EU LEADERS are facing pressure to finalise quickly all parts of the new rescue package to tame the debt crisis as a record spike in Italian borrowing costs underscored the vulnerability of the euro zone’s third-largest economy.
Key strands of the plan agreed in the early hours of Thursday morning are still subject to negotiation. These include the debt-exchange element of the 50 per cent “haircut” on privately held Greek bonds and the plan to leverage the firepower of Europe’s bailout fund.
The sense of post-summit relief in official and diplomatic circles was tempered by continuing concern about Italy, which saw its 10-year borrowing costs rising above 6 per cent for the first time since the euro’s introduction in the wake of debt auction yesterday.
The rise came as German chancellor Angela Merkel, who says the euro zone faces a crisis of confidence, warned that Europe would still be confronted with the crisis in a year’s time.
“We’re not going to get rid of that in a day, with one big bang, or in a year,” she said in a speech.
Berlin downplayed a temporary ban by Germany’s constitutional court on the right of a newly convened parliamentary committee to approve emergency actions by the bailout fund.
The ban, pending a full court ruling, means the support of parliament generally will be required. Dr Merkel bypassed the committee when she asked the Bundestag to endorse her negotiating stance in Wednesday’s summit.
While markets rose immediately after the deal, European shares gave up some of their gains yesterday as investors awaited information on new sources of investment for the bailout fund to increase its lending capacity.
“Parallels with the euro area summit of July 21st, when a warm afterglow of confidence quickly dissipated, underline the importance of rapid and full implementation of the policy commitments,” said rating agency Fitch.
The lack of definitive agreement at the euro zone summit on all aspects triggered speculation in Brussels that European finance ministers might be quickly recalled to Brussels to hammer out the remaining details.
However, Poland’s rotating presidency of the EU insisted yesterday that there was no need for an emergency meeting within the next few days. “The necessary preparatory work for finance ministers’ decisions which derive from the summits will now be conducted,” said a spokesman.
The ministers are due back in Brussels on Monday week, four days after European leaders discuss the debt crisis with their global counterparts at the G20 summit in Cannes.
Although Fitch said it would view the proposed 50 per cent haircut as a “default event” under its distressed debt exchange criteria, it said the deal to increase private sector involvement in the Greek rescue was necessary to put the country’s public finances on a more sustainable footing.
EU leaders have shied away from using “ default” in relation to the Greek debt plan. By insisting on exclusively “voluntary” participation by bondholders, they hope to avoid a ruling by the International Swaps and Derivatives Association that the deal will result in a “credit event”. Any such declaration could trigger contagion in markets as it would compel the issuers of insurance against a Greek default to make compensation payments under contracts known as credit default swaps.
Analysts have been expressing reservations about a key part of the new plan: measures to enable the bailout fund to provide first-loss insurance to euro zone countries when they issue bonds.
Daniel Gros of the Centre for European Policy Studies in Brussels said this scheme relied on an incomplete analysis of the underlying problem.
