It looks like the alternatives for the EFSF are now official with Bloomberg reporting on a draft EU document containing details of the two options that are to be discussed at Wednesday’s meeting:
The European financial backstop can be boosted in two ways that might be combined, with the extent to which the fund is leveraged determined after discussions with investors and rating companies, a European Union draft showed.
“The capacity increase in both options is achieved by combining public and private resources in order to attain financing for member states at sustainable prices,” said the draft provided to German lawmakers today and obtained by Bloomberg News. “In both options, the technical market preparations can in principle be achieved quickly.”
While the first model would increase the European Financial Stability Facility’s capacity by insuring a fraction of countries’ funding requirements, the second model combines capital from European and non-European public and private investors, it said.
“The leverage which can be achieved can only be determined after dialog with investors and rating agencies around the new instrument, and in the light of prevailing investor appetite over time for the sovereign bonds of particular member states,” it said.
However, it is not just the private sector that these options will need to be discussed with. The German parliament also want a say given its new power of veto under the recent ruling from the Constitutional court, and depending on the outcome of a vote on Wednesday morning we could see some serious back pedalling from Angela Merkel at Wednesday night’s summit. According to Spiegel the German parliament is likely to hold a full vote on Wednesday on proposals to leverage the eurozone rescue fund. The parliamentary group leader Volker Kauder is expected to call for the vote which would take place shortly after Merkel’s planned speech about the EFSF leverage options.
So there does seem to be some positive movement on the EFSF front, but the same cannot be said for private sector involvement in the Greek haircuts still has a long way to go. The Troika report I mentioned yesterday has a recommendation of a 60 per cent haircut on Greek bonds and Germany has been demanding between 50-50% as well. At present the best the EU banks have offered it 40% claiming that anything larger would risk triggering a credit event. That position seems to have some support at the ECB:
European Central Bank Governing Council member Yves Mersch warned against forcing banks to accept higher losses on their Greek bond holdings.
“It is advisable to avoid any restructuring that is not purely voluntary or that shows elements of compulsion, and to avoid any credit events and selective default or default,” Mersch said today in Montreux, Switzerland, according to a speech published by Luxembourg’s central bank, which he heads.
So it now looks like we have some sort of plan for the 3 crisis issues. A bank recapitalisations of approximately 100 billion euros, a proposal to leverage the EFSF up possibly towards the 1 trillion euros range, and also attempts to get private sector haircuts of around 50-60% on Greek debt. There are still obvious stumbling blocks and some technical issues to work through but this looks like it will be the set of 3 proposals that will be taken to the EU summit on Wednesday night. Whether any of these will be large enough to prop-up Europe is debatable, and we must remember that we have 27 countries now attending Wednesday’s summit all with different ideals and political pressures which is sure to make it a difficult event. But there at least seems to be a plan now.
In the meantime Europe’s real economy continues to stumble with the Eurozone flash PMI coming in lower than expected, as H&H covers this morning.
On the political front the UK and French PM’s have had a row over the UK’s involvement in the EU summit with Mr Sarkozy was quoted as telling Mr Cameron, “We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings”. On top of that Mr Sarkozy and Ms Merkel were caught out openly laughing in a press conference when asked if the Italian government was capable of implementing reforms.
Italy is certainly facing the brunt of Europe’s problems at this point. Italian Prime Minister Silvio Berlusconi has been on the defensive since he was publicly lambasted over Italy’s position during a meeting with European Union President Herman Van Rompuy, European Commission President Jose Barroso, German Chancellor Angela Merkel and French President Nicolas Sarkozy.
Berlusconi returned to Italy and went on the offensive:
Prime Minister Silvio Berlusconi hit back on Monday at European Union partners who have been pressing Italy for swift economic reforms, saying no country in the bloc was in a position to give lessons to others.
As cabinet held an extraordinary meeting to discuss fresh reforms demanded by partners including Germany and France, Berlusconi issued a statement saying Italy would present firm proposals at the next EU summit on Wednesday.
The comment came after German Chancellor Angela Merkel and French President Nicolas Sarkozy demanded action from Berlusconi at a news conference on Sunday which Italian media interpreted as humiliating for the 75-year-old prime minister.
“Nobody in the Union can appoint themselves administrators and speak in the name of elected governments and the peoples of Europe,” Berlusconi said in the statement. “Noone is in a position to be giving lessons to their partners.”
However once back in Rome, Berlusconi was forced to call an emergency cabinet meeting to announce a plan to raise retirement age by two years, to 67 which has upset the country’s parliament and threatens to set-off yet another challenge over Berlusconi’s leadership.
I’ll certainly be watching out for Italy on Wednesday night.