Germany shatters 'dreams' of quick fix to crisis

Europe's options for overcoming the debt crisis narrowed as Germany doused expectations of a breakthrough at this weekend's summit and central bankers baulked at extended bond purchases.

European stocks and the euro reversed initial gains yesterday, slumping after German Chancellor Angela Merkel's office knocked down what it called "dreams" that next Monday's summit would be the last word in taming the crisis. Christian Noyer, head of France's central bank, ruled out a ramping up of the European Central Bank's bond-buying programme as part of a multi-pronged strategy to shield countries like Italy.

While Group of 20 finance ministers and central bankers pressed European Union leaders to set out a strategy by the end of the week, divisions flared over an emerging plan to avoid a Greek default, bolster banks and curb contagion.

"We're really in a bind here," Carl Weinberg, founder and chief economist at High Frequency Economics, said. "We have a lot of egos, a lot of national interests, a lot of political considerations, and that's just hampering us from getting to a solution."

The ECB said yesterday it bought €2.2 billion ($3.8 billion) of bonds last week, the least since it restarted the market support programme in August over the objections of Germans on its council. While looking to exit the bond-buying business, the ECB also opposes the use of its balance sheet to boost the government-financed €440 billion rescue fund with enough firepower to do that job.

Merkel's spokesmen Steffen Seibert said that EU leaders would not provide the complete fix that global policy makers are pushing for at their Brussels summit.

Merkel had made it clear that "dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won't be able to be fulfilled," Seibert said in Berlin. The search for an end to the crisis "surely extends well into next year".

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe's emerging crisis plan. Providing a week to act, they set Monday's meeting of European leaders as the deadline.

On the summit agenda is how any recapitalisation of Europe's banks "might be carried out in a co-ordinated way" and how to make the European Financial Stability Facility, the EU's rescue fund for indebted states, as effective as possible, Seibert said.

The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.

In Greece, parliamentary debate is due to begin on a fresh round of austerity measures amid public protests and labour-union unrest.

Finance Ministry workers began a 10-day strike yesterday, complicating the Government's efforts to collect taxes and highlighting the mood in Europe's most indebted country as Greek lawmakers face another vote on fiscal measures due in two days. That's a showdown Prime Minister George Papandreou needs to win to ease the way for more foreign financing and stave off default.

Across Europe, obstacles to an accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe's capitals over how to multiply the firepower of their bailout fund and recapitalise financial institutions. At stake is confidence in the 17-nation currency union that Merkel stresses she wants to preserve.

Greek bond losses of as much as 50 per cent envisaged in Europe's plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said.

In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic control.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses on Greek holdings difficult, Deutsche Bank chief executive officer Josef Ackermann has said.

"The problems in the euro zone are chronic" and "won't go away," said Nouriel Roubini, chairman and co-founder of Roubini Global Economics.

He said the EFSF needed to be more than four times its current size to be effective. Bloomberg