October 20, 2011

Merkel, Sarkozy Split on Debt Bailout

Final plan to forestall eurozone crisis expected to be 'underwhelming'

As the clock ticks down to a weekend summit meeting of eurozone leaders to discuss a plan to deal with the \debt crisis, disagreement between France and Germany over the European Financial Stability Facility threatens to bog down the process and escalate the financial crisis.

At issue, according to a Bloomberg report, is the question of whether, and how, to leverage the EFSF. Germany is opposed, and Chancellor Angela Merkel is walking a fine line, that could cost her the chancellorship, between gaining support from her government and battling opposition from Germany’s people, who do not want to pay more for rescuing peripheral euro zone states.

French President Nicolas Sarkozy, on the other hand, has been arguing that to let Greece fail is unthinkable. Leveraging the EFSF to increase its firepower could make all the difference; without a boost, the 440 billion euro ($608 billion) EFSF cannot keep up with the European debt crisis and does not have investor confidence.

French Prime Minister Francois Fillon has called for the EFSF to be turned into a bank and given leverage by the European Central Bank. Neither the ECB nor Germany are in favor of such a measure.

The crisis, lacking a spectacular solution, may escalate. That seems to be the expectation. David Mackie, chief European economist at JPMorgan Chase & Co., said in the report, “Many expect to be underwhelmed at the weekend. If they haven’t settled the leverage issue, then the sense of being underwhelmed will be overwhelming.”

Markets were down in anticipation of a lackluster solution, and Norman Chan, chief executive of the Hong Kong Monetary Authority, said in a speech posted on the Authority’s website that the world economy faces the “threat of profound and traumatic disruption.”

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