Euro Leaders Start Crisis Talks as Juncker Says Greek Default Is Possible
European leaders arrived in Brussels seeking solutions for their 21-month sovereign debt crisis as Luxembourg Prime Minister Jean-Claude Juncker said a Greek default may be unavoidable.
“‘You can never exclude such a possibility, but everything should be done in order to avoid such a possibility,” Juncker told reporters as he entered the summit today.
The second round of crisis talks in a month will follow a two-pronged approach, combining agreement of a second bailout for Greece with measures aimed at inoculating Italy and Spain from contagion. Policy makers have repeatedly failed to beat back turmoil that this week propelled the yield on Greece’s two- year bond above 40 percent and prompted U.S. President Barack Obama to express his concern to German Chancellor Angela Merkel.
Leaders must persuade bondholders to co-fund a second Greek bailout, convince the European Central Bank to accept a potential default and outline steps that would ward investors away from targeting nations at the euro area’ core. Officials are crafting a Greek bond guarantee to make a default more palatable to the ECB, said two officials who spoke on condition of anonymity.
“Today could see the next in a series of major initiatives to combat the corrosive pace at which this crisis is spreading,” Jim Reid, global strategist at Deutsche Bank AG in London, said in a note to clients today. “The European Union has a chance of winning a big battle even if the war proves far more difficult.”
German government bonds pared their decline after Juncker’s comments, leaving the 10-year yield at 2.799 percent as of 1:45 p.m. in Brussels compared with 2.767 percent yesterday. While the yield on Greece’s two-year government bond rose above 40 percent for a second day, Spanish and Italian bonds advanced. The euro fell 0.2 percent to $1.4184.
Merkel and French President Nicolas Sarkozy arrived after late-night talks in Berlin led to them agreeing a joint position on Greece. The goal is to “take another important step to overcome the debt crisis of some countries in the euro zone,” Merkel told reporters, without commenting on the plan.
Bringing the ECB on aboard would remove a key hurdle to a new rescue package. That would enable cash-strapped Greek banks to keep tapping the ECB for emergency funds after President Jean-Claude Trichet warned it would not accept defaulted debt as collateral and that a “credit event” could spur a new global financial crisis.
Policy makers would try to keep any period of default as short as possible, said an EU government official, who spoke on condition of anonymity because the talks are confidential. Greek bonds could be backed up by top-rated securities issued by the European Financial Stability Facility, an official from a national central bank said. No decisions have been taken.
“We expect the ECB wants to cooperate on a solution, as long as it’s done responsibly and that a selective default for a short duration takes place,” Dutch Finance Minister Jan Kees de Jager told parliament in The Hague today.
Standard & Poor’s assigns a selective default when it decides a borrower has defaulted on a specific class of obligations, yet will likely meet other payments in a timely manner.
With Germany and Finland demanding investors contribute, another option for Greece is for bondholders to roll over the country’s debt. Deutsche Bank Chief Executive Officer Josef Ackermann and Charles Dallara of the Institute of International Finance are both in Brussels.
The terms of outstanding bailout loans for Greece and perhaps Portugal and Ireland too may be eased through lower interest rates and longer repayment times. Juncker said today that a bank tax to fund the Greek rescue was unlikely as was the issuance of a common euro bond.
Belgian Finance Minister Didier Reynders told Le Soir newspaper a second Greek rescue would be worth around 110 billion euros ($157 billion).
Europe’s sovereign debt crisis flared up again as Greece backslid on imposing austerity and as policy makers clashed over whether bondholders should be put on the hook for future bailouts. That pushed the yield on Italian and Spanish bonds to euro-area records, creating the need for another summit.
Leaders may consider broader steps for stopping the crisis previously rejected by Germany, including the use of precautionary credit lines, a person close to the talks said yesterday. There is also discussion over allowing the 440- billion euro rescue to buy bonds directly from investors or enabling Greece to retire its debt at a discount.
Yesterday’s Berlin talks between Sarkozy and Merkel lasted seven hours and followed pressure on the German leader to take charge of Europe’s crisis response. Obama telephoned her two days ago to discuss Europe’s threat to the world economy and the International Monetary Fund warned that Greece’s woes threaten to contaminate the rest of the continent even if a so-called selective default is avoided.
While Merkel said the same day that the crisis can’t be resolved in “one spectacular step,” Greek Prime Minister George Papandreou said in an interview that the summit could be a “make-or-break moment” for the euro region.
Some officials are indicating that the only way for the crisis to be stopped is for Merkel to surrender her opposition to Europe’s governments issuing a joint bond. While it would help indebted nations raise money at lower interest rates, she rejects the move because it would remove pressure on governments to pursue austerity. It would also risk pushing higher yields on German bunds.
German Deputy Foreign Minister Werner Hoyer nevertheless said in an interview late yesterday that it may eventually back such a concept “if we further develop the European Union towards a political union.”
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