Slow train to eurozone rescue

 

At a summit in Brussels this weekend, they will try to finalise their grand plan to solve the eurozone's debt crisis.

France and Germany are still promising a "comprehensive and ambitious response" to the eurozone's financial crisis.

That is confirmed in the latest Franco-German communique, which has just been published by President Sarkozy's office.

But agreement on the rescue package will now not be forthcoming at the summit of European leaders to be held this Sunday. Instead it will come at a second meeting by "Wednesday at the very latest".

Maybe it is the pledge of the French president and the German chancellor that the timetable won't slip again that has prevented panic from gripping financial markets this evening, at this latest manifestation of just how difficult it is proving to reconcile France and Germany on a vital element of the emergency deal: namely the method for increasing the financial firepower of the eurozone's rescue fund, the European Financial Stability Facility.

Debt cut

There is a second obstacle to announcing a definitive plan, which is that negotiations haven't yet begun properly with private-sector lenders to Greece on a significant reduction of what the Greek government will repay them, beyond the 21% cut they've already agreed.

In that context, some would say the one bit of good news today is that France and Germany have announced that formal negotiations with Greece's creditors on a significant debt write-off should begin.

But whatever heart anyone draws from that is undermined by the palpable problems Mrs Merkel is facing in persuading her parliament that the European Central Bank should stand behind the European Financial Stability Fund in making bailout loans to countries such as Italy and Spain that are struggling to borrow.

For Germans, the idea of central banks lending to governments is anathema. For them, it would be a hideous symbol of how the ECB is a pale shadow of what their beloved Bundesbank had been in the decades before they gave up the mark for the euro.

Or to put it another way, memories of hyperinflationary Germany still weigh on people and politicians.

Nerve-wracking days

So what on earth could be agreed this weekend?

Well, there should be progress on the recapitalisation or strengthening of banks, along the lines I've written about over the past 10 days, although the European Banking Authority's initial estimate that this would involve an investor-reassuring 200bn euros ($275bn; £175bn) may not be realised.

As the Financial Times implied this morning, bankers and regulators in national capitals are finding ways of massaging down what their banks will need to raise, so it's not clear whether the final fund-raising will be deemed to be adequate to protect the eurozone banking system from the losses that lie ahead.

So, as you've heard me say before, we're in for a nerve-wracking few days, as we wait to see whether France and Germany can reach an entente.

One other thing: how do other members of the eurozone feel about this very public display by France and Germany that their respective interests and ideas are of only secondary importance? It would be a somewhat painful irony if in patching up their differences, France and Germany succeeded in fomenting opposition from another proud eurozone nation.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +38

    Comment number 17.

    We urgently need a loan to pay the loans we already have.
    And soon a loan to pay for that one.
    And then another for the one to pay for the one we don't yet have, which we're getting to pay for the ones we can't afford to pay.

    Anyone see the problem here?

  • rate this
    +32

    Comment number 18.

    This looks increasingly like the monetary version of Monty Python. Why did the governments ever bail out the banks in the first place! The should have taken steps to protect those with current and savings accounts and let the rest go, after all 'investing' is exactly the same as gambling and no one has ever seen the government bail out those who lost money on the 3.30 at Ascot!!

  • rate this
    +22

    Comment number 24.

    This "rescue" is nothing of the sort. Trying to agree on the size of the fund is like arguing over the size of the lifeboats instead of turning away from the iceberg. Or is that the problem - we are already holed underwater and the Captains of the EU don't want to tell us plebs in steerage class?

  • rate this
    +19

    Comment number 5.

    Not wanting to be seen as kicking the can down the road they are now pushing it inch by inch very gently and very slowly.

  • rate this
    +19

    Comment number 36.

    25. BluesBerry
    " I want these criminal products & their inventors revealed. Inventors in prison."
    ~
    We need look no further than those who lobbied for deregulation, Goldman Sachs and the like, whose actions have even led to mass starvation after their speculation in food markets. These are evil people who will stop at nothing to retain the right to control us through debt.
    Ending FRB solves.

 

Comments 5 of 280

 

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