Time running out for EU to halt debt crisis

Last Updated: Monday, September 26, 2011 - 13:22

Washington: Doubts are running high that Europe`s politicians can deliver a rescue program big and bold enough to stop its sovereign debt crisis from morphing into a major financial disaster.

Politicians simply are running out of time and markets are running out patience.

Pessimism pervaded the International Monetary Fund and World Bank meetings in Washington that European Union leaders can agree quickly on a program that would convince investors of three basic principles:

-- That European leaders stand irrevocably behind monetary union;

-- The euro zone will not stint in protecting bigger economies Spain and Italy from fallout of Greece`s debt problems;

-- And the region will stand behind its solvent banks.

Antonio Borges, the head of the IMF`s European department, said the program must be big enough to "scare" markets.

Analysts estimate 2 trillion euros would be needed to assure that Italy and Spain are not dragged into the maelstrom.

Absent measures this strong, backed up by concrete action, bankers and analysts warned that financial market confidence in European assets will remain extremely shaky. That risks spreading the market turmoil that is already undermining fragile growth in Europe and the United States.

"We don`t get a sense of urgency from European politicians to get ahead of the problem," said David Mann, head of Americas research at Standard Chartered after attending meetings here.

"They can`t even agree on what the problem is, let alone whether to put support mechanisms in place to prevent a Lehman-type financial disaster."

The gloom was palpable at the Washington meetings, creating a sense of inevitability that, bar a political breakthrough in Europe`s often slow-moving and institutionally complex decision-making process, Europe was headed for a messy restructuring of Greek debt.

"The problem is containing the contagion. I am no longer sure it can be done. I am not sure that Europe`s politicians are ready to achieve that," said David Hale, chairman of the analysis firm David Hale Global Economics in Chicago.

Hale made his prognosis after listening to German Finance Minister Wolfgang Schaeuble tell a meeting of international bankers the way to restore market confidence and prevent the debt crisis from worsening was simply for indebted countries and banks to take the pain and deleverage, not for EU leaders to throw more money at the problem.

"You cannot fight fire with fire," Schaeuble said.

His puritanical approach was sobering for finance ministers and bankers who had seen the United States in 2008 throw massive resources at preventing a seize-up of its financial markets after the collapse of Lehman Brothers and used USD 700 billion to backstop undercapitalized banks.

They want to hear of a similar EU response and were hoping this weekend`s discussions, pushed hard by the IMF and the US Treasury, would persuade the EU to rally behind a plan to increase the firepower of Europe`s emergency bailout fund.

By leveraging the 440 billion-euro European Financial Stability Fund, it could be made sufficiently large to sling a safety net under banks and sovereigns, and reassure investors that monetary union will not spin apart.

The fund could be used to recapitalize banks if needed, or to guarantee government debt.

A central plank of those discussions involves strengthening the European Central Bank`s ability to buy up government debt.

However, the ECB already has been riven by political discord over bond buying. Two German central bankers, Axel Weber and Juergen Stark, have resigned over the issue, saying it violates the ECB mandate and risks monetizing government debt -- a view several ECB members repeated here.

Despite the public posturing, there was a hint of movement.

After delivering his hard-line speech on Saturday, Schaeuble told reporters he was in fact open to ideas for leveraging the EFSF and it might be done by sidestepping the political sensitive issue of using the central bank.

"There are other possibilities than going to the ECB," Schaeuble said.

Even if politicians can reach agreement, the earliest date for a major announcement would be mid-October because first they must complete parliamentary approvals to expand the EFSF. Talk here centered on having a plan ready for the Group of 20 leaders` summit in Cannes on Nov. 3 and 4 -- six weeks away.

The concern is that will prove too late.

"I know that these are very difficult issues to deal with and that important progress is being made. Unfortunately markets and households are growing increasingly impatient with progress on both sides of the Atlantic," said Peter Hooper, head of US fixed income research at Deutsche Bank.

"If stocks and sentiment continue to move lower, yes, a recession becomes increasingly likely." he said.

Even worse, too little action by politicians increases the risks of a messy Greek default that strains EU unity. If that happens, former Bundesbank President Axel Weber said chances rise that leaders will opt for "drastic action."

"It is not the first best solution and not even the second or third best solution. But sometimes in a crisis you don`t have the option," Weber said.

"I fear very much the situation is going to deteriorate further before it improves."

Bureau Report



First Published: Monday, September 26, 2011 - 13:22

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