EURO ZONE leaders advanced a plan early this morning to intensify the battle against the debt crisis but they remained silent on key elements of the package and said final decisions would not come until next month.
Although there was scant detail on the talks last night, US stocks rose as the summit continued in anticipation of progress in the effort to settle the debt crisis.
The leaders resolved to multiply the capacity of their rescue fund, but left it to finance ministers to hammer out the fine print. While agreeing to increase private-sector involvement in the ailing Greek bailout, they did not plan to quantify the level of losses they sought.
A bondholder loss of 50 per cent is in prospect, but the leaders cannot proceed with the plan until they gauge the likely level of participation by the banks which hold Greek debt.
The euro zone leaders expected to make a pledge to provide adequate support to boost Greek banks to address “the implications” of increased private sector involvement, which will lead to large losses at Greek banks.
“Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks,” said a draft summit communiqué.
The clearest element of the package was a €106 billion plan to boost the capital of weakened banks, an initiative in which Spanish banks will need as much as €30 billion and Italian banks €14.78 billion.
The requirement for such funding for these banks, at a time when both countries are under exceptional fiscal strain, has raised expectation that they may have to tap Europe’s bailout fund to raise the capital.
Again, however, there remains some doubt over the definitive figures and this will not be clarified until next month.
“The European Banking Authority expects to disclose the final capital shortfall in the course of November, based on banks’ figures as at 30th September 2011 when individual banks will be asked to disclose their capital and sovereign debt position.” The main Irish banks, recapitalised to a higher threshold than their European counterparts, will not be required to boost their capital further.
“This outcome reinforces the robust and conservative nature of our Prudential Capital Assessment Review (PCAR) exercise in March of this year,” said Minister for Finance Michael Noonan.
The draft summit communiqué said euro zone finance ministers were pleased with the progress made by Ireland in fully implementing its adjustment programme, which it said was “delivering positive results.” The draft said two options would be available to leverage the ¤440 billion European Financial Stability Facility, which is too small to deal with the risk that Italy and Spain might need aid.
Early this morning diplomatic sources reported “good progress” in this element of the talks. The first leveraging option involves creating a special purpose investment vehicle to access funds from sovereign and private investors such as Chinese and Middle Eastern wealth funds to buy bonds of struggling euro zone countries.
“This will enlarge the amount of resources available to extend loans, for bank recapitalisation and for buying bonds in the primary and secondary markets,” the draft communiqué said.
The second option involves using the EFSF to offer partial guarantees to purchasers of new euro zone debt. “The EFSF will have the flexibility to use these two options simultaneously, deploying them depending on the specific objective pursued and on market circumstances. Their leverage effect is expected to be several-fold,” the draft said.
Between €250 billion and €275 billion of the EFSF’s lending capacity remains unused after its rescues of Ireland and Portugal and a looming intervention to boost the Greek bailout. A leveraging effort to boost that by a multiple of four would bring its firepower to €1 billion.
The draft communiqué called on euro zone finance ministers to finalise the terms and conditions for the implementation of these proposals in November. The draft also said the EFSF could be further bolstered by closer co-operation with the International Monetary Fund. As the summit continued, however, sources said the extent of increased IMF aid to the euro zone rescue effort still hung in the balance.