The script for saving the euro has already been written. The monetary union's 17 finance ministers will meet in Brussels this Friday, their counterparts from the remaining European Union countries will join them on Saturday and, finally, on Sunday the EU heads of state and government will arrive to give their blessing to the bailout package.
The most important meetings were scheduled for the weekend so that the decisions can be taken when financial markets are closed. Everyone is afraid of how the ominous markets will react.
"We will meet on Friday until trading ends on Wall Street, and we intend to be finished on Sunday before the first markets open in Asia," says the head of the euro group, Luxembourg Prime Minister Jean-Claude Juncker.
The pressure on Europe's political elite to make progress has never been as high as in the run-up to this summit. But rarely has Europe been this divided, either.
More and more countries are being sucked into the debt crisis. Greece has not met the austerity goals set for it and is mired in recession. The rating agencies have also downgraded Italy, while Spain's debt was downgraded last week. Even France could lose its AAA rating.
Doubts are growing worldwide as to whether Europe can pull itself out of its debt quagmire on its own. Newly industrialized countries like Brazil, India and China are already offering their assistance, while the United States is piling pressure on the EU. Washington expects "resolute action" to emerge from the Brussels summit, US Treasury Undersecretary of International Affairs Lael Brainard said last week. But if Europe is to take resolute action, the 17 euro zone countries should at least be acting in concert.
The crisis of confidence has now bounced back to those banks that triggered the acute financial crisis three years ago, making the multi-billion euro bailout efforts necessary in the first place.
Last Thursday, Deutsche Bank CEO Josef Ackermann burst into this highly-charged atmosphere when he voiced his strong opposition to the forced capitalization of large European banks. The struggle over how to rescue the euro is also Ackermann's last battle as the head of Germany's largest financial institution.
The outcome is still undecided. Will Greece be forgiven part of its debt? Will other European high-debt nations be able to avoid contagion? What can be done to avert the collapse of the banking system if holdings of Greek bonds are massively written down?"
The only thing that is clear at the moment is the distribution of roles on the Brussels stage. On the one hand, there are those who are calling for a radical debt haircut for Greece and want private lenders to make a much bigger contribution. These are for the most part the representatives of those EU countries that still have strong credit ratings. They are led by Luxembourg Prime Minister Juncker and German Finance Minister Wolfgang Schäuble.
Pushing the Banks
Under their plan, banks would be called upon to voluntarily increase their share of the financing of Greek debt. If this does not lead to a debt haircut of at least 50 haircut, the banks would be compelled to participate in the plan. There are many indications that Greece cannot reduce its high debt level, Schäuble told fellow Christian Democrats in Berlin last Wednesday. "And if the debts are not sustainable in the long term, they will simply have to be reduced to such an extent as to provide Greece with a reasonable outlook." But this cannot be done exclusively at the expense of taxpayers, Schäuble added.
In plain language, Schäuble wants the banks to participate in a haircut, and to a much greater extent than agreed at the last euro summit July. Why else, Schäuble argues, were they bailed out in the first place?
But it is highly unlikely that the banks will do this voluntarily. The French are particularly resistant to a larger haircut, because a handful of them have lent large sums of money to shaky economies like Greece, Spain and Italy. French President Nicolas Sarkozy fears that downgrading these countries' bonds would lead to the collapse of his banking system.
Both the southern EU countries and the European Central Bank support Sarkozy's position. Last week, the ECB warned expressly against a larger debt waiver by the private sector in Greece. "The application of PSI (private sector involvement) to one member country may put at risk the financial stability of the currency area as a whole," the ECB wrote in its October monthly bulletin.
This is why European politicians intend to inject fresh capital into the banks to prepare them for a larger debt haircut for Greece. The holdings of Greek government bonds on the banks' books are not their primary concern. In fact, some banks have already sharply reduced those holdings. Deutsche Bank, for example, now holds only €900 million ($1.23 billion), compared with total assets of about €1.8 trillion.
But it is highly likely that if there is a debt haircut for Greece, investors will take an even more critical view of the creditworthiness of countries like Italy and Portugal. There is a risk that their bonds too will have to be written down further in bank balance sheets.
Banks to Be Forced to Beef Up Capital
Until now, banks have not had to prepare for such scenarios. Although they are required to build up a certain amount of equity capital as a cushion against high-risk investments, accounting rules have treated European government bonds as absolutely dependable. But that will now change. "We will ensure that all system-relevant banks are equipped with sufficient capital, even if not all banks like this," says German Finance Minister Schäuble.
European Commision President José Manuel Barroso said that all banks should be "temporarily" required to maintain a higher equity ratio. The newly established European Banking Authority (EBA) is assessing just how high that ratio should be. The number currently being considered is nine percent in crisis situations (instead of the five-percent equity ratio now required).
Even before the criteria for this small-scale stress test were clear, dramatic crisis scenarios were being discussed. According to calculations by the investment bank Morgan Stanley, Deutsche Bank would need €12.5 billion, while Commerzbank would need €8.8 billion.
The banks were unanimous in their rejection of the plans, and Deutsche Bank CEO Ackermann promptly launched a counterattack. Speaking to a group of German small and mid-sized business owners in Berlin, he questioned "whether politicians are even capable of coming up with a sustainable solution to the crisis anymore," calling their ideas on recapitalizing the banks as "counterproductive." Rarely have the financial and political worlds been as bitterly opposed to one another as they are today.
