A thick fog over the European Council

Ralitsa Kovacheva, October 22, 2011

Hello from Brussels again. The news here today is, again, for another day in a row, that there is no news, at least not officially. As the briefing of the eurozone finance ministers was cancelled yesterday, today [22 October] the 27 EU finance ministers met and left without giving a press conference. Obviously, the Brussels's threat to impose more stringent verbal discipline is already working and there is a complete silence on the eve of the European Council and the summit of the euro area tomorrow. However, a huge amount of rumours and speculations are circulating, unofficial sources are explaining various options to solve the disputable issues and the media, of course, are publishing these, given the silence of the official institutions.

What is clear at this stage is that hours before the leaders' meetings the most controversial issue remains how to enlarge the size of the eurozone rescue fund EFSF, so that the euro area countries do not have to bring in additional capital - the so called leverage. Various options are being discussed. Maybe we can say for sure that the option the fund to be backed by the European Central Bank has dropped out because of the strong resistance of the German Bundestag - Chancellor Merkel has a mandate to negotiate an increase of the fund, but not if it would lead to any ECB commitments.

Two other options have remained, according to Dutch Finance Minister De Jager, but he did not specify what exactly these two options were. What we know by now is that there is an option the EFSF to act as an insurer of the eurozone countries debt - that means to insure 20 to 30 percent of the debt issued by the euro area countries. Thus it would make them more attractive to investors because there will be guarantees, there will be security. This in turn means that the eurozone countries will be able to raise funds from the financial markets and for that service they will pay a fee to the EFSF, which will make profit.

The idea is this way the fund, which currently has 440 billion euros but part of the money is involved in the rescue programmes of Greece, Ireland and Portugal, to be increased to (there are various figures) 1 trillion, 1.5 trillion or 2 trillion euros even, so that it is able to perform its new functions, which have been recently approved by all eurozone member states. An EFSF representative, who was here in the press centre, informally explained that there is also an option to set up a so-called Special Purpose Vehicle - it is a byword often used here in Brussels to call things when it is not very clear yet what exactly they should be.

That Special Purpose Vehicle could be created by the EFSF or it could be created by others but the EFSF to participate in it. It would attract other players, other capital, such as the IMF or as the EFSF source said - China, Singapore or other countries who would be interested. According to him, the IMF thoughts go in the same direction, so the IMF could have a more serious role in the rescue operations in the euro area. But obviously everything is left to the leaders, they must agree, to take decisions. Most likely this will not happen tomorrow. Tomorrow there will be just detailed discussions on the controversial issues. Thankfully, at least one of these is already off the table - Greece is going to receive the sixth tranche of its bailout loan.

Another very important issue which has to be resolved is the negotiations with the private sector - what losses will be borne by the private financial institutions in the Greek debt restructuring, now we are already talking about 50% to 60%. The question is whether negotiations with the private sector will be completed by Wednesday, by when France and Germany have pledged to have definitive solutions to all these issues, and if they are not completed - and what measures the eurozone leaders are ready to undertake in this case. This would probably be clarified in the course of tomorrow when we are going to be here again to follow live the European Council and the meeting of the eurozone leaders.

A More Different European Council – 23 October 2011