The European Commission threw its weight behind the push to recapitalize banks and issued a thinly veiled plea to Germany and France, the euro zone’s paymasters, to overcome their differences before the debt crisis triggers another recession.
The EC effort is apparently designed to put pressure on European leaders to make good on their commitment to reach a comprehensive crisis-fighting plan at their crucial summit on Oct. 23. The leaders may use the summit to ask financial institutions to take losses of as much as 50 per cent on their Greek debt holdings.
Jose Manuel Barroso, president of the EC, told the European Parliament that the EU needed “compatibility” if the crisis is to be fixed. “How can we speak about co-ordination and integration in a disintegrated manner?” he said on Wednesday. “It is obvious that we need a community approach.”
His plea was thought to be aimed at Germany and France, which have had differing views on how Europe’s banks should be propped up as the combined weight of rotting sovereign bonds and the economic slowdown damages their health. France has favoured using the enhanced €440-billion ($617-billion) bailout fund, known as the European Financial Stability Facility (EFSF), to bolster the banks’ capital; Germany wants national governments to take the lead in fixing home-grown banks.
It appears that the Germany might get its way, though the two countries have not announced that they have covered over their differences. On Wednesday, French budget minister Valerie Pecresse said Paris would not tap into the fund. “The fund can be used to recapitalize the banks, but France will not make use of the EFSF,” she said.
The enhanced EFSF fund has yet to be ratified by Slovakia, the last holdout among the 17 euro zone countries, but the country is expected to vote again this week on the measure.
Mr. Barroso unveiled a five-part plan to tame the debt crisis, one that was short on detail but long on urging quick and decisive action after almost two years of European dithering that resulted in three sovereign bailouts (Greece, Ireland, Portugal) and threats to the debt-paying ability of Spain and Italy.
Fixing the banks is key to his plan. He said the EU governments, the EC and the European Central Bank must co-ordinate efforts to bolster banks’ capital through private and state injections. Banks must come clean on their sovereign-debt holdings and regulators should implement higher capital requirements after accounting for the banks’ sovereign holdings.
One key provision: Mr. Barroso wants any bank that falls short of its capital requirements to be barred from paying dividends or employee bonuses.
Euro zone countries will ask financial institutions to accept losses of up to 50 per cent on their holdings of Greek debt in an attempt to bring down Greece’s crushing debt load, Reuters reported Wednesday. In July, they had asked the industry to take a 21-per-cent “haircut” on their Greek holdings as part of Greece’s second rescue package, worth €109-billion.
The other parts of Mr. Barosso’s crisis-fighting plan urge continued bailout instalment payments to Greece while it pushes through austerity programs; the launch of the successor to the EFSF in 2012, a year earlier than planned; stronger and quicker growth-enhancement policies; and more steps to “integrated economic governance.”
If the EFSF is to be used to boost bank capital in some countries, it has to be receive parliamentary approval in Slovakia, one of the smallest of the euro zone countries. On Tuesday night, Slovakia rejected the enhanced EFSF in a confidence vote that took down the coalition government. The coalition and opposition parties later agreed to hold a second vote by Friday; it is expected to approve the bailout fund.
The political focus is now shifting to Italy, where Prime Minister Silvio Berlusconi faces a confidence vote after his government failed to pass a key budget provision earlier this week. If he loses the confidence vote, expected Friday, Italy’s austerity and economic reform packages might go into reverse.