Markets rise ahead of eurozone debt plan

 
Angela Merkel and Nicolas Sarkozy The French and German leaders still have not agreed how to bolster the eurozone's bailout fund

Markets have finished on a higher note they await details of an agreement to resolve the eurozone debt crisis.

European stock markets had a mixed day but ended strongly.

Although a weekend summit of eurozone leaders was inconclusive, the outline of a deal was agreed, with a summit to finalise details set for Wednesday.

Eurozone leaders agreed to force banks to protect themselves against future losses, and to increase the firepower of the single currency's bailout fund.

By the close, the Cac 40 index in France, the German Dax and London's FTSE 100 were all between 1-1.5% up on the day, while the Dow Jones index ended up almost 0.9%.

Earlier market sentiment was not helped by industry surveys that suggested the French and German economies were still struggling to avoid recession.

Pressure on Italy

Among the main points of agreement reached at the weekend were:

  • European banks must raise more than 100bn euros (£87bn) in new capital to shield them against possible losses to indebted countries
  • The European Financial Stability Facility (EFSF) - the single currency's 440bn-euro bailout fund - will be given more firepower, although it is not as yet clear how this will be achieved
  • Lenders to Greece will be asked to agree to much deeper losses than the 21% write-off currently on the table.

News of the growing consensus over a much bigger write-off of Greece's debt sent shares in the country's banks - the country's biggest lenders - about 20% lower on Monday.

As a result, the Greek stock market ended the day down 4.5%.

BBC business editor Robert Peston said the 100bn-euro bank recapitalisation agreed in the deal would be provided to banks by commercial investors, national governments and the EU's bailout fund.

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However, it appears the bailout fund may only be used as a last resort, if governments are unable to provide the money to support their banks themselves.

Italy also came under pressure to do more to stabilise its finances.

Germany's Chancellor, Angela Merkel, said she had had a "conversation among friends" with her Italian counterpart, Silvio Berlusconi.

"Italy has great economic strength, but Italy does also have a very high level of debt and that has to be reduced in a credible way in the years ahead," she said.

Mr Berlusconi responded by calling an emergency cabinet meeting to agree further austerity and economic reforms, but later on Monday issued a statement saying no country in the eurozone was in a position to give lessons to others.

He said Italy would present firm proposals at the summit on Wednesday but gave no further details.

However, key reforms - such as raising the retirement age - have faced fierce opposition from the prime minister's coalition partners, in particular the Northern League.

Guarantees

Key points of disagreement remain between the main eurozone powers.

France had hoped that the European Central Bank (ECB) would support the EFSF, by providing it with loans that could increase the fund's total capacity to 2tn-3tn euros.

But this idea was blocked by Angela Merkel.

Instead, governments are expected to agree that the EFSF can help out troubled eurozone governments such as Italy and Spain by providing partial guarantees to investors and banks who lend them more money.

There was also disagreement over the extent of losses that should be imposed on Greece's lenders, with Germany seeking a 50%-60% haircut.

The ECB opposes any such increase, according to a footnote in an internal document on the Greek economy leaked over the weekend.

Start Quote

After all the hours of horse-trading and haggling this weekend, eurozone leaders still have two very big decisions to make by close of play on Wednesday”

End Quote

However, governments reportedly agreed that Greece's lenders should "consent" to the losses - something the ECB has demanded in the past.

There are fears that a unilateral default by Greece - such as a debt write-off without lenders' consent - could have unforeseen consequences, for instance by triggering payments under credit derivative contracts.

The lead negotiator for the banks, Charles Dallara, managing director of the Institute of International Finance, warned on Monday that any deal forcing banks to take bigger losses on Greek debt "would be tantamount to default" and impose a high cost on European taxpayers.

Another unknown element in talks is whether and how much non-European countries may provide support.

Brazil, Russia, India, China and South Africa are thought to be considering making additional money available via the International Monetary Fund, which could be used to complement the EFSF's efforts.

'National interest'

Europe's leaders have agreed to change the EU treaty if necessary.

EU president Herman Van Rompuy said after a day of emergency talks in Brussels that members would "explore the possibility of limited change".

Start Quote

The more closely integrated the eurozone becomes, the greater the British fear will be that decisions will be taken that impacts on their major concerns such as preserving and expanding the single market”

End Quote

Any such changes would need to be ratified by all 27 EU governments, including the UK's, and are liable to be used by the UK to demand new opt-outs from its existing obligations under EU treaties.

Mr Cameron told a news conference: "This must not be at the expense of Britain's national interest."

The prime minister is currently facing a rebellion among some euro-sceptic backbench MPs, who are demanding a referendum on the UK leaving the EU altogether.

UK Prime Minister David Cameron said he had sought assurances to protect Britain's interest if there is change.

However, he got into a spat with the French President, Nicolas Sarkozy, who told Mr Cameron: "We are sick of you criticising us and telling us what to do."

What is the European Financial Stability Facility?

Meanwhile, further calls for a treaty change came from the outgoing ECB president, Jean-Claude Trichet, who used his last scheduled public speech to suggest eurozone authorities should have greater powers over the economic policies of members who failed to maintain stable finances.

Mr Trichet said eurozone states should examine all aspects of each others' economic policies, something that he said would "evidently require a Treaty change".

A new treaty was also called for by financier George Soros, chairman of Soros Fund Management, who suggested that member states change the rules to agree to create a common treasury, and for the EFSF to take over the Greek bonds held by the ECB and the IMF.

Wednesday's emergency summit will see all 27 EU government heads gather, whereas originally it was intended that only the 17 eurozone governments would meet.

 

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  • rate this
    +4

    Comment number 101.

    France and Germany and other countries are working hard to sort out this crisis. We are affected by this and our leaders should be making things better, not worse. The resoultion has to be workable over the long term too so theres going to be more rounds of talks. Markets will recover as they always do, but the speed at which this happens is dependant on our leaders making correct public spending.

  • rate this
    +15

    Comment number 34.

    So what?

    It means nothing.

    There is a massive debt crisis, which hasn't been solved, just papered over, fundamental structural issues regarding a lack of fiscal union, the fundamental problem of the PIIGS being totally uncompetitive with no possibility of devaluing, undoubtedly more pain to come, undoubtedly substantial civil unrest to come.

    This isn't even the end of the beginning!

  • rate this
    +9

    Comment number 16.

    I don't think they will come up with a long-term solution this week. They will simply kick the can down the road as they have done before. Markets will go up temporarily, but we will be back in the same position in a few months time. The real question is what happens when there is no road left for can kicking.

 
 

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