EU Sets Deadline To Resolve Debt Crisis

12 October, 2011

European Union leaders have given themselves a deadline of two weeks to agree a comprehensive deal to tackle the eurozone debt crisis, a grand bargain senior European officials said would include a final decision on Greece’s bail-out and a new strategy to recapitalise Europe’s banking sector.

Herman Van Rompuy, the European Council president, said EU leaders would meet on October 23 to “finalise our comprehensive strategy”, allowing Europe to present its plan for restoring confidence in the euro to the G20 summit on November 3-4.

The eurozone has come under intense pressure from Washington and London to get to grips with its sovereign debt crisis by early next month or risk plunging the global economy into turmoil.

Greece continues to be the most contentious issue, according to European officials, with a German-led group of creditor countries pushing to revise the second €109bn Greek bail-out to include much deeper “haircuts” for Greek bondholders – a plan resisted by France and others worried it could spread panic through the financial system.

Both sides have agreed to wait for a detailed report from the so-called “troika” of international lenders to Greece before deciding how to proceed, officials said.

Troika negotiators are expected to wrap up their talks in Athens on Tuesday, but a complete evaluation of Greek finances is unlikely to be finalised until the middle of next week, forcing EU leaders to delay Monday’s planned summit until October 23.

Despite the remaining hurdles, the euro saw its biggest one-day gain against the dollar in more than a year and European equities extended their winning streak to four days as hopes rose that policymakers had committed to tackling the crisis. The euro rose more than 2 per cent against the dollar, while the FTSE Eurofirst 300, the pan-European stock index, rose 1.6 per cent.

EU leaders set themselves their new deadline amid further signs of strain in bank funding markets. Three-month euribor rates, the traditional gauge of unsecured interbank lending in euros, inched higher, suggesting worries over the health of banks was still preventing institutions from lending to each other.

Just hours after France and Belgium agreed to break up Dexia, whose inability to raise short-term funding brought it close to collapse, Austria’s Erste announced it had also fallen victim to the recent turbulence. The Austrian banking group said it would lose as much as €800m this year and write down €180m in eurozone sovereign debt.

Senior European officials insisted they were close to consensus on a bank recapitalisation plan after Paris softened its demand any Europe-wide strategy be run through the eurozone’s €440bn rescue fund.

Officials said the plan would instead call for national governments to provide funds if capital cannot be raised in financial markets. The eurozone rescue fund would be used only in extremis.

France is still resisting using its own national treasury to shore up its banking sector in the near term, however, and another senior European official said Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, could not come to agreement Sunday on the breadth and timetable of the recapitalisation plan.

President Barack Obama stepped up his recent pressure on European leaders to take swift action to end the crisis, telephoning Mr Sarkozy on Monday. The Elysee palace said Mr Sarkozy stressed the determination of France and Germany to achieve a “global and durable solution of the eurozone’s difficulties” before the G20 summit in Cannes early next month.

Some senior European officials are pushing the European Banking Authority to “mark to market” banks’ sovereign bond holdings, a process that would hit French banks particularly hard.

Additional reporting by Patrick Jenkins and David Oakley in London

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EU Sets Deadline To Resolve Debt Crisis

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