No deal yet on euro crisis as the danger grows

French Pres­i­dent Nico­las Sarkozy, right, ges­tures while speak­ing with Spain’s Prime Min­is­ter Jose Luis Rodriguez Zap­a­tero, left, dur­ing a round table meet­ing at an EU sum­mit in Brus­sels on Sun­day, Oct. 23, 2011. Greece’s prime min­is­ter is plead­ing with Euro­pean lead­ers in Brus­sels to act deci­sively to solve the continent’s debt cri­sis. At a sum­mit Sun­day, the lead­ers are expected to ask banks to accept huge losses on Greek bonds to ease the pres­sure on the coun­try, and to raise bil­lions more in cap­i­tal to weather those losses. (AP Photo/Yves Logghe)

SARAH DiLORENZO

AP Busi­ness Writer

BRUSSELS (AP) — Euro­pean lead­ers yet again put off the tough deci­sions needed to save the con­ti­nent from its debt cri­sis but promised Sun­day that a com­pre­hen­sive plan is still coming.

As they daw­dled, the dan­ger was ris­ing in an already high-stakes game.

Lead­ers of the continent’s rich­est coun­tries had unusu­ally stern words Sun­day for Ital­ian Prime Min­is­ter Sil­vio Berlus­coni, because many fear his nation could be the next dragged into the debt cri­sis if it does not make major bud­get cuts quickly.

That would spell dis­as­ter: Europe has res­cued three small nations — Greece, Ire­land and Por­tu­gal — but can­not afford to res­cue Italy, the eurozone’s third largest econ­omy. Ana­lysts say EU lead­ers, known as the Euro­pean Coun­cil when they meet in Brus­sels, have to act now to elim­i­nate the pos­si­bil­ity of Italy’s finan­cial collapse.

“Between now and Wednes­day, some mem­bers of the Euro­pean Coun­cil have to con­vince col­leagues that their coun­try imple­ments com­mit­ments fully,” EU Pres­i­dent Her­man Van Rompuy said after the day’s meet­ings, clearly refer­ring to Italy. On Wednes­day, lead­ers will gather again — to unveil their solu­tion, they promise.

When asked later what would hap­pen if coun­tries failed to fall in line, he responded: “They will make commitments.”

Whether that mes­sage was get­ting through, how­ever, was unclear. “The Ital­ian fun­da­men­tals are very solid,” Berlus­coni told reporters after the 12-hour meeting.

For weeks it’s been clear what the 17 coun­tries that use the euro must do: reduce Greece’s debt bur­den so the coun­try even­tu­ally can stand on its own, force banks to raise more money so they can ride out the finan­cial storm that will entail, and show that their Euro­pean bailout fund is big and nim­ble enough to pre­vent larger economies from get­ting dragged into the crisis.

On Sat­ur­day, offi­cials said the lead­ers were near­ing agree­ment on slash­ing Greece’s debts and strength­en­ing the continent’s banks, many of which are awash in Greek bonds.

But Sun­day, the only solid detail to emerge from three days of intense talks was that banks will have to raise their cap­i­tal buffers much faster than they had planned — by the end of 2012, instead of 2019.

A Euro­pean offi­cial said Sat­ur­day the banks would be forced to raise just over euro100 bil­lion ($140 bil­lion) more for their rainy-day funds, but lead­ers have not given an offi­cial figure.

Instead, at a series of news con­fer­ences Sun­day, all they could do was promise to deliver big at their next summit.

“There are still prob­lems to solve, but we are mov­ing for­ward on all sub­jects,” French Pres­i­dent Nico­las Sarkozy said as he left Sunday’s meet­ings. “There is a still a lot of work to do … but there are no more blockages.”

Ana­lysts who have seen this pat­tern for months couldn’t help but be skeptical.

“By fail­ing to agree on any­thing sub­stan­tial today, EU lead­ers may have set them­selves up for an even big­ger fall,” said Sony Kapoor, man­ag­ing direc­tor of the Re-Define think tank. “They owe it to Europe to pull a rab­bit out of the hat now, but this seems to be beyond them.”

Part of the chal­lenge is that Euro­pean lead­ers are unable to decide on any­thing until every­thing is in place, since each piece of the puz­zle affects the oth­ers. The value of Greece’s bonds can’t be slashed until banks are strength­ened — or at least have con­fi­dence they can get help from the res­cue fund. But some coun­tries are reluc­tant to strengthen the fund until they know there’s a plan to bring Greek debt under control.

Banks — which have already agreed to take losses on their Greek bonds of some 21 per­cent — are already rum­bling at sug­ges­tions that they might need to dou­ble or nearly triple that fig­ure. But with­out reduc­ing Greece’s debt load, the whole plan does not work.

The euro­zone also still needs to work out how to most effec­tively use Europe’s bailout fund to make sure Italy and Spain don’t see their bor­row­ing costs spi­ral out of con­trol, as hap­pened with Greece, Por­tu­gal and Ireland.

Offi­cials said lead­ers had reduced seven dif­fer­ent pro­pos­als down to two options, which are not mutu­ally exclu­sive. Both options would essen­tially use the Euro­pean Finan­cial Sta­bil­ity Facil­ity to insure investors against a first round of losses on bonds from wob­bly countries.

But before that can be done, those coun­tries have to con­vince their part­ners in the euro­zone that their weak­ness is only tem­po­rary and they can get back into shape soon.

Ger­man Chan­cel­lor Angela Merkel and France’s Sarkozy came out with par­tic­u­larly strong words for Italy.

“We made it very clear that Italy is a big and impor­tant part­ner for the euro area and that every­thing needs to be done to live up to this respon­si­bil­ity,” Merkel told reporters after the two met with Berlusconi.

“Trust does not just come from a fire­wall,” she added. “Italy has great eco­nomic power but Italy also has a very high over­all debt level. And that was to be taken down in the com­ing years in a cred­i­ble way.”

The stern tone reflected the seri­ous­ness of Europe’s prob­lems, which have roiled finan­cial mar­kets in recent months and been blamed for slow­ing eco­nomic growth across the globe.

Worst off, of course, is Greece, which is reel­ing from repeated rounds of bud­get cuts, job cuts and new taxes that have sparked near-daily strikes and even riots. The coun­try is look­ing at a fourth year of reces­sion and unem­ploy­ment has hit a record of 16.5 percent.

“This bur­den … is insuf­fer­able,” Greek Prime Min­is­ter George Papan­dreou told reporters as he urged lead­ers to solve the cri­sis. “It must be light­ened so we can breathe.”

Posted by AP News on Oct 23 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.