Differences Between Germany and France Stall 'Comprehensive Plan' Progress

Word that talks had stalled between France and Germany on how best to deal with the European debt crisis rattled the markets again on Wednesday. At issue are the questions of how best to use the €440 billion EFSF bailout fund and how big the “haircut” should be for private bondholders of Greek debt.

French President Nicolas Sarkozy boarded a plane for Germany on Wednesday in an effort to break the impasse. Also in attendance at the meeting were the heads of the ECB, IMF, and the EU. So, with time running out on the Sunday deadline to come up with a comprehensive plan to attack the crisis, it appears that all of the important players are in the room.

Reports from Dow Jones, Bloomberg, and Reuters indicate that the primary difference between the positions of France and Germany is the degree to which the private sector should participate in the bailout of Greece. Recall that the July 21 agreement called for bondholders to take a 21% “haircut” on the value of Greek bonds via an extension of the duration of the debt. Recently Germany has been pushing hard for this level to be increased to between 50% and 60%.

France, which it should be noted, is a very large holder of Greek debt, has balked at the idea, with Sarkozy reportedly calling the idea of such a haircut “absurd.”

Opponents to the increased haircuts argue that such a move could create a “credit event” which would trigger CDS, deepen the crisis, and damage the region’s banks.

The other issue on the table is how best to utilize the remaining funds in the EFSF bailout fund. This is often referred to in the press as increasing the “firepower” or the “leveraging” of the fund.

According to Reuters, the French argue that the best way to increase the effectiveness of the EFSF is to have it file to become a bank so that the fund could gain access to ECB funding. Unfortunately, both Germany and ECB are against the idea.

Another solution for increasing the firepower of the EFSF is termed the “insurance plan.” Under this approach, the money in the fund would be used to provide a “first guarantee” against any losses incurred from a sovereign default. Analysts suggest that given the amount of cash left in the EFSF after the bailouts owed to Greece, Portugal, and Ireland, the EFSF would be able to insure between €1 and €1.5 trillion of new debt.

The key issue presently however is that EU leaders are expected to have an agreement on a comprehensive completed plan by Sunday. Therefore, with France and Germany apparently far apart, doubt crept into the markets on Wednesday as to whether or not a the plan would come together.

While stocks took a dive on the report that talks had stalled, we believe it is important to note that disagreements between Germany and France are not new and that there have been several compromises between the two countries during the crisis. As such, until there are signs that the deal is about to fall apart, we feel it is probably best to assume that the powers-that-be will not drop the ball here. In short, there is just too much at stake – and they all know it.

 

Remember, you are in control your email alerts! You can receive alerts for more than 25 free research report alerts including: The “10.0” Report, The Insiders Report, ETF Leaders Report, and The Focus List.