BRUSSELS — European leaders' decision to create a permanent financial backstop for future eurozone crises — but without spelling out who pays — looks set to trigger a power struggle among governments in the months to come.
The deal that emerged from a two-day summit of EU leaders in Brussels Friday is vague on how private creditors such as banks and hedge funds — and not just taxpayers — would share the cost of financial rescues such as the one that pulled Greece from the edge of bankruptcy in May.
Forcing private bondholders to pay for some of the consequences of risky lending was a key demand from Germany, which was the biggest contributor both to a €110 billion emergency loan for Greece and a €440 billion stability fund for the wider eurozone.
Other governments — backed by the president of the European Central Bank — fear that threatening bondholders with debt restructuring would send up funding costs for countries like Greece, Portugal or Ireland and again imperil the stability of the euro.
Both the emergency loan and the stability fund run out on June 30, 2013. By then, Greece's debts will likely stand at 150 percent of gross domestic product — a level that many economist think is unsustainable.
Markets were quick to remind politicians that the European debt crisis is far from over. The interest rate on Ireland's national debt reached a new euro-era high Thursday as investors sold off Irish bonds amid skepticism that the country can reverse its soaring deficits.
In Portugal, talks between the government and the opposition on how to slash the country's budget broke down Wednesday. Greece is still awaiting final deficit figures for 2009, which might force Athens to impose even more painful austerity measures.
EU leaders backed "limited" changes to the EU treaty to allow for the creation of what they call a "permanent crisis resolution mechanism." Such a mechanism, they said, is needed save governments from having to scramble for a solution like they did this spring, when funding costs for highly indebted states like Greece and Ireland soared and the euro plummeted.
But leaders left it to the European Commission — the EU's executive — and a task force around EU President Herman Van Rompuy to work out the details of how such a mechanism should function and what role, if any, should be played by the International Monetary Fund, the Washington, DC-based international organization which joined in the Greek bailout.
By December, those two groups will explore "the role of the private sector, the role of the IMF, and the very strong conditionality under which such programs should operate," Van Rompuy said.
The vague language of the statement falls short of the firm commitment demanded by German Chancellor Angela Merkel.
Merkel is under pressure from taxpayers, who feel they are paying for the excesses of spendthrift nations in the European periphery.
"Everybody also has to be in a position to remain politically effective at home," she said at a news conference Friday afternoon.
While EU leaders agreed that it was necessary to support eurozone countries that run into fiscal troubles, interpretations of what the crisis resolution mechanism will look like gyrated widely.
"For some it could simply mean that the current Financial Stability Facility would become permanent," Carsten Brzeski, senior economist at ING, said in a note. "For the German government it rather means a debt-rescheduling facility."
Indeed, Van Rompuy stressed that "we didn't talk about restructuring debts."
Merkel meanwhile declared that private creditors must "participate in a future crisis resolution mechanism."
Berlin has ruled out extending the financial stability fund, unless private creditors bear some of the costs when a highly indebted country runs out of money — either by giving the country more time to pay or by accepting a so-called haircut, a reduction in the total sum they are owed.
"A permanent crisis mechanism should be able to address financial distress and avoid contagion from one country to another," Van Rompuy said. "It should also avoid moral hazard."
Figuring out how such moral hazard — which allows investors to make risky bets without the threat of losing their money because they know governments will bail them out — can be avoided, without sending those same investors into a panic about losing their money, will be a tricky task for the EU and its member states in the months to come.
"The financial markets will wait, if they are wise enough, until the moment the secondary legislation will be in place," said Jean-Claude Juncker, who represents the group of 16 countries that use the euro. "Because it is after having laid down the secondary legislation that the whole arrangement will become more comprehensible."
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