Europe warned of systemic crisis over debt

Tue Oct 11, 2011
By Sakari Suoninen and Martin Santa

Frankfurt/Bratislava (Reuters) - Europe's top financial watchdog warned on Tuesday that the euro zone's sovereign debt crisis has become systemic and threatens global economic stability unless decisive action is taken urgently.

European Central Bank President Jean-Claude Trichet issued the dramatic warning as chairman of the European Systemic Risk Board, created to avoid a repeat of the 2008 financial crisis, amid growing fears that Greece will default on its massive debt.

"The crisis is systemic and must be tackled decisively," Trichet told a European Parliament committee in his final appearance before retiring at the end of the month.

"The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond."

European banking regulators meanwhile asked banks across the continent to provide updated data on their capital position and sovereign debt exposures to help reassess their need for recapitalisation.

Germany and France, the leading powers in the 17-nation euro zone, have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until Oct. 23.

But they must first resolve differences over how to recapitalise banks, whether to force a Greek debt restructuring or stick to a voluntary deal with private bondholders and how to use the euro zone's rescue fund.

Trichet was speaking before international lenders were due to deliver a provisional verdict on Greece's troubled reform and austerity programme, while the fate of the euro zone's rescue fund hung in the balance in Slovakia's parliament.

Slovak Prime Minister Iveta Radicova raised the stakes in a battle to win approval for new powers for the European Financial Stability Facility by tying the decision to a vote of confidence in her centre-right government.

The small, liberal SaS party, the only member of the five-party ruling coalition which opposes the EFSF, said it would abstain, depriving the government of the votes needed to pass the motion.

EU diplomats expressed confidence that the EFSF agreement approved by the 16 other euro zone countries would eventually be ratified, noting that the Slovak parliament can hold a second vote if ratification is rejected at the first attempt. However, it may bring down the government in Bratislava.

TORTURED PROGRESS

In Athens, inspectors from the European Commission, the European Central Bank and the International Monetary Fund were due to issue a statement after completing an extended review of Greece's tortured progress on its bailout programme.

Anti-austerity protesters blocked ministries and state workers went on strike as Greeks awaited the verdict on whether international lenders will hand over a vital tranche of aid needed to stave off imminent bankruptcy.

The so-called troika is due to send a detailed report to euro zone finance ministers and the IMF board next week, and it was not clear whether Tuesday's statement would contain a clear recommendation on releasing the 8 billion euros the government needs to pay salaries and pensions in November. Its next major debt redemption is due in December.

Speaking shortly before the statement was due, Finance Minister Evangelos Venizelos told a conference: "Greece is and will always be a member of the euro zone, a member of the euro."

Europe's inability to draw a line under the crisis has caused growing international alarm, with Japan weighing in on Tuesday after the United States and Britain pressed EU leaders to take decisive action.

Japan said it would consult with the United States before it considers buying more euro zone bonds. Finance Minister Jun Azumi urged Europe to restore market confidence in the run-up to a Group of 20 finance leaders' meeting in Paris this week.

Azumi repeated that Japan stood ready to buy more euro zone bonds so long as Europe comes up with a solid scheme to solve a crisis that has resulted in financial rescues for Greece, Ireland and Portugal.

Interbank lending rates in Europe continued to rise amid growing concern over European banks' ability to handle the debt crisis, despite the prospect of massive ECB liquidity support.

Three-month Euribor rates , traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, rose to 1.570 percent from 1.567 percent.

Some European banks voiced concern at the prospect of being forced by governments to raise additional capital some say they do not need, possibly taking public money.

Germany's banking association said Europe should look at recapitalisation on a case-by-case basis rather than taking a blanket approach apparently envisaged by Berlin and Paris.

The director of the BDB association, Michael Kemmer, also told ARD television that politicians should stick to a July agreement on voluntary private bondholder involvement in a rescue plan for Greece.

That deal envisaged a 21 percent writedown on Greek debt for banks and insurers that participate in a bond swap to reduce and stretch out Greece's debt burden.

However, German Finance Minister Wolfgang Schaeuble and the chairman of euro group finance ministers, Jean-Claude Juncker, have said that figure may no longer be sufficient and the talks may have to be reopened.

Speaking on Austrian television late on Monday, Juncker refused to rule out a mandatory debt restructuring for Greece, which many market analysts and economists say is bound to happen in the coming months.

Many analysts see the rush to recapitalise European banks as a prelude to an enforced write-down of 50 percent or more on their Greek debt holdings. (sourced Reuters)