Plans to tackle the eurozone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region's bailout fund, French President Nicolas Sarkozy said on Wednesday. Sarkozy told French parliamentarians the dispute was holding up negotiations.
---- Moody's cuts Spain's sovereign rating by two notches
He then flew to Frankfurt to talk with German Chancellor Angela Merkel and try to break the deadlock ahead of a make-or-break European leaders' summit on Sunday.
He was also expected to meet outgoing European Central Bank President Jean-Claude Trichet while IMF Chief Christine Lagarde and other officials, including European Commission President Jose Manuel Barroso, were attending too. France has argued the most effective way of leveraging the European Financial Stability Facility is to turn it into a bank which could then access funding from the ECB, but both the central bank and the German government have opposed this.
"In Germany, the coalition is divided on this issue. It is not just Angela Merkel who we need to convince," 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 will be able to agree a clear and convincing plan when they meet on Sunday.
Failure to do so would further undermine 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. 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 euro zone debt for "as long as it takes", something Trichet has said should not happen.
That position appeared to be seconded by 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." 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 told an event in Frankfurt to mark the end of Trichet's presidency of the European Central Bank.
Eurozone officials have told Reuters that an alternative model, whereby the EFSF could underwrite a portion of newly issued euro zone debt, is also on the table.
By guaranteeing the first 20-30 percent of any losses, the EFSF could stretch three to five times further. With about 300 billion euros of its 440-billion-euro capacity still available, the fund could be expanded to more than 1 trillion euros, and give markets pause for thought. Moody's cut Spain's bond rating to A1, from Aa2, the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard & Poor's and Fitch.
The agency's reasoning may focus minds ahead of Sunday's summit, highlighting the lack of resolution to the bloc's crisis rather than particular Spanish policy shortcomings. "Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored," Moody's said.