February 28, 2024

Europe Attempting Stronger Response to Debt Crisis

European officials said a plan was in the works that would enlarge the bailout fund’s borrowing power but not the amount of money that countries were contributing. The proposal was met guardedly by German officials, who are struggling to swing public opinion in favor of the more modest aid plan they agreed to in July — never mind any new initiatives.

As finance ministers and central bankers trickled back to Europe from meetings in Washington over the weekend, markets were clearly eager for a plan that would isolate Greece’s problems from the rest of the Continent and ensure that Italy and Spain do not also fall victim to the debt crisis.

Major stock indexes in Europe rose Monday, in part because of expectations that a more robust response to the problem was in the works.

A more potent bailout fund would not remove the need for other changes, like strengthening the banking system and improving decision making by the European Union, said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. But it would help, he said.

“I don’t think one measure can solve it all but it would make a significant difference in market sentiment,” said Mr. Véron, who testified last week before the U.S. Senate Banking Committee on the debt crisis.

Meanwhile, Finland appeared to be closer to resolving an impasse that had threatened to hold up deployment of the existing bailout fund. Alexander Stubb, the Finnish minister for European affairs, said the country’s Parliament was likely to approve a plan agreed to by leaders in July.

Finland is also close to resolving a dispute about its demand for collateral in return for granting more aid to Greece. The dispute illustrated how political opposition in just one of the 17 euro members can block initiatives.

“I’m very confident we will get the package through Parliament,” Mr. Stubb said by telephone. He declined to give details of how the collateral dispute would be resolved.

In Brussels, Amadeu Altafaj Tardio, a spokesman for the European Commission, confirmed that discussions were under way on methods to extend the effectiveness of the bailout fund, called the European Financial Stability Facility, or E.F.S.F.

Olli Rehn, the commissioner for economic and monetary affairs, had made clear at meetings in Washington that the euro zone was “contemplating further leveraging of the E.F.S.F.,” Mr. Altafaj Tardio said. That option has been urged by U.S. officials.

Separately, leaders tried to quash rumors that Greece and its creditors had discussed the possibility of banks’ taking a larger cut in the value of their Greek bond holdings — perhaps as much as 50 percent — to reduce the government’s onerous debt burden to a more manageable level.

Such a move remained highly controversial and was opposed by the large banks as well as the European Central Bank, which owns Greek bonds with a value estimated at as much as €60 billion, or $80.8 billion. Any Greek default would probably also require a coordinated bailout of banks with large holdings of Greek debt.

As has often been the case, European leaders seemed to have different perceptions of what was being discussed and how likely it was that the proposals would find support.

A spokesman for the German Finance Ministry, Martin Kotthaus, said in Berlin there was no need to expand the size of the bailout fund by giving it more money than already agreed. There is fear that pumping more money into the fund might threaten the credit rating of countries like France by increasing their liabilities.

But German officials did not appear to be opposed to increasing the rescue fund’s power to leverage its government guarantees. They simply wanted to avoid any discussion until Parliament votes this week on a proposal to expand the size of the fund to €780 billion. That plan was agreed to by European leaders on July 21. Some analysts have said that the fund needs to be two or three times as big to convince markets that it could handle a wider crisis.

On Monday, a senior official in the Greek Finance Ministry, responding to persistent default rumors, said no such event was imminent. And on Sunday, Evangelos Venizelos, the Greek finance minister, said in Washington that the government’s plan to exchange some existing bonds for new, longer-term securities remained on track.

The debt exchange would impose a relatively modest 21 percent loss on the face value of the affected bonds. It is regarded as a good deal for investors because they would get more solid paper in exchange. Greek creditors must still indicate their willingness to participate.

Article source: http://www.nytimes.com/2011/09/27/business/global/europe-attempting-stronger-response-to-debt-crisis.html?partner=rss&emc=rss

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