European Debt-Crisis Agreement Not Quite Ready

Oct 23, 2011
Originally published on October 23, 2011 3:30 pm

Transcript

AUDIE CORNISH, host: This is WEEKEND EDITION from NPR News, I'm Audie Cornish. In Brussels, European leaders are meeting to forge consensus on a broad plan to stop the eurozone's worsening debt crisis from spreading. But it doesn't look like there will be a breakthrough - at least not until another summit on Wednesday. NPR's Eric Westervelt is in Brussels and we have him on the line. Eric, some people were saying that this was the weekend to save the euro, but what's happening?

ERIC WESTERVELT: Well, it looks like the savior won't come until the middle of the week, Audie. It became clear by really the middle of last week that the two largest euro zone economies, Germany and France - these key players in this ongoing debt drama - were still far apart on important issues, especially on how to best use and get the most power out of the eurozone's bailout fund to help stop, you know, these sovereign debt problems from spreading. So, EU leaders have agreed to keep talking today and in the days ahead to come up with a broad agreement by the end of Wednesday. French President Nicolas Sarkozy said last night that between now and Wednesday - in his words - a solution has to be found - a structural solution, an ambitious solution, a definite solution. But I have to point out that EU leaders have several times in the last two years come out and said, look, this is the big solution to the debt crisis, only to see those hopes dashed as the problems spread, as markets reacted negatively and as the crisis continued. So, we'll just have to wait and see, but they certainly set the bar pretty high, saying by the middle of this week they will have some kind of grand solution to the debt drama.

CORNISH: This has got to be worrying for all those banks that hold Greek debt. I mean, there's been violent protests in the streets over European demands for greater austerity. Walk us through some of the key issues at the center of this.

WESTERVELT: Well, Greek debt is one key issue of several they will be working through. In late July, banks and other holders of Greek government debt agreed to take a 21 percent loss - a so-called 21 percent haircut - on the bonds but barely three months later, with Greece's economic problems worsening and with some Greek bonds trading at 40 percent of their face value, it became abundantly clear that that summertime deal was no longer viable. So, some EU officials and economists now think a loss on Greek bonds of 50 to 60 percent is now likely and needed. Banks, of course, oppose taking such a large haircutter or loss and being repaid just half of what they're due or worst. EU officials voiced some optimism last night but then the lead negotiator representing investors and banks told the Associated Press that the two sides were, in his words, nowhere near a solution.

CORNISH: So, what are EU leaders proposing to help banks generally to ride out the market turmoil?

WESTERVELT: Well, again, like so many other areas of this debt crisis, there's, you know, disagreement over the scale of the problem and how best to fix it. There's concern that, you know, among European leaders and economists that the financial health of European banks have been badly hurt by the falling value of sovereign bond holdings. Many of these big banks, of course, hold large portfolios of Greek, Irish, Portuguese, Spanish and Italian debt - countries that are having such economic problems. So, there's a lot of concern that unless banks get more capital to cover potential losses on these bonds, you know, other banks will be less likely to lend to them and that could trigger a broader liquidity crisis and EU officials want new capital rules to just sort of force banks to boost their capital reserve to head off this problem and raise more than 100 billion euros. But, you know, there are no details yet on the amount and how that would work.

CORNISH: And finally, Eric, Germany and France - these are the big players here - are they any closer to agreement on how the rescue of the weaker economies should work?

WESTERVELT: It appears they're closer but they're still at odds and talks are ongoing. France has been pushing for weeks to use the eurozone's large rescue fund and link it to the European Central Bank to try to get the fund more oomph, more power, because it would have access to the unlimited funding of the European Central Bank. Germany and the ECB strongly oppose this move. They say it would be illegal, it would be against EU treaties and set a dangerous precedent. But it's still not clear in the end what kind of solution they'll come up with. You know, one possibility is a broad agreement to use this big rescue fund to guarantee losses on Italian and Spanish government bonds if they get into deeper trouble. But details are still being worked out, and EU leaders, again, have set the deadline of mid-week to say that's our drop-dead date, that's when we want to come up with viable solutions to these complex issues.

CORNISH: NPR's Eric Westervelt in Brussels. Eric, thank you.

WESTERVELT: You're welcome. Transcript provided by NPR, Copyright NPR.