Eurozone summit under way

As a crucial eurozone summit in Brussels begins Oct. 26, private lenders to Greece look increasingly likely to take major write-downs on the debt they hold.  

So-called "haircuts" - where bond holders recover just a percentage of the money they loaned - of up to 60 percent are under discussion as eurozone leaders shy away from the alternative of coming up with an additional 252 billion euros in bailout money over the next 10 years.

The Financial Times obtained a "strictly confidential" report circulating among international lenders that says eurozone countries are likely to have to come up with more than double the 109 million euros agreed upon in July. An analysis by the International Monetary Fund, the European Central Bank (ECB) and the European Commission found Greece's overall bailout needs could grow to some 444 billion euros.

The report has also exposed divisions between the three big authorities dealing with the crisis as the ECB reportedly disagreed with including the haircut scenarios in the confidential report.

Moving forward, the expanded powers of the 440 billion euro European Financial Stability Fund (EFSF) would be utilized to calm market fears in the wake of such a significant write-down and recapitalize banks. Eurozone leaders look poised to expand the size of the EFSF to some 1 trillion euros, although Chancellor Angela Merkel and others have insisted it will be done through various financial engineering mechanisms that do not require additional contributions from eurozone member governments.  

Following a weekend of meetings in Brussels Oct. 22-23, it seems Europe's largest 90 banks will need 108 billion euros in additional capital.

Meanwhile, the Greek government has passed another round of budget cuts, despite widespread social unrest that saw some of the most severe rioting yet during a two-day general strike Oct. 20-21.

"We are at a critical point, not only for us but for European history," Greek Prime Minister George Papandreou said. "I have never, in my memory, heard before from leaders of major European countries that there is danger of Europe coming apart."

But according to The Financial Times, even Greece's severe austerity measures and continued privatization of public assets are expected to generate some 20 billion euros less than originally planned.

The German Parliament is expected to give Merkel a strong backing to negotiate a solution to the spiraling debt crisis Oct. 25. A full vote in in the Bundestag would likely bolster confidence that a resolution can be reached in Brussels. A German Constitutional Court decision in September gave Parliament increased power in making eurozone crisis decisions, and lawmakers will likely use that mandate to give Merkel a relatively free hand. She is slated to address the Bundestag before the vote and then make her way to Brussels.

France and Germany clashed at an Oct. 23 meeting, with Merkel convincing her counterpart, French President Nicolas Sarkozy, that the ECB could not be used to fight the crisis, meaning the write-downs and bolstered EFSF are likely to be the main tools used moving forward.

Markets opened the week up Oct. 24 on speculation that a deal in Brussels was imminent.    

Benjamin Cunningham can be reached at
bcunningham@praguepost.com