Summit won't solve crisis, Germany says

German Finance Minister Wolfgang Schaeuble

Πηγή: azcentral
By By David Rising

Oct 17 2011

BERLIN - German finance chief Wolfgang Schaeuble dampened expectations of an upcoming EU summit, saying Monday that it would not provide a comprehensive solution to the eurozone debt crisis that threatens to cause another global recession.

Markets have rallied for days on hopes for the plan, which is widely expected to focus on lightening Greece's debt load, making banks raise more money and boosting the scope of the eurozone bailout fund's lending capacities.

Schaeuble said leaders expected to adopt a five-point plan to address instability within the eurozone but that more work would still needed to be done.

"We will not . . . have the definitive solution on the weekend," the finance minister said in Duesseldorf, according to the news agency dapd. "But we want to get rid of the market uncertainty with the five elements."

Stocks and the euro fell after the comments as investors reigned in their expectations that the Oct. 23 meeting in Brussels would mark a turning point for the beleaguered 17-nation currency zone.

Optimism had grown earlier this month when German Chancellor Angela Merkel and French President Nicolas Sarkozy said the EU meeting would yield a "comprehensive response" of measures to counter the debt crisis.

One of the key sticking points is getting banks to take sharper losses on the Greek government debt they hold without causing a messy default that could roil markets and plunge the global economy back into recession.

A second bailout for Greece tentatively agreed in July calls for a 21 percent writedown on the debt, but European officials say Greece needs to an even bigger discount, possibly 50 percent. Talks with representatives of the banks are still ongoing.

To protect the banks from such losses, the EU plan is expected to call for them to have stronger capital buffers.

Schaeuble endorsed the EU Commission's proposal to force key lenders to raise the financial pad they maintain to absorb losses to about 9 percent of their loans, investments and other risky assets.

"I assume that in Europe we will agree on the 9 percent," he said Monday.

Analysts have estimated that such new core capital rules might require the biggest banks to raise several billion euro each. If they fail to raise it from investors, they would have to turn to their government.

Forcing banks within months to raise their capital buffer to 9 percent would effectively mean advancing new international rules on bank capital, the so-called Basel III rules, which were meant to be binding only in 2019. To pass this summer's stress tests, European banks only needed to have capital cushions of 5 percent to 6 percent.

Finally, the EU's plan would seek ways to maximize the impact of the 440 billion euros ($600 billion) bailout fund, or European Financial Stability Facility. Some have suggested that the fund guarantee a part of government bonds issued, to boost their appeal to investors.

Details on all these plans are scant, however, only days ahead of the weekend's meeting.

Merkel's spokesman Steffen Seibert downplayed suggestions the plan would spell the end of the crisis.

"The chancellor has said that the dreams that are taking hold again, that with this package everything will be solved and everything will be over on Monday, will again not be fulfilled," he told reporters in Berlin.

"These are important steps on a long path, and that is a path that will continue far into next year where other steps must follow," he said.

Seibert would not give any more details about the ongoing discussions between European countries, saying "the debates will be held internally and made public on the weekend."

Meanwhile, the debt crisis is weighing on the real economy. Germany's central bank, the Bundesbank, said Monday that Europe's biggest economy would likely slow in the coming months amid "clearly weakened" demand for its industrial goods.

It said in its monthly report that following strong growth in the third quarter, prospects for the final quarter of 2011 and the first quarter of 2012 had "further darkened."