October 2, 2022

Top E.U. Official Joins Chorus Warning of Greek Fallout

BRUSSELS — On the eve of a crucial summit of euro area leaders, a senior European Union official said Wednesday that failure to act decisively on Europe’s debt crisis could have global repercussions.

The warning from José Manuel Barroso, president of the European Commission, came as the French President Nicholas Sarkozy was heading to Berlin for a pre-summit meeting with the German Chancellor Angela Merkel.

“Nobody should be under any illusion: the situation is very serious,” Mr. Barroso said in Brussels. “It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond.”

In recent days the crisis has taken on a new and potentially more dangerous dynamic, with a spike in borrowing costs for Italy and Spain, which are much bigger economies than the three that have already sought international bailouts, namely Greece, Ireland and Portugal.

The financial markets appear unnerved by the prospect that private investors will be asked to share the burden of a second Greek bailout — which the leaders will debate on Thursday — and that this will be classified as a default, amplifying the contagion.

As long ago as February 2010, European leaders promised to take determined and coordinated action to preserve their common currency, and Mr. Barroso challenged leaders to live up to their rhetoric.

The leaders “have said they will do what it takes to ensure the stability of the euro area,” Mr. Barroso said. “Well, now is the time to make good on that promise.”

Mr. Barroso outlined the broad shape of the deal that is expected to emerge from the meeting of 17 euro-zone leaders, including measures to ensure “the sustainability of Greek public finances.”

Though he did not go into detail, these plans are likely to include a reduction in the rate of interest and an increase in the maturity date of international loans.

In addition Mr. Barroso highlighted the “scope for more flexible action through the European Financial Stability Facility,” the bailout fund that is already lending to Ireland and Portugal and which some governments want to finance a buyback of Greek bonds.

Mr. Barroso also said the plan should identify the “feasibility and limits of private sector involvement” — again without any specifics.

This has been the biggest point of conflict in constructing a second Greek bailout because Germany, the Netherlands and Finland have been pressing for private investors to share a substantial part of the pain.

In recent days, a new idea for a bank levy has been floated as one solution which would not trigger a default and risk further contagion.

Mr. Barroso also called attention to the need to repair the banking sector and “ensure the provision of liquidity to our banking system.”

Germany was initially resistant to the idea of calling a meeting of leaders on Thursday, suggesting that it was only sensible if preparations were well enough advanced to reach agreement.

On Tuesday, Mrs. Merkel, has cautioned observers and financial markets not to expect anything spectacular.

But on Wednesday, her spokesman, Steffen Seibert, sounded more positive, saying the meeting Wednesday night with Mr. Sarkozy should help. “We are very confident that there will be a good and sensible solution,” he told reporters in Berlin.

The Greek Prime Minister George Papandreou said Europe’s leaders needed to demonstrate they can resolve the debt crisis to avoid a contagion enveloping Italy and Spain.

“It could be a make-or-break moment for where Europe is going,” Mr. Papandreou said during an interview Tuesday, Bloomberg News reported.

Article source: http://feeds.nytimes.com/click.phdo?i=23b8a6cb89e01a7a154dc360c8a8ce93

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