Saturday, October 22, 2011

France: "If there isn't a solution by Sunday, everything is going to collapse"

French president Nicolas Sarkozy has raised the stakes dramatically in Europe's debt crisis.

"If there isn't a solution by Sunday, everything is going to collapse," he told his inner circle before an emergency trip on Wednesday night to see German Chancellor Angela Merkel in Frankfurt.

The talks are deadlocked, reflecting a deep rift between Euroland's two great powers. The French fear the EU's €440bn EFSF rescue fund will not be enough to shore up monetary union without mobilising the might of the European Central Bank as lender of last resort. It is a view shared by UBS, Citigroup, RBS and the US Treasury.

Mr Sarkozy wants the fund to operate as a bank, able to leverage its rescue power by tapping the ECB's credit window. This is less likely to endanger France's AAA credit rating. Yet the idea is anathema to Germany and Bundesbank purists.

Paris has grave doubts about Mrs Merkel's demand for larger "haircuts" – perhaps 50pc – for Greek bondholders. Such a move risks triggering default, crystallising crippling losses for French banks and courting "Lehman-style" contagion.

Mr Sarkozy's task is made harder by bail-out fatigue and mounting euroscepticism in the Bundestag. "It is not just Merkel we need to convince, the coalition is divided," he said. more