France and Germany have less than a week of frantic negotiation ahead to resolve key differences on a “comprehensive plan” to end the eurozone sovereign debt crisis after the world’s leading finance ministers put the ball firmly in their court at the weekend.
The Group of 20 richest nations told the eurozone that by the European summit next Sunday it should: agree on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalisation of Europe’s banks; and install a firewall to protect other countries from Greece’s woes.
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The eurozone is still some way from agreement in these areas and G20 finance ministers urged policymakers to act. Having risen sharply last week on expectations that Europe was getting a grip on its problems, financial markets are also nervously awaiting the political decisions to be taken this week.
More optimistic than of late, Tim Geithner, US Treasury secretary, said: “They clearly have more work to do on the strategy and the details, but when France and Germany agree on a plan together and decide to act, big things are possible.”
Details of the eurozone package are not expected to emerge before Thursday, when the 17 governments hope to have the full report of the troika – the International Monetary Fund, European Commission and European Central Bank – on the sustainability of Greek debt.
“They clearly have more work to do on both the strategy and the detail”
– Tim Geithner, US Treasury secretary
The report, expected to be delivered on Wednesday night, will spell out the financing gap that has emerged in the Athens budget since a €109bn second rescue package was agreed in July. That is the basis on which they will need to agree how much of the gap can be filled by a bigger “haircut” on bonds held by private creditors than the 21 per cent already agreed.
Wolfgang Schäuble, German finance minister, said the package must contain a “lasting solution” to Greece’s debt problem, with an increased contribution from private creditors. But Paris and the ECB insist that any Greek debt restructuring must still be voluntary, something which becomes more difficult the greater the suggested haircuts.
The European Banking Authority is finalising new stress tests and plans for the recapitalisation of banks, constrained by the need for the stress scenarios to be sufficiently tough to be credible at the same time as demonstrating that the capital requirements are achievable without deepening the squeeze on credit.
The package must also convince the markets that Europe has the firepower to prevent further contagion. The G20 urged the eurozone to “maximise the impact” of the European financial stability facility without expressing a preference of how the eurozone should generate leverage in the €440bn fund.
Sony Kapoor, head of Re-Define, an economic consultancy, said on Sunday: “The challenge is not to disappoint sky-high market expectations while working under very severe financial, time and political constraints”.