THE GERMAN chancellor is meeting the president of the European Commission for key talks in Berlin this evening as the EU executive presses for tougher measures to tackle the sovereign debt crisis.
Dr Angela Merkel and José Manuel Barroso will discuss a package of measures including a partial restructuring of the debt of distressed countries such as Greece, a scheme which could ultimately be deployed to ease some of Ireland’s debt burden.
Sources say a restructuring of Irish debt in this context has not been discussed. However, the rules of the European Financial Stability Facility (EFSF), which is the euro zone rescue fund, are written in a way that means the same provisions apply to all participants.
Measures that would cut the interest rate on Ireland’s bailout loans are also on the table as the two leaders meet. A further possibility is that the euro zone rescue fund is empowered to help bailout recipients to recapitalise struggling banks.
EU economics commissioner Olli Rehn will make the case for EFSF reforms at a separate meeting today with Dr Merkel’s liberal Free Democrat coalition partners. Their leader Guido Westerwelle has warned in recent weeks that Berlin’s solidarity towards its European partners is conditional and must be earned.
Sources briefed on the debt restructuring proposal argued that its “debt reduction impact” has been “overestimated” as bondholders would not be compelled to participate.
Still, German finance minister Wolfgang Schäuble is believed to be well disposed to the notion. In question is whether the EFSF can be empowered to lend to bailout recipients so they can buy back some of their debt at a discount.
This idea has been attributed in many quarters to EFSF chief Klaus Regling. It is now under discussion in Europe’s economic and financial committee, which groups senior finance ministry officials from all euro countries with officials from the European Commission.
With bondholders free to reject any offer to buy back the paper at a discount, a European official said many of them would be likely to hold on to their investment as they would have an incentive to do so.
However, the official made the case that the very existence of such measures could help to keep a ceiling on bond yields when they spike upwards in times of crisis. “It can have an impact on the decisions of other bondholders.”
A further suggestion is that it would be open to the European Central Bank (ECB) or other euro countries to sell at a discount euro zone sovereign paper they hold. This may have limited effect, however, as the EU’s “no-bailout clause” bans the ECB or national central banks from directly acquiring debt from member states.
The discussion of such debt buybacks follows concern that Greece may be unable to make its return to private markets at the end of its rescue programme in 2013. The objective in funding a discounted bond buyback would be to ease pressure on the exchequer in Athens, softening the ground for its return to private investors.
Dr Merkel’s meeting with Mr Barroso comes as euro group finance ministers gear up for intensive talks to widen the reach and mandate of the EFSF. While Mr Barroso has pushed for a definitive decision by the next EU summit on February 4th, this received a frosty response from Berlin.
However, the fact that Dr Merkel has not ruled out far-reaching reforms is significant. EU leaders are more likely to push for a deal at a summit in late March.
