’s operations to provide money for bank recapitalisations could provide a cheaper source of capital for the rescue of Anglo Irish Bank. Such support is being financed in part by expensive promissory notes and the Government is keen to lessen the load.
Overshadowing all of these considerations is the sense that the present talks represent a final opportunity for Europe’s leaders to demonstrate their power to assert control over the debacle.
It is not simplistic to say the State’s recovery would be boosted if they do, even if a referendum is required. Still, the State’s descent into the bailout zone shows the opposite is also true.