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 Merkel rebuffs Sarkozy on euro zone solution

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PostSubject: Merkel rebuffs Sarkozy on euro zone solution   Fri Oct 21, 2011 9:44 am

BRUSSELS/BERLIN | Fri Oct 21, 2011 9:33am EDT

(Reuters) - France's push to use more European Central Bank money to fight the euro zone debt crisis has run into strong resistance from Germany and other EU partners, leaving Paris increasingly isolated before a crucial summit.

The rift between Europe's two biggest powers has already forced leaders to tack on an extra summit in the coming week. They will now meet twice -- on Sunday and Wednesday -- to try to adopt a comprehensive strategy to fight the crisis that began in Greece, spread to Ireland and Portugal and is now threatening to engulf bigger economies in the 17-nation currency area.

Senior European sources said Berlin and Paris were still at loggerheads on two core elements of a plan to build a firewall around Greece and stabilize bond markets -- how to scale up the euro zone's rescue fund and how to reduce Greek debt.

French President Nicolas Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday in seeking to turn the 440-billion-euro ($600 billion) EFSF rescue fund into a bank able to access ECB liquidity to fight contagion, and would have to back down, they said.

Germany, the ECB itself and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments.

"The path is closed for using the ECB to ease liquidity problems," German Chancellor Angela Merkel told her conservative parliamentary caucus in Berlin, according to participants at a closed-door meeting.

Finance Minister Wolfgang Schaeuble hammered home the same message on arrival for a preparatory meeting of euro zone finance ministers in Brussels, telling reporters: "We will stick to the situation as it is in the treaty that the central bank is not available for state financing."

A German government spokesman said the most important decisions at the two-part meeting would only come on Wednesday.

Merkel needed more time to secure parliamentary support under new rules that stipulate that the Bundestag's budget committee must approve all key EFSF decisions.

The timetable forced the EU to postpone a summit with China next Tuesday, highlighting how the debt crisis is impinging on Europe's place in the world.

Striking a new note of exasperated urgency, Chinese Premier Wen Jiabao told European Council President Herman Van Rompuy in a phone call that European leaders should take concrete actions to contain the crisis and stabilize the euro and financial markets.

The summit outcome will determine whether investors' confidence in the euro area can be restored. It will also influence whether an expected Greek debt write-down triggers a chain reaction of financial turmoil across Europe.

As a first step, leaders of the 27-nation European Union are set to endorse a plan on Sunday to strengthen banks' capital base and may also launch a procedure for longer-term reform of the euro area's economic governance, EU sources said.

European banks will be required to increase their core tier one capital ratio to 9 percent to help them withstand losses on sovereign debt, but it is not yet agreed how long they will be given to raise extra funds.

EU officials said the total amount required was just short of 100 billion euros. Those banks that cannot raise money on the markets will have to turn to national governments.


An EU source said France, which has presidential and parliamentary elections from April to June and is desperate to keep its top-notch AAA credit rating, was pressing for banks to be given at least nine months to meet the target.

France fears its credit rating could come under threat if the wrong method is chosen to scale up the bailout fund to prevent contagion spreading to Italy and Spain, the euro zone's third and fourth largest economies.

Ratings agency Standard & Poor's said on Friday it is likely to downgrade France and four other states if Europe slips into recession. It was the second agency this week to cast doubt on Paris' triple-A rating after Moody's on Tuesday.

There are also differences between Germany and France and between the EU and the International Monetary Fund over how deep a write-down banks and insurers will have to take on Greek bond holdings to make that country's debt sustainable.

Paris and Berlin called on Thursday for negotiations to start immediately with the private sector over its contribution to a sustainable plan for Greece's mountainous debt.

Underlining the threat the euro zone crisis poses to the global economy, U.S. President Barack Obama held a video conference with Merkel and Sarkozy on Thursday, reiterating that he hopes a solution will be in place in time for a summit of G20 leaders in Cannes, France on November3-4.

The IMF is more pessimistic than the EU about the sustainability of Greek debts and believes that a deeper debt reduction is needed, EU sources told Reuters.

Despite the differences, EU and IMF inspectors are expected to go ahead and approve an 8 billion euro aid payment to Greece next month, the sixth tranche from a 110 billion euro package of EU/IMF loans agreed last May.

Without that payment Greece faces default, possibly dragging the larger economies of Spain and Italy into the mire and sending shockwaves through the European banking system.

A German government spokesman said the timing of the second summit would allow the parliamentary budgetary committee to debate plans for the euro zone rescue fund. The committee has to consider such plans, according to German regulations.


The biggest challenge is agreeing on the method of scaling up the EFSF.

The most likely approach is to use the EFSF to guarantee a portion of potential losses on new euro zone bonds, a way of trying to restore market confidence and convince investors that Italian and Spanish bonds are safe to buy. But ministers stressed other options were still on the table.

By guaranteeing only a portion, perhaps a third or a fifth, of each debt issue, the available EFSF funds would stretch 3-5 times further, increasing it to around 1 trillion euros.

