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28 March 2024

Sarkozy yields on ECB crisis role

French President Nicolas Sarkozy, center, reaches out to touch the hand of Dutch Prime Minister Mark Rutte during a round table meeting at an EU summit in Brussels on Sunday, Oct. 23, 2011. (AP)

Published
By Reuters

European Union leaders made some progress toward a strategy to fight the euro zone's sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

"Further work is still needed and that is why we will take the decisions in the follow-up euro zone summit," European Council President Herman Van Rompuy said after chairing 12 hours of talks.

He indicated that Italy, the euro zone state now in the markets' firing line, had been told to come up with a more convincing plan this week to implement structural economic reforms to raise its growth potential.

"Between now and Wednesday, some members of the European Council will have to convince colleagues that their country is implementing the promised measures fully," Van Rompuy said.

Italian Prime Minister Silvio Berlusconi said he expected to call a cabinet meeting on Monday to discuss measures to boost growth, as Italy came under mounting pressure from European partners to step up reforms to restore market confidence.

Sarkozy acknowledged that France's proposal to multiply the firepower of the euro zone's rescue fund by turning it into a bank and letting it borrow from the ECB would not fly for now because neither Germany nor the central bank accepted it.

"No solution is viable if it doesn't have the support of all the European institutions," the French leader told a joint news conference with German Chancellor Angela Merkel.

Merkel said only two options remained on the table for leveraging the 440 billion euro ($600 billion) European Financial Stability Facility, and neither involved drawing on the central bank. Van Rompuy said, however, that some form of ECB involvement could not be entirely discounted.

Officials said the emerging solution would combine using the EFSF to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries that could guarantee bonds in the secondary market.

It remains to be seen whether that will convince investors that euro zone government bonds are safe after expected heavy write-downs on Greek debt.

"This is not going to be the 'shock and awe' solution to really impress the markets given there are still a lot of details to be worked out and there is still a great deal of uncertainty about how this is to be implemented," WestLB rate strategist Michael Leister told Reuters.

Leaders endorsed a broad framework drafted by their finance ministers for recapitalising European banks, which regulators say need between 100 and 110 billion euros to cope with likely losses on Greek and other euro zone sovereign bonds.