The comments by German officials suggested that governments still face formidable obstacles in forming a plan to strengthen European banks, increase the firepower of the E.U. bailout fund and require private investors to take on more of the burden of Greece’s rescue.
Germany and France have yet to resolve their differences about how best to recapitalize the banks, and the banks have yet to agree to the idea of raising more capital — while at the same time contributing more toward the Greek bailout.
Germany and France are also at odds over proposals to leverage the €440 billion, or $605 billion, bailout fund, the European Financial Stability Facility, so it could deploy up to €2 trillion in support to ailing governments and banks.
During a news conference Monday, a spokesman for Chancellor Angela Merkel, Steffen Seibert, said Mrs. Merkel had pointed out that “the dreams that are once again cropping up, that by Monday this package will have solved everything and it will all be over, once again cannot be fulfilled. These are important working steps on a long path. This is a path that with certainty runs far into next year and also additional working steps will have to follow.”
The German finance minister, Wolfgang Schäuble, said the “definitive solution” would not be forthcoming at the meeting, but added, “We want to get rid of the market uncertainty with the five elements.”
The five-point plan is based loosely on proposals outlined by the European Commission president, José Manuel Barroso, that would see Greece’s debt put on a sustainable footing; increase the heft of the E.F.S.F.; add capital to the banks; develop measures to promote economic growth; and strengthen the economic management of the euro zone.
The financial markets are expecting a significant package of measures to emerge from this weekend’s summit meeting or, at the very latest, by Nov. 3-4, when leaders of the Group of 20 countries meet in Cannes.
The weekend of talks is to start Friday night, when euro zone finance ministers gather in Brussels. They should be able to agree on the release of €8 billion in aid to Greece from the country’s first bailout, and without which the government could default in November.
More problematic is how much more private investors should contribute toward a second Greek bailout, negotiated July 21. Because of changes in market conditions, officials say that the banks now need to increase their contribution to meet the losses they agreed to accept.
But pressure is mounting to bring the banks’ haircut to perhaps 50 percent.
If that is agreed to, policy makers need to ensure that E.U. banks can withstand the losses. While German banks have been divesting themselves of large amounts of debt from Greece and other southern European governments, French institutions have not been doing likewise, according to a European official speaking on condition of anonymity because of the sensitivity of the issue.
Equally worrying is the risk that a big write-down of Greek debt would unleash a fresh market assault on Italian or Spanish bonds. On Monday, European stocks fell and the euro slid from a one-month high against the dollar, down 0.8 percent to $1.3787.
After meeting with his counterparts in Germany, France and other countries last weekend at a meeting of G-20 finance officials in Paris, the U.S. Treasury secretary, Timothy F. Geithner, said the Europeans’ main goal was to make sure the plan to be presented Sunday would convince markets that the troubles in Greece would not spread to Spain and Italy.
“The stakes are high,” Mr. Geithner said. “They have come to recognize that if you underdo it, it can be expensive, and if you let the momentum build against you, it’s hard to arrest.”
Mr. Geithner and President Barack Obama have started to put more blame on Europe for America’s own economic woes, warning that a failure to contain the sovereign debt crisis could aggravate the U.S. downturn.
But Mrs. Merkel and a number other Europeans say the Americans are hardly in a position to lecture them, given that the global financial crisis started on Wall Street. Mrs. Merkel said last week that it was unacceptable for critics to press Europe for bolder action while refusing to endorse a plan designed to rein in market attacks on banks and troubled European countries through a new tax on financial transactions.
Liz Alderman reported from Paris. Nicholas Kulish contributed reporting from Berlin.
Article source: http://www.nytimes.com/2011/10/18/business/global/germany-lowers-expectations-for-eu-summit.html?partner=rss&emc=rss