"The problem is not the banks' capitalization, but the fact that government bonds have lost their status as risk-free assets," the top banker said. The key to solving the problem, he added, lies solely with governments and not with banks.
Criticism of Deutsche Bank's Ackermann
Politicians reacted with outrage. Ackermann shouldn't go too far in criticizing the EU's bank capitalization plans, said Gerda Hasselfeldt, a leading member of the conservative Christian Social Union (CSU), the Bavarian sister party of Chancellor Angela Merkel's conservatives. Ackermann, as the representative of an important German bank, holds "great economic and social responsibility," she added. "This includes taking into account the interests of the general public."
CSU General Secretary Alexander Dobrindt also took aim at the banks, raging against those institutions that "are still putting most of their earnings into bonuses and dividends."
Green Party co-Chairman Cem Özdemir asked himself "whether Mr. Ackermann is even interested in a lasting solution to the crisis. In my view, such a solution also includes making sure that there are no longer any system-relevant banks." Özdemir finds it unacceptable "that banks can take massive risks and get themselves into debt up to their ears and that taxpayers then have to foot the bill for them. We also need a debt limit for banks that's based on existing equity capital."
'Ackermann Could Use a Little Humility'
Ackermann has incurred the wrath of the political class once before. In early 2009, shortly after he and the German government had put together a multi-billion-euro bailout package for the German financial industry, the Swiss national said that he would be "ashamed" if his own bank had to accept government funds. He neglected to mention that Deutsche Bank did indeed profit indirectly from the billions on public funds spent to stabilize the German financial industry.
"Deutsche Bank, with its profitability goals, is one of the drivers of speculation in the financial market," says Carsten Schneider, a budget expert with the center-left Social Democratic Party (SPD). "Even if it did not receive any direct aid in the last financial crisis, it benefited from the fact that politicians averted a collapse of the financial market. Mr. Ackermann could use a little humility."
What angered German politicians at the time earned Ackermann a great deal of praise in the economy. He is now celebrated around the world as the man who shepherded his bank through the financial crisis without government support.
Now Ackermann sees his life's work threatened by the planned compulsory injection of public funds. He is as concerned about the prospect of government commissioners on the bank's supervisory board as he about the possibility that bonuses for Deutsche Bank's profitable investment bank would have to be trimmed. The Fitch rating agency is already considering a downgrade for the Frankfurt-based bank.
But politicians cannot take account of the business interests of individual lenders. French President Sarkozy, in particular, likes to point to the systemic risks that result from the growing mistrust among banks in Europe. He advocates the mandatory injection of government capital, which would be particularly beneficial to his country's ailing major banks.
Merkel: 'There Will Be No Bombshell'
Ackermann, deeply alarmed, made a personal call to German Chancellor Angela Merkel. Apparently he was successful. According to an agreement between France and Germany, the banks can now attempt to obtain fresh funds in the private capital market.
But the French, contrary to reports, are still trying to secure at least some of the capital for the banks from international funds, including both the expanded European Financial Stability Fund (EFSF) and the International Monetary Fund (IMF).
The Germans and French are also divided over the conditions under which the EFSF will be able to purchase government bonds in the future. Berlin wants to allow the EFSF to purchase only the bonds of countries for which an aid program has already been approved. France, for its part, is urging that such purchases be subject to as few conditions as possible. Euro group chairman Juncker supports the French position. "The bailout fund needs this flexibility to be able to take preventive action," says Juncker. He fears that the current summit could end, once again, in half-baked compromises.
To pursue this goal, Juncker and European Council President Herman Van Rompuy are meeting this week with private bankers to convince them to become more deeply involved in a debt haircut. He also spoke with Ackermann last week and urged him to abandon his efforts to obstruct the plan. The talks with the French are also proving to be extremely difficult. A meeting between Finance Minister Schäuble and Sarkozy on Friday did not produce a breakthrough.
Will Merkel Get Off the Fence?
Everything depends on Merkel now. So far, the chancellor has been unwilling to satisfy the yearning for a major, comprehensive package to solve the crisis. The markets are applying pressure, but Merkel is downplaying expectations. "There will be no bombshell," she said last week during a visit to Vietnam. The chancellor has not taken a position on a possible debt haircut yet. Although she has publicly warned against what she called an "adventure," she recently admitted that she no longer rules out an "orderly bankruptcy" for Greece.
The extent to which Merkel is vacillating became clear in a meeting of the CDU presidium, the Christian Democrats' top leadership body. At the meeting, a few party leaders pushed for a prompt debt haircut, but Peter Altmaier, the CDU's parliamentary group leader and an expert on the EU, warned of the consequences. According to Altmaier, the banks must be supported, in Greece and elsewhere, and the European bailout fund might have to issue guarantees for the holders of Italian and Spanish bonds, because they also fear that they will be asked to pay up. "I urgently advise against Germany pushing this issue," Altmaier said. "If it happens, it'll happen on its own."
Merkel was impressed by Altmaier's remarks, but she declined to take a position. She wants to wait for the troika's report on Greece and the results of the stress tests performed by European bank supervisors. The experts' reports are expected this Thursday. Then Merkel will have to decide whether to continue her non-committal approach or whether to send a signal to the markets. The European leaders must present their decisions on Sunday, by not much later than midnight, because markets open in Tokyo only two hours later. Then Europe's politicians will discover whether they have made a wise decision.
REPORTED BY PETER MÜLLER, CHRISTOPH PAULY, CHRISTOPH SCHULT, ANNE SEITH AND DIMITRI SOIBEL.