No consensus as Europe limps toward Greece summit (Reuters)

BRUSSELS/PARIS (Reuters) – European government officials and commercial bankers struggled to reconcile competing proposals for a second bailout of Greece on Monday, just three days before a summit meeting called to prevent the crisis from spreading through the region.

French government spokeswoman Valerie Pecresse said she believed the summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it was unclear how a consensus could be reached on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

Imposing a small tax on all euro area banks is under active consideration as a possible alternative to more risky forms of private sector involvement, a source familiar with the talks said, confirming a German media report.

The source also said officials were considering measures to try to prevent the fallout from the Greek crisis from damaging financial markets globally.

Fears that the rescue of Greece might fail, leading eventually to a disorderly debt default, pushed the euro down against other currencies and bond yields of highly indebted euro zone governments rose. Italy's 10-year yield climbed over 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.

"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

RANGE OF SCHEMES

Officials are wrestling with a range of proposed schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek bonds, or possibly both. The schemes would be conducted at a discount to the bonds' face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.

But all of the schemes could face technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone, and they risk fuelling market instability if credit rating agencies respond by declaring Greece in limited default.

The source familiar with the negotiations said the tax on banks, which might substitute for those schemes, could raise 10 billion euros a year, yielding 30 billion euros over three years -- the sum which Germany and other countries have set as the benchmark for the private sector's contribution.

Asked about the apparent unfairness of making banks not exposed to Greek debt share the burden with those that do have exposure, the source said the tax could be structured to fall mainly on investors with the most exposure. He did not say how.

"This has been discussed for a few weeks but never really got momentum. Lately it's been getting a bit more. The Germans say they are not against it. It would be a form of private sector involvement without the collateral damage of triggering a credit event or a selective default," the source said.

But any contribution by the private sector is unlikely to be nearly enough to solve Greece's problem. Analysts have estimated its debt would need to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.

A bond swap might have the most impact.

But a European Union official source told Reuters that any agreement on a swap this week would probably be quite small, merely paving the way for a debate on a bigger restructuring of Greek debt that would have to take place in a few months' time.

"What we're talking about down the road is the need for a massive reduction in the debt burden, and they are just not ready to do that yet," said Guntram Wolff, deputy director of the Bruegel think tank and previously a senior economist at DG Ecfin, the European Commission unit dealing with the crisis.

"It will require some form of substantial debt restructuring and you have to see who is going to take the hit, will it be the taxpayers or will it be the banks? To carry out such a move you need to prepare, and they don't have the time to prepare before Thursday."

BAILOUT

As part of the second bailout, officials have also been looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.

EU sources said there was a basic agreement on extending the maturities and lowering the interest rates for bailout loans extended to Greece, Ireland and Portugal. Greece's EU loans have maturities of about 7.5 years with a rate of 4 percent; their length might be doubled or even quadrupled, and the rate cut by at least 0.5 percentage point.

But de Grauwe said the mood of financial markets was now so negative that such a step might not help weak euro zone states regain the ability to fund themselves.

"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."

There has also been talk of expanding the 750 billion euro bailout facility which the EU and the IMF created last year as the debt crisis erupted. The EU source said there probably would not be enough time to agree on the idea this week.

The source familiar with the negotiations said that to reassure global markets, governments were considering proposals to make the EFSF more flexible by, for example, allowing it to recapitalize banks or provide precautionary credit lines.

Euro zone leaders may also issue a statement declaring Greece is a unique case, to try to convince private investors they will not be called on to help pay for bailouts of countries such as Ireland and Portugal. After recent credit rating downgrades, however, many investors are assuming the worst.

IMF

Another concern is that the IMF and other major governments around the world may lose patience with Europe.

German newspaper Die Welt quoted diplomatic sources as saying the IMF was angered by Europe's unsuccessful crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.

U.S. Treasury Secretary Timothy Geithner said on Monday that Europe had to act more forcefully to contain risks in its banking sector, which is heavily exposed to Greek, Irish and Portuguese sovereign debt.

Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe should move much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months," Summers wrote.

Many economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the bloc.

But Germany has shown no appetite for such a solution, which in any case would require a complex revision of the EU treaty. Berlin is concerned that a common bond would provide no meaningful incentives for national governments to pursue prudent policies.

(Writing by Andrew Torchia; Editing by Ruth Pitchford)

View the original article here

Italy political consensus helps calm markets (Reuters)

ROME (Reuters) – A quick agreement by Italy's government and opposition to pass a closely watched austerity package helped calm markets on Wednesday, but there were calls for further steps to reductions in the deficit.

Facing a market rout after stocks plunged and borrowing costs hit record highs on Tuesday, government and opposition parties shelved their differences and agreed to ensure quick approval of a four-year, 40 billion euro austerity plan.

"The market remains nervous, very attentive, but we had an Italian reaction that was remarkably fast on budget austerity," said Deutsche Bank analyst Gilles Moec.

"The growth issue remains, but there was an immediate, patriotic reaction by the Italian political class that has positively impressed investors."

Economy Minister Giulio Tremonti, widely seen as the guarantor of Italian financial stability, said the government's austerity package would be approved by Friday, and he brushed aside rumors that he may step down.

