EU leaders must put aside divisions to avoid contagion, says Barroso

EUROPE’S LEADERS should stop prevaricating and quickly adopt a plan to bail out Greece, recapitalise the region’s banks and give the euro zone’s rescue fund more firepower to stop economic contagion, the president of the European Commission said.

José Manuel Barroso did not specify how to help Greece, Europe’s banks or boost the rescue fund, highlighting the fierce divisions that still exist among European officials and among national capitals over the way forward – divisions that must be bridged by the time EU leaders gather for a summit in less than two weeks.

Senior EU officials said there was an intense debate within Mr Barroso’s commission over whether to specifically back a 9 per cent core tier-one capital ratio for banks – the key measure for financial strength and far higher than required just three months ago in European stress tests.

Irish banks have already been recapitalised to a higher level.

In the end, Mr Barroso omitted the figure from his speech and instead called for “a temporarily higher capital ratio after accounting for exposure” to sovereign debt of shaky euro zone economies, which most big European banks hold in large quantities. He also proposed that banks requiring recapitalisation be barred from issuing bonuses to executives or dividends to shareholders.

Despite the lack of detail, Mr Barroso’s blueprint, presented to the European Parliament, set out in public for the first time all the elements of a grand bargain EU leaders are hoping to finalise at their meeting on October 23rd.

“To break the vicious cycle of uncertainty over sovereign debt sustainability and over growth prospects, we need comprehensive solutions now,” Mr Barroso said. “Now is the time to bring them all together, to once and for all meet the depth of the crisis with a full comprehensive and credible response.”

In addition to quick action on Greece, banks and the rescue fund, Mr Barroso called for an overhaul of the way the euro zone is governed and movement on long-standing proposals aimed at boosting economic growth.

The most contentious issue, however, continues to be the size of losses to be pushed on private holders of Greek bonds. According to European officials, Germany continues to urge a “haircut” of about 50 per cent, but others, led by France and the European Central Bank, are resisting any move that could be considered a “credit event” – an explicit default that would trigger insurance contracts known as “credit default swaps”.

There is also division over the banks plan. A 9 per cent core tier-one capital threshold under the European Banking Authority definition is roughly equivalent to the 7 per cent requirement under Basel III bank accords. – (Copyright The Financial Times Limited 2011)