Euro zone summit likely to give few numbers on crisis response

Euro zone leaders are unlikely to provide many hard numbers to flesh out their debt crisis response at a summit on Wednesday because the size of banks' losses on Greek bonds is still under negotiation and the bigger firepower of the bailout fund is tough to quantify, euro zone officials said.
Euro zone leaders may not be ready to name the exact size of the "haircut" for investors on Greek debt, but may indicate the desired level -- thought to be between 50 and 60 percent -- by announcing the intended size of public sector help and the target for Greece's debt-to-GDP ratio in 2020, officials said.

Leaders of the 17 countries using the euro meet on Wednesday evening to try to agree on a comprehensive response to the escalating sovereign debt crisis. The response is expected to include a plan to recapitalize banks, boost the firepower of the EFSF bailout fund and a new financing package for Greece.

But there are already doubts that concrete steps, including clear and hard numbers on the level of bank recapitalization and the leverage of the EFSF, will be agreed.

Talks with private investors holding Greek paper on what losses they would be prepared to accept on a voluntary basis to make Greek debt sustainable are still under way.

"Talks with the private sector are very difficult, and the issue of lowering Greek debt could be one of the most difficult points at the summit," a senior EU official said.

The officials said the euro zone had no legal authority in Greek debt restructuring, which was an issue between Greece and its private investors.

"The question is what is actually for the euro zone to decide. They cannot decide on a haircut after all -- what legal power do they have to do so?" a second euro zone official said.

"They can only refer to something that has been agreed by Greece and its creditors, if something has been agreed by the time of the euro zone summit. And I would not be so sure that there will be," the second official said.


The euro zone needs private sector losses on Greek bonds to be deeper than the 21 percent agreed in July, because of a deeper-than-expected Greek recession, slippage in Greek reforms and fiscal targets, and changed market conditions.

Officials have said that a new financing package for Greece, which would take over from the initial 110 billion euro bilateral loan agreement from May 2010, would have to be financed from both private and public money.

The commitment from euro zone taxpayers is likely to be announced on Wednesday, the official said. In July it was set at around 109 billion euros, but could now be marginally higher.

"On the official financing there will have to be a number," the second euro zone official said.

"One possibility is that they will not give a number on the private sector haircut, but give the number for official financing and indicate the target for the debt ratio we would like to achieve by, for example, 2020," they said.

"And that gives the parameters for what is left for the private sector to do."

A debt sustainability report by international lenders showed last week that if the euro zone were to contribute 109 billion euros to the new Greek financing package, private investors would have to agree to a 60 percent loss on their Greek bonds to bring the debt down to 110 percent of GDP in 2020.

If private sector losses were to be 50 percent, the public sector contribution could be 114 billion euros and Greek debt would decline to 120 percent of GDP in 2020.

"50 percent is real, it will not go off the table," a third official said. "The only issue that can be discussed is whether there will be some sweetener to the 50 percent, some kind of enhancement, but 50-60 percent is there," a third official said.

Euro zone leaders are also unlikely to say what firepower the European Financial Stability Facility (EFSF) bailout fund will have after it is leveraged through two options that are under consideration -- an insurance scheme and a special purpose vehicle open to outside investors.

"The numbers are not yet finalized -- you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number," the third official said.

"The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging -- it will be very difficult to agree on everything," the third official said.

One senior EU official said some countries thought it was important to provide at least an outline of the numbers to send a message to financial markets.

"We may have a range of figures there. It depends on how far we get in the negotiations over Greek debt. There are ways of presenting the parameters in such a fashion that it gives the markets some view of what the end result will be," he said.

As well as shying away from giving a headline figure for the scaled-up EFSF, European leaders are looking increasingly unlikely to give an overall amount for the recapitalization of European banks on Wednesday, officials said.

Such a figure, thought to be roughly 110 billion euros, is in part designed to reassure investors that banks could withstand the fallout from losses on state bonds, as Europe seeks to arm itself against a Greek default.

EU leaders are likely to outline a framework which will give key banks until the middle of next year to reach a higher capital level but not outline how much fresh capital in total they need.

"There is an issue with numbers," said one diplomat. "Everyone is nervous about numbers. We have presented numbers in the past and they haven't been enough."

"Do we really need a figure?" another official said. "Is it necessary?"

One euro zone official said that giving a headline number for banks is difficult until the closely connected questions of larger losses for Greek bondholders as well as extra firepower for the EFSF are resolved.

Both issues may need fine tuning in the coming days. "Without first having addressed Greece and the EFSF, it's a moving target," he said.


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