Finance ministers from the eurozone’s 17 countries have begun weekend negotiations to try to overcome differences over how to strengthen a bailout fund, which is key to preventing the union’s debt troubles from spinning out of control.
Giving the 440bn euro European Financial Stability Facility much more firepower is considered essential before the eurozone can deal with its two other main problems: cutting Greece’s massive debts and forcing weak banks to boost their capital buffers to shore up their defences against worsening market turmoil.
“Once we have the option for the leveraging (of the EFSF) then - building on that – we can develop all other points,” said Austrian finance minister Maria Fekter as she arrived for the meeting in Brussels yesterday.
Markets appeared to be giving Europe the benefit of the doubt, trading substantially higher on Friday even though a wide-ranging plan to deal with the crippling debt crisis won’t be in time for Sunday’s summit of EU leaders.
A second meeting on Wednesday has been scheduled.
Governments have ruled out increasing their financial commitments – but they acknowledge that with some 140bn euros already going to Ireland, Portugal and Greece, the EFSF is not big enough to both help recapitalise weak banks and keep big economies like Italy and Spain from being dragged into the crisis.
A failure to agree on the best way of maximising the fund’s impact between Germany and France forced European leaders to call another crisis summit for Wednesday – on top of the two-day talks between Finance ministers and a first summit of EU leaders this weekend.
Ms Fekter said as many as seven technical options for giving the EFSF more leverage were on the table. Both she and German finance minister Wolfgang Schaeuble ruled out the possibility that the fund would be able to tap into the vast resources of the European Central Bank.
That proposal is still being pushed by France, which sees ECB help as the best way of giving the EFSF the necessary force.
A high-ranking German official, who declined to be named, said that a combination of two options had crystallised as the most likely solution.
IMF managing director Christine Lagarde, who joined the ministers in Brussels yesterday, said her institution would do everything it could to help Europe.
“We will find solutions,” she said, without going into details.
Europe’s leaders have already told their counterparts in the G20 that they will have a plan ready to present to them at their next meeting in Cannes, France, early next month.
However Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said the announcement to delay all decisions until the next summit on Wednesday looked “disastrous” to the outside world.
He also cancelled a Press conference that had originally been scheduled yesterday, indicating that hopes were low of having clear results to present.
In Greece, labour unions are threatening further strikes next week after parliament approved further harsh cutbacks amid mass protests and riots that left one man dead and about 200 injured.
Ilias Iliopoulos, secretary-general of the Adedy umbrella civil servant union, said the new law “will not be implemented” and accused the governing Socialists of ignoring popular dissent.
Shares in London yesterday soared higher on hopes that the politicians could hammer out a deal to ease the eurozone crisis.
Tomorrow’s deadline for decisive action is now unlikely to be met, but traders gambled that a second meeting of European leaders next week will deliver radical measures to shore up the region’s financial system.
The FTSE 100 index jumped by almost 2 per cent or 103 points to 5488.6, its highest closing level since early August.
Other European stock markets also rose strongly with the CAC 40 in France and the Dax in Germany rising by 2 per cent and 3 per cent respectively.
Market Report: Page 20.