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In EU Efforts to Fix Debt Crisis, Divisions Remain and Questions Unanswered

October 26, 2011 at 12:00 AM EST
The German Parliament passed a measure to boost a bailout fund for the eurozone as leaders arrived in Brussels for an emergency European Union summit. Margret Warner discusses what EU leaders hope to accomplish at the summit with Zanny Minton Beddoes of The Economist magazine.
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GWEN IFILL: Margaret Warner takes the story from there.

MARGARET WARNER: So what did the leaders accomplish, and what remains to be done?

For more on that, we turn now to Zanny Minton Beddoes, economics editor of The Economist magazine.

And Zanny welcome back.

As we heard, there weren’t a lot of specifics coming out of Brussels, at least not so far, though they’re still meeting. But what if anything did these leaders resolve?

ZANNY MINTON BEDDOES, The Economist: Well, the answer is that we really don’t know yet, because, as your report said, they are still talking. And we haven’t had any final details.

But I think the tone of your report was absolutely right, that what appears — they promised there would be a comprehensive solution to this crisis. And what seems to be on the table is rather short of that.

They needed to make progress on four fronts, first of all, creating a firewall around countries like Italy and Spain that are embattled, but not insolvent. And that meant boosting the firepower of the European rescue funds. Secondly, they needed to make progress on recapitalizing Europe’s banks. Thirdly, they needed to come to a realistic debt deal for Greece, because that which was agreed earlier this summer, everybody agrees is not enough.

And, fourthly, they need to make progress on improving Europe’s governance, Europe’s kind of rules so that they don’t get into this mess again. And the question is how much progress will they end up making on all of those four? And it seems from what’s sort of dribbling out — and let me repeat, we simply don’t know yet what the final thing will be.

But it does seem as though progress will be somewhat unimpressive.

MARGARET WARNER: Explain to us — we will take the pillars, or at least as many as we have time for.

And take the first one that you mention, which is getting — quote — “recapitalizing the European banks,” or, rather, getting them to have more of a capital cushion for the sovereign debt that they hold.

Now, why is that so important?

ZANNY MINTON BEDDOES: Well, that’s extremely important because European banks are at the moment unable to attract funding. And basically people are very worried about their financial health because these banks hold a huge amount of sovereign debt.

And the sovereign debt, people are worried about the ability of the governments in Europe to repay that sovereign debt. And that’s caused a lot of concerns about the European banks. And so this is why these problems are very interlinked.

Until you — if you recapitalize the banks, you obviously put them in stronger position. But until you create a firewall around the sovereigns which makes clear that they won’t default, then actually no amount of bank recapitalization is enough.

So I would kind of put these four things that they have to do in a slightly different order, and I would say the single most important thing is to bolster Europe’s rescue funds, so that they can create this firewall around countries like Italy and Spain.

MARGARET WARNER: So that fund now is roughly, what, $610 billion? The German Parliament at least voted to approve increasing that. One, is that significant, and, if so, by what size, and how do you get from there to getting all the European leaders to agree on it?

(LAUGHTER)

ZANNY MINTON BEDDOES: This gets very technical.

What the Europeans have now is the European Financial Stability Facility, which has, yes, 440 billion euros, and it basically has the ability to issue bonds, which are then guaranteed by Europe’s government. And they’re guaranteed. The most important ones are the Germans, the French, the AAA-rated governments.

And the question — but everyone knows that’s not enough money to credibly stand behind a country like Italy. And so the question then is how do you kind of increase that firepower? And over the last few weeks and months, there has been lots of arguing about how to do it. One way would be for the European governments to put more money in.

Actually, they have all said they don’t want to put any more money in. Another way would be to have the European Central Bank either lend to that fund or put money in directly. Again, they ruled that out. The ECB is not going to do any more.

So now what they seem to have resorted to is some financial engineering, which will do two things. The funds will be allowed to basically insure against the first loss, the first 20 percent loss of any new bonds that are issued by, say, Italy or Spain.

And a second part of the plan will be — and I — you will laugh at this.

MARGARET WARNER: Yes, I think we have to…

ZANNY MINTON BEDDOES: They’re going to create a special-purpose vehicle, a special-purpose investment vehicle, which, if you speak English-English, a SPIV is a kind of slightly dodgy character. So they’re going to create a SPIV.

And this SPIV, special-purpose investment vehicle, will basically be a new fund into which they hope other investors will put money. And so they’re going to hope that the Chinese, for example, might come in and cough up some money. But the idea is that no more from the European governments, none from the European Central Bank, but instead this leverage.

MARGARET WARNER: Now, finally, the third big one you named was, of course, the Greek debt and trying to change the terms of that and get the private investors to take more of a loss, a haircut.

And I think we know why that’s important, but what’s the hang-up there? Why can’t these European leaders basically order the banks to do it?

ZANNY MINTON BEDDOES: Well, because they’re desperate to have this be a voluntary deal, because if it’s “voluntary” — quote, unquote — then it doesn’t trigger credit default swaps, which are the sort of insurance mechanism that banks take out to guard against the possibility that a country defaults.

They don’t want to trigger those, so they want to have a voluntary restructuring. And that’s what they agreed in the summer, but that voluntary restructuring that they agreed was very small and a very small haircut — a very small reduction in the present value of Greek debt.

Now the new numbers have shown that Greece needs a much, much bigger debt reduction. And the question is how far can they push the bankers to agree, a voluntary one, or will they say, take it or leave it, you have to do a much bigger one?

And that’s really where there’s a lot of argument still going on amongst European politicians, because some are terrified of doing a forced one. Others say the number has to be very, very big.

MARGARET WARNER: Well, I guess a lot more argument to come.

Zanny Minton Beddoes, thank you so much.

ZANNY MINTON BEDDOES: My pleasure.