After more than a week of delays, the summit of 17 euro nations produced merely the third leg of what was supposed to be a “comprehensive” three-part rescue plan.
While they were said to have agreed that the region’s bailout fund would be leveraged up to a firepower of €1 trillion – half markets’ hopes of €2 trillion – they did not give an official number or method for achieving it.
They did agree that banks must be required to amass a level of capital equal to nine per cent of their assets after a write-down of their sovereign bond holdings. The total capital to be raised by European banks will be around €106bn, with Britain’s lenders deemed to have enough reserves to avoid raising anything more.
But euro leaders failed to deliver a plan for tackling the fundamental problem of burgeoning debt among uncompetitive Eurozone economies. After producing a vague outline for reform, Italian parliamentarians ended up in a brawl that saw MPs exchanging blows and grabbing at one another’s throats. Rome’s parliament was hastily suspended.
In Brussels, European leaders grappled for hours with two crucial elements of the rescue plan: an orderly default for cash-strapped Greece and a way to leverage up the region’s €440bn bailout fund.
In the event, they failed to announce details on either score.
The IMF was said to favour a haircut on Greek debt of 70-75 per cent – above expectations of 60 per cent – but there was no official announcement. Banks will so far only be required to write down their holdings of government debt and non-core assets for sale to market prices as of September.
They will have until June next year to reach the nine per cent pass rate for stress tests conducted by the European Banking Authority, and will have to tap private markets for cash first before going cap in hand to governments. For those states that cannot afford it, the money will come from the euro bailout fund.
However, the capital requirements are subject to an assessment of “the impact of the proposed magnitude and nature of any proposed deleveraging”.
That means that if national regulators fear that the aggressive stress tests and tight time-frame could choke off credit to the real economy too quickly, the rules could be adjusted.
Spain’s largest five banks, including Santander, are expected to have to raise €26bn between them, not much more than Greece’s six biggest lenders, which will have to beef up their balance sheets to the tune of €30bn.
France’s biggest four banks are expected to have to raise €8.8bn – lower than previous estimates of €10bn – while five Italian lenders will need to produce €14.7bn extra. Thirteen German banks will between them have to raise only €5.2bn.
French President Nicolas Sarkozy and German Chancellor Angela Merkel have already started meeting with banks in order to thrash out the details of haircuts on their Greek debt holdings.
Sarkozy is also said to be seeking billions in Chinese and Brazilian cash to buy any debt issued by the Eurozone bailout fund in order to leverage it to the required levels.