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13Jul11
Germany digs in heels over Friday summit on Greece
Euro zone plans for a leaders' summit on a second Greek rescue were thrown into doubt by Germany on Wednesday, raising fears markets may exploit a policy vacuum with a new onslaught on the bloc's high debtors.
Berlin stuck to its line that Greece was funded until September so there was no rush to finalize the details of a second package. "There are no concrete plans for a special summit," a German government spokeswoman said.
Others were less sanguine. Italian central bank chief Mario Draghi, soon to take the helm of the European Central Bank, and Ireland's premier both said a definitive plan was needed and quickly -- echoing a strongly-worded attack from Greece's prime minister earlier in the week.
Ratings agency Moody's downgraded Ireland's credit to junk status on Tuesday and said that, like Greece, it would need a second bailout. Minds have been focused even more sharply by a market attack on Italy which, if it required assistance, would overwhelm the euro zone's existing rescue funds.
"Moody's problem is not with Ireland, Ireland's problem is with Europe," Prime Minister Enda Kenny told parliament. "There is no point in having a meeting that won't bring about a conclusion in a comprehensive sense to something that is not going to go away unless it is dealt with."
The European Commission, sharply critical of the role ratings agencies are playing, described Moody's decision as "incomprehensible." The cost of insuring Irish debt against default rose and 10-year bond yields hit 14.19 percent.
Italian and Spanish bonds settled but traders did not expect long-term respite without decisive action.
"We are still pretty bearish on the periphery in general given there are various risk factors in terms of the policymakers' response to the crisis so far," said Michael Leister, a strategist at WestLB. "We're not too convinced they can turn things around in the short term."
Wrangling
The leaders need to pin down how private holders of Greek government bonds can be persuaded to shoulder a portion of the cost of a new package for Greece, and weigh up the potential impact on markets if securing their involvement is declared a debt default by ratings agencies, as expected.
But they appeared to be subsiding into a bout of internal wrangling and risk creating a no-win situation:
If no summit is now held on Friday, it could have a strong negative impact on financial markets. If it is held and no clear decision is taken, the impact could be worse.
Herman Van Rompuy, the president of the European Council, has informed ambassadors he intends to hold the summit on Friday evening, and most of the 17 euro zone member states back that decision, but Germany is reluctant to fix the date, especially if there is no decision ready to take.
"Markets reacted very badly after euro zone finance ministers could not reach an agreement," an EU diplomat said, referring to a finance ministers' meeting on Monday. "If they cannot agree, we take the fight to the highest level. People are working on a set of conclusions to be agreed."
A senior EU official said the Germans were furious about being "backed into a corner" and were therefore holding firm on not attending on Friday, which would skittle the summit. Diplomats said furious rounds of phone calls were being made.
They said the current intention was for leaders to meet on Friday evening and for finance ministers to gather again on Sunday so the precise details of a plan can be fixed before financial markets open on Monday.
Stress Tests
A major concern on leaders' minds will be the results of stress tests on 91 European banks, to be released on July 15, which are expected to show 10 or more banks may have failed.
That could have a further impact on Italy, where bank stocks and the bond market have been hit by growing concerns that the euro zone's third-largest economy could be next in line after Greece, Ireland and Portugal to suffer debt contagion.
Draghi said Italian banks would comfortably pass the stress tests but echoed Kenny's call for a comprehensive EU response to the spreading debt crisis.
"We have to recognize that management of the financial crisis has not gone smoothly with partial and temporary interventions," he said in a speech to the Italian banking association.
"We must now bring certainty to the process by which sovereign debt crises are managed, by clearly defining political objectives, the design of instruments and the amount of resources," he said.
Current proposals on the table for securing the private sector's involvement in Greece focus on the buy-back of Greek government bonds and the swapping of existing Greek debt for longer-dated securities with a lower coupon, which would materially reduce Athens' outstanding obligations.
However, it remains unclear how a buy-back of Greek bonds would be financed. One proposal is to use the 440 billion euro European Financial Stability Facility (EFSF), which has been used to bail out Ireland and Portugal.
The ECB remains vehemently opposed to any Greek plan that ratings agencies would be likely to see as a default.
ECB policymaker Jens Weidmann, a former adviser to German Chancellor Angela Merkel, said the EFSF should not be used to buy bonds in the secondary market and it would be unacceptable for the ECB to accept defaulted Greek debt as collateral.
"The money of the (EFSF) bailout should not be used for the purchase of government bonds in the secondary market," he told Die Zeit newspaper. "Containment of the crisis should not mean that we undermine our principles. We must draw a red line."
But Germany's finance ministry said funds from the euro zone's rescue mechanism could in theory already be used by members of the bloc to buy back their own bonds, suggesting a shift in Berlin's stance.
German newspapers ran headlines and editorials on Wednesday calling on leaders to get their act together.
"The fact that some important heads of state have still not realized the entire amplitude of the problem is ... disastrous," a commentator wrote in Die Welt.
One Eurogroup official said Friday's meeting, if it happens, may not deliver on what the market is expecting.
"If there is a meeting on Friday, it is more psychological support than anything else. The heads of state will not decide anything," he said, explaining that there was not enough time between now and then to prepare a meaningful decision.
[Source: By John O'Donnell and Sarah Marsh, Reuters, Brussels and Berlin, 13Jul11]
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