However, analysts are concerned that such a plan could create a two-tier bond market, with bonds that have guarantees trading at a premium to the secondary market -- an outcome that could exacerbate market turmoil.

Markets traded cautiously on Friday after news of the summit delay, with safe-haven German Bund futures higher.

Adding to uncertainty, EU officials said some key euro zone member states were coming to the view that further private sector involvement in Greek debt reduction may have to be forced, not voluntary -- an outcome ruled out up to now.

"Let's be serious, everybody knows that a 50 percent haircut, as Germany is asking for, is not a voluntary move," one EU official said.

In July, banks and insurers agreed to contribute 50 billion euros to reducing Greece's debt via a debt buyback and swap agreement, which equated to a 21 percent writedown. That is now seen as insufficient to make Athens' debts sustainable.

Greece remains mired in recession and its overall debt is forecast to climb to 357 billion euros this year, or 162 percent of annual economic output. German government sources said Greek debt should be reduced to about 120 percent of GDP. ($1 = 0.730 Euros)


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PostSubject: Re: Merkel rebuffs Sarkozy on euro zone solution   Fri Oct 21, 2011 9:52 am

BERLIN | Fri Oct 21, 2011 9:03am EDT

Merkel split summit for OK from powerful MPs

BERLIN (Reuters) - Angela Merkel's new legal requirement to consult parliament on changes to euro zone bailout funds and the lack of detailed proposals to show lawmakers was behind a decision to split a European crisis summit in two, an aide said on Friday.

Against a backdrop of reports that Germany and France are at loggerheads on how to deliver on their promise of a solution to the crisis by month-end, European leaders will meet on Sunday to discuss a Greek debt write-down and bank recapitalization.

But the leaders of the 17-nation single currency zone will have to meet again on Wednesday to give the German chancellor time to get a mandate from the Bundestag's (lower house of parliament) budget committee for any proposals from Brussels.

This bears out fears that a September ruling by Germany's constitutional court giving parliament more say in how Germany responds to the crisis would slow down the 17-nation currency zone's reactions by forcing Merkel to consult MPs.

Merkel's spokesman said there had to be two summits because there had not been time for the Bundestag committee to study proposals in detail -- and in German -- before Sunday, when the leaders of all 27 European Union members, then those of the euro zone, meet in Brussels at a crucial time in the crisis.

The "Troika" report on Greek debt sustainability by inspectors from Europe and the International Monetary Fund, which will help determine the scale of a write-down on Greek debt, has not yet been presented.

"Decisions could not be made on Sunday because without a discussion and approval by the budget committee, the chancellor would have had to travel to Brussels without a mandate on these issues," said spokesman Steffen Seibert.

"A Brussels summit which could not decide on important questions because Germany could not give its agreement would have been a huge setback for our European drive for stability," he told a news conference.

European officials spoke of frustration with Germany's even tardier response to the crisis -- Berlin is already blamed for delays in bailing out Greece the first time, in 2010 -- though it also appeared agreement was still lacking on key details.

Merkel's conservatives and main opposition Social Democrats -- whose support for extra powers for the European Financial Stability Facility (EFSF) was crucial last month in the German parliament -- were in agreement on rejecting French proposals to use the European Central Bank to leverage the rescue fund.

"The path is closed for using the ECB to ease liquidity problems," Merkel was quoted as telling coalition deputies, while Seibert made it clear that the German position on this had not changed.

Carsten Schneider, the SPD's budget affairs spokesman, said his party agreed: "This would break taboos, and we, like the government, reject it."

Germany and France, which have promised a definitive plan to stop contagion from Greece -- and to a lesser extent Portugal and Ireland, which have also received bailouts -- have made it clear there is no question of increasing the 440 billion euro EFSF nor Germany's maximum contribution of 211 billion euros.

But it was not yet clear what opposition might crop up in the budget committee to less drastic measures such as other ways of leveraging the fund, or requirements for European banks to accept bigger haircuts on their Greek debt holdings and up their capital to protect savers.

Merkel managed to get the souped-up EFSF approved in the Bundestag last month with a stronger majority than expected, but her coalition allies -- especially the Free Democrats (FDP), who are weak in polls -- are increasingly prone to revolts by eurosceptics.

The FDP and all other German parliamentary parties are represented proportionally on the 41-member budget committee, which has to approve all government expenditure. It is usually chaired by the main opposition group, meaning the SPD.

The committee was due to meet on Friday and next Tuesday to consider the proposals Merkel brings from Brussels. She will then address the full parliament on Wednesday before returning to Brussels for the decisive second leg of the summit.

"Next week we await possible formulations on the leverage question and we'll then discuss this in the budget committee," said Volker Kauder, president of Merkel's conservative bloc in the lower house.


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PostSubject: Re: Merkel rebuffs Sarkozy on euro zone solution   Fri Oct 21, 2011 4:25 pm

It seems as tho Europe wants Germany to bail them out and Germany is saying "Wait a second here not so fast"

Being defeated is often a temporary condition. Giving up is what makes it permanent.
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