European Finance Ministers Call Off Pre-Summit Meeting

With less than 24 hours before the summit meeting of government chiefs in Brussels, banking representatives and European officials were locked in negotiation over what losses banks should accept.  

The banks have taken a hard line and warned that the write-off of debts they are being asked to accept — of about 55 percent — could result in a default or similar shock to the financial system, something European officials are desperate to avert. That has prompted a search for so-called complementary measures which might help to sweeten the deal for the bankers.

Italy, meanwhile, has come increasingly under the spotlight as investors doubt the government’s commitment to reduce curb the country’s 1.9 trillion euro, or $2.6 trillion, debt.

European Union leaders want the Italian prime minister, Silvio Berlusconi, to present firm plans on growth and debt reduction in time for the meeting.

Italian news agencies reported late Tuesday that  Mr. Berlusconi had reached an accord with the Northern League,  his principal coalition partner. The league’s leader, Umberto Bossi, said earlier in the day that Mr. Berlusconi’s government could  fall over the issue of raising the standard retirement age to 67 from 65, a move Mr. Bossi opposed.

With the clock ticking, a senior German official, Jörg Asmussen, and a French counterpart, Ramon Fernandez, joined intensive discussions with the banks in Brussels.

Under one of about five plans being debated, Greek bonds might be swapped for those of much lower face value issued by the euro zone’s bailout fund, according to two officials briefed on talks, who added that the idea might make a write-down more attractive for the banks.

The Institute of International Finance, which represents the banks involved, intends to send its own proposal to European leaders on Wednesday, according to a person with direct knowledge of the negotiations. That would involve banks taking more than the 21 percent loss they had agreed to in July, in exchange for sweeteners that would help mitigate some of the additional loss, such as allowing banks to buy bonds from the bailout fund.

“It’s clear that circumstances have changed too much for the July 21 agreement to work at this point,” said the person, who spoke on condition of anonymity because the discussions are ongoing. “We are prepared to adjust to new circumstances within limits. The question is are the governments prepared to meet us halfway.”

Adding to the mood of anxiety, a meeting of E.U. finance ministers on Wednesday, which was to precede the second gathering in a week of European leaders, was abruptly canceled on Tuesday by the Polish government, which holds the bloc’s rotating presidency.

Though that was a recognition that the deal with the banks will not be ready by Wednesday morning, it did not mean that agreement was impossible later in the day, when the leaders meet, diplomats and officials said.

The summit meeting will still take place and “work on the comprehensive package of measures to curb the sovereign debt crisis” will continue there, the Polish statement said.

Those measures include a recapitalization of European banks and an expansion of the firepower of the euro zone’s 440 billion euro bailout fund, probably to more than 1 trillion euros. This will likely be achieved through two methods that are likely to run alongside each other.

The rescue fund, known as the European Financial Stability Facility, is expected to offer insurance against a portion of the losses on bond purchases. A separate mechanism is expected to be set up to purchase bonds, drawing in funds from the International Monetary Fund and other investors from the emerging world.

Though France is reluctant to bring other powers, like China, into the heart of the euro zone, it will probably have to overcome its reservations because of the gravity of the situation.

Jack Ewing reported from Frankfurt. Liz Alderman contributed reporting from Paris and Elisabetta Povoledo contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/10/26/business/global/european-finance-ministers-call-off-pre-summit-meeting.html?partner=rss&emc=rss