Europe’s options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend’s summit and central bankers balked at extended bond purchases.
European stocks fell for a second day after German Chancellor Angela Merkel’s office knocked down what it called “dreams” that the Oct. 23 summit will be the last word in taming the crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program as part of a multi-pronged strategy to shield countries like Italy.
While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.
“We’re really in a bind here,” Carl Weinberg, founder and chief economist at High Frequency Economics, said in an interview with Betty Liu on Bloomberg Television’s “In the Loop.” “We have a lot of egos, a lot of national interests, a lot of political considerations, and that’s just hampering us from getting to a solution.”
The ECB said yesterday it bought 2.2 billion euros ($3 billion) of bonds last week, the least since it restarted the market support program in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed 440 billion-euro rescue fund with enough firepower to do that job.
Underscoring the stress on Europe’s finances, Moody’s Investors Service said in a release overnight that France’s top credit rating is under pressure as the debt crisis has led to a “deterioration” of its government finances.
Moody’s cited “the possible need to provide additional support to other European sovereigns or to its own banking system” as stresses on French finances.
France will do “everything” to maintain its top debt ratings, Finance Minister Francois Baroin said today on France 2 television. “We have the highest public spending in the G8,” Baroin said. “We have room for maneuver.”
The Euro Stoxx 50 Index slid 0.8 percent to 2297.28 at 10:20 a.m., led by BNP Paribas SA and Societe Generale SA. The euro traded at $1.3718, down from $1.3738 in New York yesterday, when it slid 1 percent.
“It is far from clear that the summit will deliver a package that is viewed as broad and deep enough,” David Mackie, chief European economist at JPMorgan Chase & Co, said in a note today. “Indeed, comments out of Germany appear to be trying to dampen expectations of what the summit will deliver.”
Merkel’s spokesmen Steffen Seibert stoked the disagreement by saying that EU leaders won’t provide the complete fix that global policy makers are pushing for at their Brussels summit.
Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Seibert told reporters in Berlin. The search for an end to the crisis “surely extends well into next year.”
Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging crisis plan. Providing a week to act, they set the Oct. 23 meeting of European leaders as the deadline.
“Quite frankly, Europe’s response over the past year has been disappointing,” Canadian Finance Minister Jim Flaherty said in a speech yesterday in Dublin. “This is the world’s most immediate and pressing problem,” Flaherty said, according to a prepared copy of the speech, and “is threatening to bring the world to the verge of another recession.”
On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.
In Greece, parliamentary debate is due to begin today on a fresh round of austerity measures amid public protests and labor-union unrest. Finance Ministry workers began a 10-day strike yesterday, complicating the government’s efforts to collect taxes and highlighting the mood in Europe’s most-indebted country as Greek lawmakers face another vote on fiscal measures due in two days. That’s a showdown Prime Minister George Papandreou needs to win to ease the way for more foreign financing and stave off default.
Across Europe, obstacles to an accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe’s capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel stresses she wants to preserve.
In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.
Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses on Greek holdings difficult, Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 13. Ackermann, who chairs the Washington-based Institute of International Finance and spearheaded the July accord, was scheduled to hold talks in Brussels today with policy makers.