France Retreats in German Clash Over Bailout Fund Leverage
Oct. 22 (Bloomberg) -- France retreated in a clash with Germany over how to expand the power of Europe's bailout fund in the first meeting of a six-day marathon intended to stave off a Greek default and shield banks from the fallout.
France's view that the fund, the European Financial Stability Facility, should get a banking license enabling it to borrow from the European Central Bank, "is not a definitive point of discussion for us," French Finance Minister Francois Baroin said yesterday in Brussels. "What matters is what works."
The French flexibility indicated progress toward easing the threat to the global economy stemming from Greece. As they began their consultations, the euro-area finance ministers received an assessment from auditors that Greek finances have taken a "turn for the worse," requiring more official aid and deeper investor writedowns.
Stocks and the euro rallied on signs that policy makers may heed prodding from global leaders including President Barack Obama to calm global markets. Officials are also considering unleashing as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, almost double the current ceiling, by combining the 440 billion-euro EFSF and its planned successor, the European Stability Mechanism.
The Standard & Poor's 500 Index added 1.9 percent yesterday to reach its highest close since Aug. 3. The euro strengthened 0.9 percent to $1.3898 at 4:20 p.m. in New York.
Sarkozy-Merkel Meeting
French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet today in Brussels before a summit tomorrow and a follow-up gathering on Oct. 26 to nail down what they've called a "comprehensive" plan.
Aid of 256 billion euros for Greece, Ireland and Portugal has failed to stabilize markets or prevent the turmoil spreading to France, co-anchor with Germany of the European economy. French bank shares have tumbled on concern they are vulnerable to losses around Europe's periphery.
With French bond premiums against Germany at euro-era highs, France yielded to opposition from both the ECB and its neighbor and largest trading partner.
The Franco-German split centered on how to leverage the EFSF. While Germany endorsed enabling it to insure a portion of cash-strapped nations' bond sales, Baroin said France wanted to turn it into a bank that could tap the ECB.
'Everyone Knows'
"Everyone knows the reticence of the central bank and everyone also knows of the reticence of the German position," Baroin said Oct. 19. "For us it is and will remain the most effective position. The Americans do it, the British do it."
Germany's Wolfgang Schaeuble, repeating his opposition as he arrived, said "the central bank is not available for state financing."
Austria's Maria Fekter said after the meeting that "progress was made" and that seven options to leverage the fund had been whittled to two. She declined to comment further.
The meeting's start was overshadowed by the report by the European Commission, ECB and International Monetary Fund on Greece that highlighted the scope of fixing Greece's finances without sending shockwaves through the banking system.
Officials are considering five scenarios to update a July agreement that foresaw 21 percent losses on Greek debt for private bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so- called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.
Bank Talks
"We have to discuss with the private sector and see what is suitable," Spain's Elena Salgado told reporters. Ministers discussed investor losses of "more than 21 percent," she said.
Divisions over the handling of Greece were thrown into relief by the report, which was obtained by Bloomberg News. It contained a footnote that the ECB, which has lobbied against writedowns, "does not agree" with the inclusion of the bond- loss scenarios.
A deepening recession and delays in enacting budget cuts have raised Greece's financing needs by at least 20 billion euros since July, when euro leaders hammered out a 159 billion- euro package, the people said.
"Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros," according to the auditors' report, dated yesterday. "To get the debt down further would require a larger private sector contribution" of at least 60 percent to reduce debt below 110 percent of gross domestic product by 2020.
Debt Load
The government in Athens forecasts the debt load next year at about 172 percent of GDP.
The ministers signed off on on the payout of its 5.8 billion-euro share of an 8 billion-euro loan to Greece. It's the sixth installment of a 110 billion-euro package awarded in May 2010.
Greece has said it has the cash to operate until mid- November after a scheduled review of the country's progress in meeting fiscal targets was suspended for about two weeks last month.
"The sacrifices of the Greek people and the implementation of tough, but nationally imperative, rescue measures are the basis not only of the sixth tranche but also of the new program that secures the long-term sustainability of Greek public debt," Greek Finance Minister Evangelos Venizelos said in an e- mailed statement.
To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net Tony Czuczka in Berlin at aczuczka@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
Find out more about Bloomberg for iPad: http://m.bloomberg.com/ipad/
