Merkozy fail to agree deal to save euro

Tim Wallace
Follow Tim
HOPES for a decisive breakthrough on a Eurozone rescue package at this Sunday’s summit collapsed as France and Germany failed to agree on the purpose of the European Financial Stability Fund (EFSF) yesterday.

Officials said another summit might be held early next week to continue discussions on private sector involvement in a second Greek bailout, and how to boost the €440bn (£384bn) spending power of the EFSF.

Angela Merkel cancelled today’s scheduled speech to the German parliament after failing to agree with French president Nicolas Sarkozy.

France favours turning the EFSF into a bank so that it could borrow from the European Central Bank. Germans oppose this as it breaches treaty clauses.

An alternative – “the most realistic option”, said Investec – is to use the EFSF to provide sovereign bond insurance. The scheme would guarantee the first 20 to 50 per cent of losses, which could encourage private investors to buy sovereign debt.

It is believed that a plan on bank recapitalisation has been agreed. Austrian finance minister Maria Fekter said it was agreed that around €100bn would be needed to finally prop up troubled banks to a sustainable extent.

However, analysts were sceptical that this would be sufficient.

“If the markets think that at least €200bn is needed to prevent a banking collapse, then producing a plan incorporating anything less is unlikely to be warmly received,” said Capital Economics’ John Higgins.

Standard and Poor’s published a stress test report yesterday showing that a double-dip recession – which economists view as increasingly likely, considering October’s consumer confidence data showed a fifth consecutive monthly fall – and 60 per cent Greek haircut would push total recapitalisation costs to €115bn.

With an interest rate shock too, that could rise to €135bn – clearly in excess of the €100bn expected to be agreed.

However, analysts have some hope on Greek debt restructuring. “If a voluntary restructuring is agreed, a deal could be announced as early as this weekend,” said Barclays Capital’s Julian Callow.