Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), was in Beijing for talks with Chinese officials a day after eurozone leaders struck a last-minute accord on the two-year-old debt crisis.
European leaders are under pressure to finalize the details of their plan to slash Greece’s debt burden and strengthen their rescue fund. After their summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to cut Athens’ debt load to sustainable levels.
Regling said the bailout deal with Greece was an exceptional case that he did not believe would have to be repeated for other nations.
Many in financial markets are concerned that the fund is not big enough to cope if Italy and Spain are drawn deeper into the crisis. Italy’s borrowing costs hit new euro-era highs at a bond auction on Friday. In the auction, interest rates on government bonds maturing in 2022 rose to 6.06 percent compared to 5.86 percent at the last similar auction on Sept. 29. The yield on bonds set to mature 2014 rose from 4.68 percent to 4.93 percent.
“We all know China has a particular need to invest surpluses,” Regling told journalists on Friday, referring to the country’s $3.2 trillion of foreign exchange reserves.
Gesture of confidence
France said investment by China would inspire confidence.
“The reality is that China is the third largest shareholder in the International Monetary Fund (IMF), and if China via the IMF wants to participate – not by saving Greece or the euro – but by participating in investment, that is a gesture of confidence,” French Finance Minister Francois Baroin said.
Economists polled by Reuters on Oct. 27 were split down the middle over whether the writedown was big enough.
Reached after more than eight hours of negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the EFSF, to give it firepower of 1 trillion euros ($1.4 trillion).
Switzerland said it was looking at participating in the EU bailout fund via a special investment vehicle, although the idea could run into domestic opposition given the country’s eurosceptical nature. Norway, however, whose $564 billion oil fund is Europe’s biggest investor in equities, said it had less than 100 million euros in EFSF investments.
Under the plan, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece’s debt burden by 100 billion euros, cutting its debts to 120 percent of gross domestic product (GDP) by 2020, from 160 percent now.
The eurozone will offer 30 billion euros in “credit enhancements” or sweeteners to the private sector to get them on board. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012. The value of that package would be 130 billion euros – up from 109 billion euros in the July deal.
German court suspends bailout committee
Germany’s Constitutional Court on Oct. 28 suspended a parliamentary committee’s right to approve urgent actions by the eurozone’s bailout fund, potentially delaying decision-making in Europe’s top economy on key moves to tackle the debt crisis.
The parliamentary leader of Chancellor Angela Merkel’s conservative bloc, Peter Altmaier, said the court’s decision meant parliament’s entire lower house would need to decide on urgent matters relating to the European Financial Stability Facility (EFSF). But he said the court’s action – pending a final ruling on a complaint from two lawmakers alleging the committee’s powers breach Germany’s basic law – would not tie the hands of either the Bundestag or the EFSF.
“The German parliament will ensure that, until the main ruling, Germany’s ability and the EFSF’s ability to act are secured,” he said.
The Constitutional Court said it was temporarily suspending the use of the committee to take decisions in urgent matters on behalf of parliament, while it investigates whether this infringes lawmakers’ rights.