European leaders converge for last-ditch effort to avoid financial meltdown

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The Central Scrutinizer
Nov 21, 2008
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BRUSSELS—European leaders are struggling for compromise on a crucial debt-fighting agreement, but it was unclear if their last-ditch meeting on Wednesday would produce an accord capable of calming financial markets.

With the future of the European Union possibly hanging in the balance, leaders have been trying to put aside national interests and craft the elements of a comprehensive, EU-wide plan to head off a financial meltdown across the continent.

Hours before EU leaders were set to arrive for the one-night Brussels summit, German Chancellor Angela Merkel won vital parliamentary approval at home on plans to increase the eurozone rescue fund’s firepower.

The summit will look at a strategy to vastly increase the $600-billion bailout fund by offering government bond buyers insurance against possible losses and drawing capital from private investors and possibly sovereign wealth funds from such countries as China and Brazil.

In a speech to the Bundestag in Berlin, Merkel called for European leaders to recognize the urgency of Europe’s situation.
“We need to look to the future,” she told legislators. “If the euro fails, Europe fails.

“We need to overcome the acute crisis, we need to come to concrete solutions with regard to countries that are very much in debt, we have to tackle the mistakes made in the past so the crisis will not get worse,” Merkel said.

In another positive sign, Italian Premier Silvio Berlusconi appeared likely to at least partially meet EU demands for new austerity measures designed to rein in Italy’s massive public debt, which is contributing to instability on the continent’s financial markets.

Berlusconi nailed down an overnight deal early Wednesday with his allies in parliament on emergency growth measures and pension reforms.
But it remains unclear whether EU leaders can reach a detailed, concrete agreement Wednesday that would reassure investors or whether the accord will be a loosely worded plan for future action. Such a vague outcome might reignite the continent’s financial crisis.

The key issue of how to restructure Greek debt was unsettled on the eve of the summit. As of Tuesday, governments and banks remained sharply divided over the extent of the losses that would have to be accepted by holders of government bonds issued by Greece, the country that tipped the continent into a financial crisis.

Banks have been resisting pressure from governments for “voluntary” write-downs of about 60 per cent on their Greek bonds.

Also, there was troubling division on how to finance the expansion of the bailout fund, the European Financial Stability Facility. France had been pushing for the European Central Bank (ECB) to support the EFSF by providing it with loans that could raise the fund’s total capacity to the $1.5-trillion range. But Germany has rejected this approach.

In a compromise, leaders may agree that the EFSF be allowed to bail out debt-laden eurozone governments such as Spain and Italy by giving partial guarantees to investors or banks who buy more of the countries’ bonds.

But key elements on how the EFSF will operate and where it will obtain funds in future may require more discussion among EU officials over coming months.

The details of any agreement are expected to be announced Wednesday evening.