Europe’s debt crisis threatened to spill over to Italy, Spain and beyond on Monday, throwing up a fresh challenge for Eurozone finance ministers gathered to mull options for indebted Greece.
Meeting in Brussels to finesse a second rescue package for Athens due to be finalised in September, ministers from the 17-nation zone went into a huddle as fears of debt crisis contagion undermined markets in Italy and Spain, its third and fourth largest economies.
The euro slumped, stock markets closed with heavy falls, including a 4% plunge in Milan, and borrowing costs rose to 12-year euro-era record highs in Spain and Italy.
“We are looking at something which is more systemic” than Greece, said Spanish minister Elena Salgado on arriving. “It concerns the stability of the eurozone in general.”
With the fate of the single currency again in the balance, EU leaders and eurozone ministers were under strong pressure to overcome widening differences over the terms of a second Greek bailout and speak with a single voice.
View to a spillover
After preparatory talks on Greece, notably gathering European Central Bank chief Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker, European Union president Herman Van Rompuy issued a statement saying “we also exchanged views on recent developments in the euro-area”.
But as tension mounted on the markets, German Chancellor Angela Merkel stepped in with a rare public plea to a fellow EU nation, urging the Italian Parliament to pass an austerity budget to avoid it being dragged into a debt crisis that so far has hit smaller nations Greece, Portugal and Ireland.
The three combined represent only half the size of the Italian economy.
The Brussels talks, to be enlarged to the full EU 27 on Tuesday, were called to discuss the prickly issue of private-sector involvement in a second bailout of Greece tipped to be almost as big as a 1€10-billion-euro rescue in May 2010.
Agreement needs to be reached both on the principle and terms of bringing banks and other private creditors to bear their fair share of a new rescue to avoid the burden falling on European taxpayers alone.
Deal or no deal
A deal had been expected early this month but was pushed back to post-holiday September. “I’m not sure we can risk waiting until September,” said Belgian minister Didier Reynders.
Divisions aired in public over the question by euro-nations in the past days have helped fuel tension on nervous markets.
“Certainly we need to move as fast as possible,” said Polish Finance Minister Jan Rostowski, whose country holds the rotating EU presidency. “It’s not good to have it not finalised.”
Initial French proposals for a voluntary rollover of Greek debt — buying new Greek bonds when current bonds come due — appear to have lost favour since a shock warning from Standard & Poor’s ratings agency that even this soft option would be viewed as a default of Greece.
Germany, the Netherlands and others favour forcing the private sector to help, whether or not this comes down to a default.
“Substantial private sector involvement is for the Netherlands and Germany a precondition,” said Dutch Finance Minister Jan Kees de Jager.
By default
“We did not say that it has to be mandatory,” he added. “We still pursue a voluntary basis but some ratings agencies will see any substantial participation maybe as not completely voluntary.”
But the ECB, along with some eurozone members, are opposed to a Greek default.
“We always said this would generate instability,” said Spain’s Salgado.
The ECB says a default would mean it could no longer accept Greek government debt as collateral for loans to Greek banks. That would probably cause the Greek banking sector to collapse.
Current options include a buyback of Greek debt, a debt swap and interest cuts. — AFP