Barroso implores EU to act on Greece

Europe’s leaders should stop prevaricating and quickly adopt a plan to bail-out Greece, recapitalise the region’s banks and give the eurozone’s rescue fund more firepower to stop economic contagion, the president of the European Commission said.

José Manuel Barroso did not specify how to help Greece, Europe’s banks or boost the rescue fund, highlighting the fierce divisions that still exist among European officials and among national capitals over the way forward – divisions that must be bridged by the time EU leaders gather for a summit in less than two weeks.

Senior EU officials said there was an intense debate within Mr Barroso’s Commission over whether to specifically back a 9 per cent core tier-one capital ratio for banks – the key measure for financial strength – far higher than required just three months ago in European stress tests.

In the end, Mr Barroso omitted the figure from his speech and instead called for “a temporarily higher capital ratio after accounting for exposure” to sovereign debt of shaky eurozone economies, which most major European banks hold in large quantities.

He also proposed that banks requiring recapitalisation be barred from issuing bonuses to executives or dividends to shareholders.

Despite the lack of detail, Mr Barroso’s blueprint, presented to the European Parliament, set out in public for the first time all the elements of a grand bargain EU leaders are hoping to finalise at their meeting on October 23.

“To break the vicious cycle of uncertainty over sovereign debt sustainability and over growth prospects, we need comprehensive solutions now,” Mr Barroso said. “Now is the time to bring them all together, to once and for all meet the depth of the crisis with a full comprehensive and credible response.”

In addition to quick action on Greece, banks and the rescue fund, Mr Barroso called for an overhaul of the way the eurozone is governed and quick action on longstanding proposals aimed at boosting economic growth.

The most contentious issue, however, continues to be the size of losses to be pushed on private holders of Greek bonds. According to European officials, Germany continues to urge a “haircut” of about 50 per cent, but others, led by France and the European Central Bank, are resisting any move that could be considered a “credit event” – an explicit default that would trigger insurance contracts known as credit default swaps.

There is also division over the banks plan. Mr Barroso’s Commission and the European Banking Authority, the region’s top banking regulator, are in broad agreement that banks should be required to raise their core tier one capital ratio to around 9 per cent, effectively bringing forward the EU’s implementation of the Basel III bank accords, which have a deadline of 2019.

A 9 per cent core tier one capital threshold under the EBA definition is roughly equivalent to the 7 per cent requirement under Basel III.

The EBA assessment of the capital shortfall will apply the higher capital level on the region’s banks once it takes into account big write-downs on the value of sovereign debt holdings, so that the analysis better reflects current distressed market conditions.

This analysis, which is due to be complete by next week, will include systemically important banks and exclude smaller institutions such as Spanish cajas and some German savings banks, which were part of the 91 institutions in last summer’s stress test.

A debate is still raging between member states over the when and how banks should be required to reach the new, higher capital levels.

Germany in particular is raising concerns over the threshold and timing, while France is more comfortable with bringing forward Basel III requirements; some of its banks have already promised to meet the goal. Officials say Paris remains determined to ensure that European funds are ultimately available for bank recapitalisation, although the French government ruled out tapping the European Financial Stability Facility to prop up its financial institutions.