Lack of ECB firepower weakens Europe’s Grand Plan
Top officials from the US Treasury and the International Monetary Fund are privately worried that Europe’s `Grand Plan’ to overcome the debt crisis is fundamentally deficient and may fail to restore market confidence.
By Ambrose Evans-Pritchard
8:30PM BST 16 Oct 2011
G20 finance ministers praised Europe’s efforts to “maximise the impact” of the EU’s €440bn bail-out fund (EFSF) and ensure that the region’s banks are “adequately capitalised”, but there were heated exchanges behind closed door as the Anglo-Saxon states, and India rebuked Europe’s leaders for failing to grasp the nettle and mobilize the full lending power of the European Central Bank.
“They clearly have more work to do on strategy and details,” said US Treasury Secretary Tim Geithner. “In financial crises, it is more risky to act gradually and incrementally than to act with bold force”.
Diplomats say Mr Geithner’s plan to use the ECB as a guarantor of eurozone sovereign bonds was dismissed out of hand, while the EU failed to offer clear assurances that bank recapitalisation would be carried out with sufficient speed and scale to halt an incipent run on the system.
Olli Rehn, the EU’s economics commissioner, said Brussels will announce a “very serious plan” over come days to beef up banks and strengthen the firewall against contagion.
German foreign minister Guido Westerwelle politely told the US to mind its own business. “I cannot understand some of the comments of our American friends. You can’t solve a debt crisis with more debt,” he told Bild Zeitung.
The Atlantic rift threatens to become serious if the crisis escalates. There is a growing frustration in Washington that the ECB has acted half-heatedly, confining itself to modest purchases of Italian and Spanish debt rather deploying overwhelming force to break the vicious cycle.
Jacques Cailloux, Europe economist at RBS, said any attempt to solve the eurozone crisis without the ECB playing a key role in shoring up the system is doomed to failure.
Jean-Claude Trichet, the ECB’s president, said late last week that the bank has done “all it could” to shore up monetary union and has now exhausted its role of “lender of last resort”. The institution is constrained by its mandate and by the fierce opposition of Germany’s Bundesbank to further “fiscal” actions, a government responsibility.
The EU must thrash out the details of its `Grand Plan’ before next week’s deadline. The broad outlines include fresh capital for banks, a scheme to leverage the EFSF to around €2 trillion, and debt relief for Greece.
German finance minister Wolfgang Schauble told ARD television last night that `haircuts’ for private holders of Greek debt would be more than the 21pc already agreed, ripping up a deal reached in July.
Josef Ackermann, head of Deutsche Bank, said plans to leverage the EFSF may be illegal. “We cannot allow a rescue fund of this magnitude. The (constitutional) court would’t permit, and nor would the people,” he said.
The likely formula is a scheme where the EFSF guarantees the top tranche of losses on sovereign debt, allowing the fund to boost bond coverage to €2 trillion or more. It exposes creditor states to huge losses if the gamble fails.
Mr Schauble told G20 colleages that Germany is willing move towards EU “fiscal union”, meaning extra EU powers to police budgets and punish EMU violators. It does not mean a debt-pool, eurobonds, or shared tax and spending.