Summit hope plummets on bailout rows

Tim Wallace
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FRENCH president Nicolas Sarkozy flew to Germany last night for crisis talks ahead of this weekend’s summit, which aims to address the Eurozone’s woes.

He wants the European Financial Stability Fund (EFSF) to become a bank, tapping the European Central Bank (ECB) for funds to help governments.

Germany and the ECB oppose the suggestion, leading Sarkozy to tell the French parliament yesterday that he was heading to Germany to convince chancellor Angela Merkel and her coalition partners.

On Tuesday she dampened hopes of a plan to save the euro emerging this weekend, saying “One cannot resolve sovereign debt with one summit. It will take difficult, long-term work.”

One suggestion that has gained traction is the idea that the EFSF should insure a portion of the losses on sovereign bonds, providing insurance for investors. That could leverage the fund from €440bn to €1 trillion or more.

However, economists are sceptical.

“I would be surprised if the leverage amounted even to €1 trillion, which would only cover peripheral refinancing needs for the next two years, and I do not think the crisis will be over by then,” said Berenberg Bank’s Christian Schulz.

“However, if banks agree to a 50 per cent haircut, Greece’s national debt will fall to 120 per cent of GDP, similar to Italian levels. They could slow tax rises and focus on structural reforms.”

CEBR’s Douglas McWilliams said there is hope bank refinancing may be agreed. “At the national level, provision needs to be made to bail out and nationalise bust banks. At the EU level funding needs to be made available to bail out the bust banks so that they can keep trading – by Monday, to stop more going the way of Dexia.”