Italy and Spain – not France and Germany – are the new obstacles to a "big bazooka" solution to the eurozone debt crisis, French sources insisted yesterday.
A broad agreement has been reached, on German terms, to end the Franco-German dispute over boosting the fire-power of the €440bn (£382bn) bailout fund. But the German approach, now reluctantly accepted by France, is opposed by Spain and Italy, the French sources said.
Rome and Madrid complain that the plan to turn the European bailout fund into an insurance scheme for European sovereign debt would only cover "new" borrowing. It would, they say, invite speculation against "old", or existing, sovereign debt. Since a great deal of Italian state debt is owned by Italian banks, the effects could be calamitous, Rome says. Some analysts also warn that rating agencies could decide to downgrade the "old" debt, further eroding the faith of financial markets in the solvency of Italian and Spanish banks.
These objections, and the need for the German Chancellor, Angela Merkel, to have an outline plan signed off in advance by the Bundestag, were the real reason for Thursday's decision to postpone the deadline for an agreement on a euro rescue package until next Wednesday, the sources said. France had originally wanted the bailout fund, known as the European Financial Stability Facility (EFSF), to be boosted from €400bn to a potential €3 trillion by raising loans or simply printing money if needed. Germany and the ECB rejected this approach as contrary to the existing EU treaty and want to turn the EFSF into an insurance fund. What remains of the bailout fund would be used to insure the first 20 per cent or more of new sovereign debt issued by Spain and Italy. The power of the EFSF would thus be "leveraged" to at least €1trn. Although French officials remain frustrated at the German approach, they have been even more irritated by suggestions that Sunday's summit has been ruined by a "Franco-German" quarrel.
Double cross over the ECB
Silvio Berlusconi's decision to nominate Ignazio Visco as the next head of the Bank of Italy has set up a potentially explosive clash with the French President, Nicolas Sarkozy, in Brussels tomorrow. The decision unravels a complex deal between the two leaders over the European Central Bank (ECB). France had supported the promotion of the incumbent Italian central bank chief, Mario Draghi, as a successor to France's Jean-Claude Trichet as ECB president on the tacit under-standing that Mr Berlusconi would move another Italian banker, Lorenzo Bini Smaghi, from his position on the ECB's executive board, and put him in charge of the Bank of Italy. This would open the way for a French banker to take Mr Bini Smaghi's place. But by appointing Mr Visco, Mr Berlusconi has ensured that Mr Bini Smaghi will not be going anywhere, thus leaving the carefully constructed deal with the French in tatters.