G-20 Working on New Euro-Zone Rescue Plan
European officials have begun to outline a rescue plan that could include steeper losses for investors in Greek bonds, higher capital requirements for banks, and increased firepower for bailouts and the International Monetary Fund.
European finance ministers and central bankers from the Group of 20 began talks in Paris today, where they began discussing ways to combat Europe’s spreading sovereign debt crisis. They may complete the plan at an October 23 summit and present it to a gathering of G-20 chiefs November 3-4.
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Three months ago, banks and insurers agreed to a 21% writedown on Greek debt, but they are now being pushed to accept a larger haircut as Greece’s economy continues to deteriorate. German banks are reportedly preparing for losses of as much as 60%.
“A Greek debt writedown, even if it takes place, should only be ventured after careful and conscientious preparation in order to prevent anything worse from happening and to pave the way for structural reforms,” said German Chancellor Angela Merkel in a speech in Karlsruhe, southwest Germany, today.
European authorities are also working on a plan to shield backs from the sovereign debt crisis by building a capital cushion. European financial institutions may be forced to raise between 100 billion euros and 300 billion euros in additional capital, money that would come either from existing investors, or more likely from state funding that would come with strings attached.
The European Banking Authority plans to have completed its assessment of the region’s capital needs ahead of a meeting of European Union finance ministers that will precede the coming summit, according to Jonathan Todd, a spokesman for the European Commission. Banks could be called on to increase their capital ratios to at least 9%, up from the 5% core capital level used in July’s stress tests. French Finance Minister Francois Baroin has gone on record saying that 9% may be a “good” level.
After Slovakian lawmakers yesterday approved measures to enhance the European Financial Stability Facility, the euro zone’s rescue fund, now ratified by all 17 euro countries, will have 440 billion euros at its disposal, and be allowed to buy sovereign debt, aid troubled banks, and offer credit lines to governments. Its original role was to sell bonds to finance rescue loans.
However, its new spending power may not be enough to contain the crisis, and many economists are saying the fund’s capacity should be boosted to 2 trillion euros. Policy makers are now looking to leverage the fund, possibly by insuring a portion of new bonds issued by debt-ridden nations.
European officials are working on a way to increase the size of the fund without requiring another round of parliamentary approvals or tapping the European Central Bank’s balance sheet. One move might include providing a partial guarantee to new bond sales, a step the ECB has endorsed. Another might be to set up the permanent rescue fund, the 500-billion-euro European Stability Mechanism, a year ahead of schedule, by mid-2012.
Non-European countries have been considering increasing the IMF’s lending resources to better enable the organization to deal with Europe’s debt woes, though such talks are only in the preliminary stages, and are unlikely to move forward until potential contributors see what other fixes Europe cooks up. Last month, IMF Director Christine Lagarde said the organization had a $390 billion cash stockpile, which would most likely be insufficient to meet all loan requests should the global economy worsen.
“Emerging markets, in particular China, may feel the pressure at this point to make some gestures to help the West,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “They do not want to invest too much given that the West’s problems are of its own making, and if they help, they want to do so in a way that brings them benefits and recognition.”