Debt woes ‘danger to all Europe’

22 October 2011 Last updated at 05:04 ET

UK Chancellor George Osborne has said the eurozone debt crisis is a “real danger” to all of Europe as he arrived for a summit in Brussels.

All of Europe’s finance ministers are meeting to try to find a solution to the bloc’s ongoing economic problems.

The eurozone has already approved the next tranche of Greek bailout loans, potentially saving the country from a disastrous default.

But the French and German governments are divided over a lasting solution.

The finance ministers from all 27 European Union states are meeting for the talks. Heads of government will then gather on Sunday, and have announced plans for an extra meeting on Wednesday.

“We’ve had enough of short-term measures, sticking plaster that just gets us through the next few weeks,” Mr Osborne said.

“The crisis of the eurozone is a real danger to all of Europe’s economies, including Britain.”

On Friday, the 17 nations that use the euro approved the next tranche of bailout loans to Greece – an 8bn-euro ($11bn; £7bn) loan that must still be signed off by the International Monetary Fund and that Athens should get in mid-November, officials said.

Debt-addled Greece has been bailed out – twice – along with the Irish Republic and Portugal. The eurozone is working on a third package for Greece now, as well as a solution that could help the huge-but-faltering economies of Spain and Italy.

But there have been widespread reports of deep divisions between France and Germany.

A deal on the euro had been expected to be signed on Sunday, but France and Germany said they would not be able to reach an agreement by then and announced that leaders would meet again on Wednesday.

Sunday’s summit had already been delayed from 17-18 October because more time was needed to finalise a plan.

BBC business editor Robert Peston said he expects a deal to be announced to recapitalise Europe’s banks on Saturday.

Haircuts

The German government has promised its taxpayers that its contribution will not go above 211bn euros so is looking for a way to increase the size of the fund without increasing the liabilities of German taxpayers.

Previous disagreements between France and Germany about the bailout plans have centred on how much the private sector would have to contribute to any package.

Germany has been leading the push for the private sector to take steeper losses, but France and the ECB fear that this would destabilise the banking sector and worsen market turmoil.

French and German banks hold much of external Greek debt, as do Greek banks – meaning they would need to be recapitalised.

Negotiations have not yet begun properly with private sector lenders to Greece on a further reduction of what the Greek government will repay them.

Banks have already agreed to take a 21% loss, or “haircut”, on their loans to Greece but there is growing pressure for them to accept higher losses. One diplomat told AFP that the eurozone wants banks to at accept an “at least 50%” loss on their Greek debt.

The French and German finance ministers greeted each other but their countries remain divided

Jean-Claude Juncker, the chairman of the eurogroup and the prime minister of Luxembourg, said on Saturday that banks must share “a substantial increase” in Greece’s debt burden.

In particular, France and Germany need to agree on how to increase the firepower of the eurozone’s bailout fund, the European Financial Stability Facility (EFSF), from its current 440bn euros.

France has proposed turning the EFSF into a bank so that it could borrow from the European Central Bank (ECB), but Germany has refused to sanction such a move, arguing it would compromise the ECB’s impartiality.

German Finance Minister Wolfgang Schaeuble reiterated this position as he arrived at the Brussels meeting on Friday.

“We have all taken note that it is clear, first, that we will stick to the agreed guarantees and that we will stick to the situation as it is in the treaty that the central bank is not available for state financing,” he said.

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