France and Germany have warned that Greece risks losing its EU aid if it fails to agree a new deal with its creditors in the short term, and said that they hope to finalise negotiations over the creation of debt limits and fiscal discipline in the eurozone before the end of January.
In a press conference after a bilateral meeting between the two countries, Nicolas Sarkozy and Angela Merkel both reiterated the importance of pushing forward from the measures agreed at the December EU summit, that saw 26 out of the 27 countries in the union agree to move towards deeper fiscal integration, in an attempt to prevent a repeat of the economic imbalances that led to the current existential threat to the eurozone. The pair hope that the new deal will subsequently be signed on March 1.
The two leaders also said that it was important that private sector holders of Greek debt agreed to a new, increased write-down on their holdings. A 50% "haircut", agreed in October, is now no longer seen as sufficient for the country to be able to pull itself out of its current solvency crisis.
"From our point of view, the second Greek aid package including this restructuring, must be in place quickly. Otherwise it won't be possible to pay out the next tranche for Greece," Merkel told the press conference.
The Greek prime minister, Lucas Papademos, warned last week that the consequence of losing the next tranche of IMF and EU bailout money could be an uncontrolled default.
Sony Kapoor, managing director of the Re-Define think tank, said that making sure the haircut was big enough this time around is key.
“Since Greece will only get one shot at debt reduction, it is only right that the EU pushes for as high a bondholder haircut as possible given the unsustainability of Greek debt,” he said.
“If anything, a larger haircut may enable Greece to return to the markets sooner rather than later.”
Sarkozy also said that the French government would present plans for a financial transaction tax (FTT) later in the month.
An FTT, or "Robin Hood tax" would skim off a small percentage of trades within the eurozone to raise capital and, hopefully, reduce volatility in financial markets. It is an idea favoured by Germany and France but bitterly opposed by the UK.
The Cameron government believes that the FTT would see the City of London lose its prominence as a centre of international finance, with trading migrating to cheaper jurisdictions in the Far East. As the UK's veto on treaty negotiations last year showed, the country is keen to be seen to guard the interests of its financial services sector.
“There is no reason why France, Germany or the whole of the Eurozone could not implement a financial transaction tax by themselves provided it is modelled on the successful Stamp Duty on share trading that mobilizes more than Euro 5 billion of revenue for the UK every year," Kapoor said.
“The FTT is one of the good answers to the question of how best to mobilize much-needed additional tax revenue in the EU in a manner that has the least negative impact on growth.”
The European Commission believes that the FTT could generate €37bn in revenue, but some analysts disagree on the assumptions and estimates made to come to that figure.
As Marie Dimon, economic advisor at Ernst & Young, said: "The European Commission’s headline estimates were based on a range of optimistic assumptions about the reaction of financial markets to the FTT. Using less optimistic assumptions about the impact of the FTT on trading volumes, and taking into account lower revenues from other taxes*, the FTT could actually create a hole of €116bn in the public finances of EU governments."
European stock markets fell after the announcement, with financials pulled down by a combination of a cheap rights issue by Unicredit, the Italian bank, and by trepidation ahead of crucial Italian and Spanish bond auctions later in the week.
A January 30 summit is the next opportunity for leaders to make progress on the response to the crisis, but markets are not overly hopeful.
As Richard Driver, a market analyst at Caxton FX noted: "We are not optimistic that a magic formula will be produced, we’ve been disappointed time and time again by these meetings."
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