February 27, 2024

Mixed Reaction to Europe’s Talk of Bolstering a Bailout Fund

European officials said a plan was in the works that would enlarge the bailout fund’s borrowing power but not the amount that countries were contributing. The proposal was met guardedly by German officials, who are already struggling to swing public opinion in favor of the more modest aid plan they agreed to in July, let alone 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 did not also fall victim to the debt crisis.

The main 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 in Washington last week before the 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 European Union countries that use the euro can block initiatives.

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

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 stability fund, Mr. Altafaj-Tardio said. That option has been urged by United States 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 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 of as much as 60 billion euros, or $80.8 billion. Any Greek default would probably also require a coordinated bailout of banks holding large amounts 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.

Martin Kotthaus, a spokesman for the German Finance Ministry, 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 wanted only to avoid any discussion until Parliament votes this week on a proposal to expand the size of the fund to 780 billion euros. That plan was agreed to by European leaders on July 21. Some analysts have said that the fund needs to be two to 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 receive more solid paper in exchange. Greek creditors must still indicate their willingness to participate.

Policy makers want to put Greece on a path toward reducing its debt load to just below 100 percent of its gross domestic product within this decade so that it can wean itself off taxpayer bailouts. The hope is that much of that reduction would come through revived economic growth.

But those prospects seem distant given the deep recession into which Greece has fallen and stricter belt-tightening measures being demanded by international creditors.

Jack Ewing reported from Frankfurt and Stephen Castle from Brussels. Liz Alderman contributed reporting from Paris and Landon Thomas Jr. from London.

Article source: http://feeds.nytimes.com/click.phdo?i=6c8e684fe2e542bfe0d0e17c16d6c470

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