EU leaders make deal on banks

All 27 leaders of the European Union have agreed on new rules requiring the region's banks to shore up their cash reserves, officials say.
German Chancellor Angela Merkel speaks with the media as she arrives for an EU summit in Brussels on Wednesday. EU leaders were trying to reach agreement on a comprehensive plan for resolving Europe's escalating debt crisis. (Virginia Mayo/Associated Press)

All 27 leaders of the European Union agreed Wednesday on new rules requiring the region’s banks to shore up their cash reserves, officials say.

The officials said the banks will be required to raise their capital cushions to nine per cent of their risky investments by June. That's in line with international banking guidelines that come into effect in 2019.

European banks need to shore up their finances because they have significant exposure to debt by governments with shaky finances.

On Greece's debt, for instance, they could soon be asked to take substantial losses, as leaders try to find a way to dig Europe out of its debt crisis by lightening Greece's debt load.

The leaders met in Brussels to patch together a plan that would prevent banks from taking huge losses if the Greek government defaults on its bonds.

The plan was expected to address not only measures to shore up banks, but also to increase the size and powers of the European bailout fund for troubled countries and the size of the write downs banks would take on their loans to those countries.

The bailout fund would offer buyers of government bonds insurance against possible losses and attract capital from private investors and sovereign wealth funds. such as those run by China and Brazil.

German parliament OKs bigger rescue fund

Earlier Wednesday, the German parliament gave wide backing to plans to increase the rescue fund. Lawmakers voted in favour of leveraging the €440 billion ($615 billion Cdn) bailout fund to make it more effective.

That gave Chancellor Angela Merkel a strong mandate to seal a deal in Brussels. Germany is the largest European creditor nation and an essential player in any bailout agreement.

Currently, Berlin has agreed to guarantee loans to the tune of up to €211 billion ($295 billion CDN). But Merkel's strong mandate  to seal a deal on continuing debt crisis could see that increase.

Opposition leaders briefed by Merkel have said the changes would take the fund's lending capacity above €1 trillion ($1.4 trillion), though that isn't finalized.

Analysts say even if it is approved, it's not nearly enough.

"It is unlikely anything is going to come out of this meeting but if it does, it's still not going to be big enough," said Gavin Graham, president of Graham Investment Strategy.

"If it's €1 trillion, it's not big enough to actually solve the problem."

Graham thinks leaders would have to come up with a much bigger lending capacity, something in the neighbourhood of €2 trillion $2.8 trillion).

Italian Prime Minister Silvio Berlusconi, left, smiles as he walks past Danish Prime Minister Helle Thorning-Schmidt at EU headquarters Wednesday. Berlusconi's government seemed poised to fall after losing the support of a key coalition ally. (Eric Feferberg/AFP/Getty)

Merkel has also indicated that private investors should take a write down of at least 50 per cent on Greek debt holdings.

Bondholders agreed in July to a cut of 21 per cent on what they could one day be paid back. But officials are now pushing for more, trying to get haircuts of as much as 50 to 60 per cent — enough to get Greece's debt load down to 120 per cent of its GDP.

A Bloomberg report Wednesday claimed those talks had broken down.

The European Union and IMF have already bailed out three small eurozone members — Greece, Portugal and Ireland — but fears it could not bail out the troubled economies of Italy and Spain, the third and fourth largest economies in the 17-nation currency bloc. It also knows that the first bailout for Greece was nowhere near big enough to keep the country from defaulting.

After several months of glacial progress, EU officials said last week they wanted to come up with a comprehensive deal on all the issues by the end of Wednesday.

To that end, officials are working on several plans at once — resolving Greece's debt situation, strengthening the continent's banks, which are expected to take deeper losses on their Greek bonds than they had planned, making sure other eurozone nations don't need bailouts and boosting the EU bailout fund itself.

Another open question is the fate of Italy. It is the continent's third-largest economy but also in danger of needing a bailout itself. The government of Silvio Berlusconi seemed poised to fall on Tuesday after losing support of a key coalition ally over his pledge to raise the pension age to 67.

"Our Italian friends know exactly that we have to insist that tonight they tell us that we get important structural consolidation measures in Italy," Juncker said. "That is a must."

With files from The Associated Press