No deal yet on euro crisis as the danger grows
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.”