Chancellor Angela Merkel will seek backing from German lawmakers to bolster the euro bailout fund on the same day she heads to a European summit, as banks joust with leaders over the size of losses they take on Greek bonds.
Leveraging the European Financial Stability Facility rescue fund and how far to cut Greece’s debt load emerged as two main hurdles in the way of a deal to combat the debt crisis at the Oct. 26 European Union summit, the second in four days. The euro weakened as Merkel’s party proposed a full vote in parliament, also on Oct. 26.
“We are still missing some important parts of the complex puzzle that is how to solve Europe’s debt crisis,” Kathleen Brooks, research director at Forex.com in London, said today. “The biggest challenge for the German Chancellor over the next 48 hours is to persuade the German Bundestag to agree to the changes to the EFSF.”
Merkel, as the biggest contributor to euro-area bailouts, is once more the fulcrum in the deliberations to stamp out the crisis that came to light two years ago in Greece. Under the terms of an agreement struck with her coalition, she must seek parliamentary backing for any changes to the rescue fund that carry budget implications for Europe’s biggest economy.
“This is new territory,” Steffen Seibert, Merkel’s chief spokesman, told reporters in Berlin today, when asked whether parliament could dictate Merkel’s stance at the next summit. Lawmakers will discuss two models for leveraging the EFSF, neither of which is “mutually exclusive,” Seibert said.
Back to Berlin
With the first of two crisis summits in Brussels ending yesterday, attention is shifting back to Berlin as the blueprint is completed on how to aid banks and strengthening the International Monetary Fund’s role.
European leaders are looking at bank recapitalizations of about 100 billion euros ($138 billion) while working on proposals to leverage the EFSF to increase its firepower to more than 1 trillion euros, Juergen Trittin, co-leader of Germany’s opposition Greens Party, told reporters after he was briefed by Merkel in Berlin today. Leaders are urging financial institutions to accept losses of between 50 percent and 60 percent on their Greek debt, he said.
“It seems that progress has been made over the weekend to get to a ‘comprehensive package,’ but it is unlikely to be a bold one,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “There remain many open questions.”
Financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said a person with knowledge of the discussions, who declined to be identified because talks are confidential. The EU is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.
Greece’s deteriorating finances have also narrowed Europe’s room for maneuver in battling the contagion, which threatens to pitch the country into default, rattle the banking system, infect Spain and Italy and tip the world economy into recession.
The German Bundestag won new powers over budgetary matters after complaints by coalition lawmakers that they were being steamrolled into accepting decisions made in Brussels affecting the German budget. They were bolstered by a Sept. 7 decision by the Federal Constitutional Court that upheld Germany’s participation in Europe’s bailout fund so long as the Bundestag maintained its authority over Germany’s purse strings. Merkel’s coalition has 22 members of the 41-lawmaker budget committee.
The committee already set conditions on Oct. 21 for negotiations. The bailout fund can’t receive a banking license or European Central Bank funding and the current 440 billion-euro volume and Germany’s 211 billion-euro contribution can’t be increased, the panel said.
European leaders at yesterday’s summit ruled out tapping the ECB’s balance sheet to boost the rescue fund.
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