Rumours of tough plans for Greece prompt further market volatility

EUROPEAN Union officials last night played down reports of emerging plans to halve Greece’s debt and re-capitalise the continent’s banks, adding to volatile trading across stock markets.

Europe came under fierce pressure from the United States and other developed economies during weekend talks in Washington DC to take swift, decisive action to stop the Greek debt crisis engulfing bigger eurozone states and derailing the world economic recovery.

But officials warned that reports that planning was already in place for a 50 per cent write-down in Greek debt and a vast increase in the eurozone rescue fund, the European Financial Stability Facility (EFSF), were “highly premature”.

One eurozone official involved in the financial assistance packages for Greece, Ireland and Portugal said: “There is no change to the framework we are working on. All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines.”

In London, the FTSE 100 index closed up 22.56 points at 5,089.37, led higher by banking stocks that reacted positively to talk of a eurozone rescue deal.

The Footsie dipped below the psychologically-important 5,000 mark in early trading, falling as low as 4,974.03 before rebounding to hit 5,148.81 later on.

European indices rallied on the back of the rumours, with the Dax nearly 3 per cent stronger in Germany and France’s CAC-40 up nearly 2 per cent.

German Chancellor Angela Merkel – struggling to convince her fractious coalition to back a strengthening of the EFSF in a crucial vote on Thursday – said on Sunday that letting Greece default would destroy investor confidence in the eurozone.

Diplomats said any talk of a fallback plan for Greece that would raise the cost to German taxpayers could only make her task more difficult.

Economists are forecasting a Greek debt default within weeks or months, coupled with a capital injection for European banks and a “leveraging up” of the EFSF so it can handle any fallout in Italy and Spain.

Eurozone officials acknowledge that such policy ideas are circulating and some could constitute a longer-term response to the 20-month debt crisis. But they insist no specific plans are yet in the works.

Instead, planning continues on the basis that Greece’s debt burden – close to 160 per cent of GDP – can be sustained, as long as the government implements austerity measures demanded by the European Commission, European Central Bank and International Monetary Fund.

US Treasury secretary Timothy Geithner highlighted global concerns about European crisis management, saying on Saturday: “The threat of cascading default, bank runs and catastrophic risk must be taken off the table.”

IMF chief Christine Lagarde, the former French finance minister, also made it clear that the eurozone needs to act more decisively, notably to re-capitalise banks on a large scale.

Eurozone policymakers accept that a combination of a much deeper Greek debt restructuring allied to co-ordinated bank recapitalisations and a bolstered rescue fund might help the eurozone get on top of the crisis.

But such a plan would require support from all 17 eurozone countries, and it takes time in the EU’s decision-making structures to bring so many moving parts together at once.

Another eurozone official said: “The ideas are all there, but it’s not as straightforward as just sitting down and deciding it. Many of us can agree privately that anything less than a 50 per cent haircut for Greece would just be cosmetic, but getting that decided by all and implementing it is not so easy.”