Is Sunday's European debt crisis summit sunk before it even starts?
With German Chancellor Angela Merkel and French President Nicolas Sarkozy at odds over how to leverage bailout funds, hopes for a solution from Sunday's debt crisis summit are wavering.
“Disastrous” was the word Eurogroup chairman and Luxembourg Prime Minister Jean-Claude Juncker used to describe the possibility that Sunday's EU summit in Brussels would not, as expected, come up with a solution to the euro debt crisis.
But it is almost certain that European leaders will not reach the eagerly awaited decision on scaling up the euro bailout fund, the EFSF, at the Sunday meeting. A second meeting has already been called for Wednesday of next week.
Financial experts agree with Mr. Juncker’s opinion that delaying the deal gives the eurozone and its ability to act a bad image. But they differ in their opinion on how to get a grip on the debt crisis as much as the politicians do.
The reason for the delay is disagreement between France and Germany on the methods for giving the euro rescue fund more clout. Both countries see some kind of leverage – increasing the effectiveness of the fund without actually raising the amount of capital it is holding – as the way to regain the trust of investors in eurozone economies. Currently the EFSF holds 440 billion euro, with a guarantee sum of 780 billion. Through leverage, this amount is expected to rise to 2 trillion euro. What they don't agree on is which model of leverage to use.
Bank or insurance model?
France wants to turn the EFSF into a bank, which – healthily capitalized as it is – could then turn to the European Central Bank (ECB) for credit that countries like Greece or Portugal won’t get anywhere else.