Crunch talks begin as plan to end debt crisis stalls
CRUNCH emergency talks got under way in Frankfurt last night after French President Nicolas Sarkozy said a plan to end the debt crisis had stalled.
Amid signs of growing tension in the negotiations, the French president announced his sudden decision to attend the talks after a brief visit to the Paris maternity clinic where his wife Carla Bruni was due to give birth to their first baby.
German Chancellor Angela Merkel, European Central Bank (ECB) President Jean-Claude Trichet and International Monetary Fund managing director Christine Lagarde were forced to break away from a retirement party for Mr Trichet to attend the crunch negotiations ahead of a summit of European leaders this Sunday.
The leaders' summit has already been delayed by a week to give France and Germany time to hammer out a common plan to end the debt crisis that now threatens to send the world economy into a slowdown.
Incoming ECB President Mario Draghi, European Union President Herman van Rompuy and European Commission President Jose Manuel Barroso also flew in for the talks.
European equities closed flat yesterday, before news of the emergency session emerged. In the US, stocks fell in late trading as talks got under way.
In the bond markets, traders said nerves were frayed. Borrowing costs for almost all euro countries increased yesterday, held in check only by fears of being caught on the wrong side of a rally next week if a deal is done on Sunday.
Irish government bond yields remain above 8pc and the premium the French government has to pay to borrow compared to Germany is close to a 19-year high.
Mr Sarkozy told a group of parliamentarians earlier that the talks had become bogged down over the issue of whether the European Central Bank should support the €440bn European Financial Stability Facility (EFSF), the eurozone rescue fund set up to prevent contagion from the sovereign debt crisis.
France has argued that the most effective way of leveraging the EFSF is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government opposed this.
"In Germany, the coalition is divided on this issue. It is not just Angela Merkel who we need to convince," Mr Sarkozy told the parliamentarians at a lunch meeting, according to Charles de Courson, one of the legislators present.
His comments fuelled doubts about whether eurozone leaders would be able to agree a clear and convincing plan when they meet on Sunday. Failure to do so would further undermine the financial markets' already shattered confidence in the currency bloc and its ability to get on top of a two-year-long debt crisis, which threatens the long-term viability of the single currency.
Reports suggested last night that any bank recapitalisation plan will be below €100bn.
One senior EU official, who is involved in coming up with solutions to the crisis, said the only "circuit-breaker" now was for the ECB to make an explicit commitment to go on buying distressed eurozone debt for "as long as it takes", something Mr Trichet has said should not happen.
That position appeared to be seconded by Mr Barroso, who said in Frankfurt: "The decisive intervention of the ECB in secondary bond markets was and still is a critical element in securing financial stability in the euro area."
Uncertainty over the eurozone's future intensified as Moody's issued a double-notch downgrade of Spain's credit rating a day after the agency warned France that its triple-A rating could come under pressure.
In Greece, workers began their biggest strike in years in protest at austerity measures.
Mrs Merkel warned late on Tuesday that leaders would not solve the debt crisis at a single meeting and reiterated that past errors would not be solved in "one stroke".
"If the euro fails, Europe fails but we will not allow that," she said in Frankfurt last night.
The hope remains that Sunday's summit will agree new steps to reduce Greece's debt, strengthen the capital of banks with exposure to troubled eurozone sovereigns and leverage the eurozone's rescue fund to prevent contagion.
"You know the French position and we are sticking to it. We think that clearly the best solution is that the fund has a banking licence with the central bank, but everyone knows about the reticence of the central bank," French Finance Minister Francois Baroin said.
A senior German government source said Berlin remained resolutely opposed to the ECB backstopping the rescue fund.
Eurozone officials say an alternative model, whereby the EFSF could underwrite a portion of newly issued eurozone debt, is also on the table.