Merkel rebuffs Sarkozy on eurozone solution

France's push to use more European Central Bank money to fight the eurozone debt crisis ran into strong resistance from Germany and other EU partners on Friday, leaving Paris looking increasingly isolated before a crucial summit. The rift between Europe's two biggest powers has already forced leaders to tack on an extra summit in the coming week and is causing consternation in global financial markets.
Leaders will now meet twice - on Sunday and Wednesday - to try to adopt a comprehensive strategy to fight the crisis that began in Greece, spread to Ireland and Portugal and is now threatening to engulf bigger economies in the 17-nation currency area. German Chancellor Angela Merkel, French President Nicolas Sarkozy and Europe's top two officials, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, will also meet late on Saturday to try to break the deadlock before the Sunday summit.
Senior European sources said Berlin and Paris were at loggerheads on two core elements of a plan to build a firewall around Greece and stabilise bond markets - how to scale up the eurozone's rescue fund, the European Financial Stability Facility (EFSF), and how to reduce Greek debt. Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday in seeking to turn the 440-billion-euro ($600 billion) EFSF rescue fund into a bank able to access ECB liquidity to fight contagion. The senior European sources said it appeared the French leader would have to back down.
Germany, the ECB and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments. "The path is closed for using the ECB to ease liquidity problems," Merkel told conservative lawmakers in Berlin, according to participants at the private meeting.
Finance Minister Wolfgang Schaeuble hammered home Berlin's message at a preparatory meeting of eurozone finance ministers in Brussels, telling reporters: "We will stick to the situation as it is in the treaty, that the central bank is not available for state financing." A German government spokesman said major decisions at the two-part meeting would only come on Wednesday. Merkel needed time to secure parliamentary support under new rules that stipulate that the Bundestag's budget committee must approve all key EFSF decisions.
The timetable forced the EU to postpone a summit with China set for Tuesday, highlighting how the debt crisis is impinging on Europe's place in the world. Striking a new note of exasperation, Chinese Premier Wen Jiabao told Van Rompuy in a phone call that European leaders should take concrete actions to contain the crisis and stabilise the euro and financial markets.
The summits' outcome will determine whether investor confidence in the euro area can be restored. It will also influence whether an expected Greek debt write-down triggers a chain reaction of financial turmoil across Europe. As a first step, leaders of the 27-nation European Union are set to endorse a plan on Sunday to strengthen banks' capital base and may also launch a procedure for longer-term reform of the euro area's economic governance, EU sources said. European banks will be required to increase their core tier one capital ratio to 9 percent by July 2012 to help them withstand losses on sovereign debt, banking sources said.
An EU source said France, which has presidential and parliamentary elections from April to June and is desperate to keep its top-notch AAA credit rating, was pressing for banks to be given at least nine months to meet the target. France fears its credit rating could come under threat if the wrong method is chosen to scale up the bailout fund to prevent contagion spreading to Italy and Spain, the eurozone's third and fourth largest economies.
Ratings agency Standard & Poor's said on Friday it was likely to downgrade France and four other states if Europe slips into recession. It was the second agency this week to cast doubt on France's rating after Moody's on Tuesday. Underlining the threat the euro zone crisis poses to the global economy, US President Barack Obama held a video conference with Merkel and Sarkozy on Thursday, reiterating that he hopes a solution will be in place in time for a summit of G20 leaders in Cannes, France on November 3-4.
The IMF is more pessimistic than the EU about the sustainability of Greek debts and believes that a deeper debt reduction is needed, EU sources told Reuters. Despite the differences, EU and IMF inspectors are expected to go ahead and approve an 8 billion euro aid payment to Greece next month, the sixth tranche from a 110 billion euro package of EU/IMF loans agreed last May.
A group of 10 major financial companies, including banks, insurers and global bond fund giant PIMCO, wrote to EFSF chief Klaus Regling on Friday, saying partial insurance of sovereign bonds could be a viable means to secure private funding for eurozone states "if implemented in size".