"Hic manebimus optime," he told a meeting of the Italian banking association, borrowing a phrase from the Roman historian Livy meaning: "We will stay here, extremely well."

At the same event, European Central Bank Governing Council member Mario Draghi urged the government to move ahead with further measures to ensure it meets its target of bringing the budget back into balance by 2014.

"The substance of future measures aimed at balancing the budget by 2014 should be defined as rapidly as possible," he said. "This is what markets are looking at above all today."

He also criticized the European policy response to the debt crisis, saying policymakers needed to "bring certainty to the process by which sovereign debt crises are managed" with clearly defined objectives and instruments.

International Monetary Fund economists have urged "decisive implementation" by Italy to cut its huge public debt, noting that the austerity plan was based on optimistic forecasts with measures weighted toward later years.

Market falls on Friday and Monday wiped around 26 billion euros off the FTSE MIB blue-chip index and sent Italian bond yields up to more than 6 percent, the highest since the launch of the euro more than a decade ago.

On Wednesday, the premium investors demand to hold Italian debt rather than safe-haven German bonds narrowed by 11 basis points to 280 basis points -- after hitting a euro lifetime high of 353 basis points at one stage on Tuesday.

The yield on the 10-year BTP bond stood at 5.46 percent, down 13 basis points but still 46 basis points higher than its levels a week ago.

With the BTP spread against German Bunds narrowing, Italian bank shares -- which have born the brunt of the sell-off because of their vast holdings of government paper -- recovered some of the heavy losses they had suffered on Friday and Monday.

However, Goldman Sachs cut its price targets on Italian banks by 12 percent on average due to expected higher funding costs and lower profitability after the recent rise in Italian government bonds.

MARKET TEST LOOMS

A further test of Italy's ability to keep tapping the markets comes on Thursday, when the Treasury offers up to 5 billion euros of long-term BTP bonds, and markets are waiting nervously to see how the auction succeeds.

If Italy, the third-largest economy in the euro zone, were to share the same fate as Greece or Ireland, consequences would be incalculable. Much too big to bail out, a severe crisis could call the future of the entire euro area into question.

Ratings agency Fitch said on Wednesday it expected the government to succeed in cutting the deficit and said the market turmoil did not reflect Italy's fundamentals.

"The sharp rise in Italian and other euro zone government bond yields in recent weeks reflect a crisis of market confidence in the European policy response to the euro zone debt crisis rather than deteriorating sovereign credit fundamentals," Fitch said in a statement.

Italy has a public debt equivalent to around 120 percent of gross domestic product, second only to Greece in the euro zone and compounded by one of the world's most anemic growth rates.

Tight spending controls, a conservative banking system and a high rate of private savings have helped shield it from the worst of the euro zone debt crisis, but the sell-off this week is a reminder of its potential vulnerability.

A senior Bank of Italy official said the impact of the recent surge in yields was limited in the short term but would be considerable if it persisted -- adding around 3 billion euros to government borrowing costs in the first year and more later.

"If these kind of levels persist, the burden for public finances would be severe," Ignazio Visco, deputy director general of the Italian central bank, told a Senate hearing.

(Additional reporting by Giuseppe Fonte, Michel Rose, Valentina Za, Nigel Tutt, Luca Trogni and Elvira Pollina in Milan; Writing by Silvia Aloisi and James Mackenzie; Editing by Hugh Lawson)

View the original article here

African Union tries to reach consensus on Libya (AP)

MALABO, Equatorial Guinea – Africa's heads of state spent the day behind closed doors on Friday, trying to reach a consensus on what to do with Libya's defiant leader Moammar Gadhafi, whose ouster would be a source of discomfort for the continent's other entrenched rulers.

Mali's President Amadou Toumani Toure said the leaders had made progress as he emerged for a break from the confidential session after hours of discussion. "But we are not yet done," he said.

Denis Sassou-Nguesso, the president of the Republic of Congo and on of five members of the African Union's high level ad hoc committee on Libya, said the group would find a solution. The leaders are meeting in Equatorial Guinea's capital for this week's African Union summit, whose theme of youth empowerment has been hijacked by the widening crisis in Libya.

Only several months ago, Gadhafi was thought to be one of the most secure of the continent's dictators, his 40-year grip on Libya still iron strong.

Among the sticking points for the presidents meeting here is what to do with Gadhafi, with some members wanting him to step down and others insisting he should be part of the solution.

Gadhafi's fall could have a domino effect, emboldening populations to rise up against other autocratic regimes, including the one in this tiny nation on Africa's western coast where critics of the regime are systematically tortured and where allegiance to the ruling party is so absolute that citizens are afraid of being seen reading the nation's only opposition newspaper.

Backers of Gadhafi are believed to include the president of Equatorial Guinea, Teodoro Obiang Nguema, who was recently elected as the African Union's rotating chairman.

The ad hoc committee on Libya has already proposed a road map, which calls for a cease-fire followed by negotiations between the warring sides leading to the creation of a transitional authority. Initially the committee was pushing for Gadhafi to be part of the negotiations, a proposal the rebels rejected. On Sunday in what appeared to be a concession, the group announced that Gadhafi had agreed not to be part of the negotiations, and in a statement the committee said they had welcomed his decision to step aside.

View the original article here