Germany Approves Bigger Bailout Fund, Ahead of Summit

Posted October 26th, 2011 at 9:45 am (UTC-5)
Leave a comment

Germany, with Europe’s biggest economy, approved a sharp increase Wednesday in the continent’s bailout fund to assist debt-ridden countries.

The German parliament voted overwhelmingly to more than double the size of the fund to about $1.4 trillion. That gave Chancellor Angela Merkel new clout ahead of a late-day summit of European leaders as they seek to craft a plan aimed at resolving the continent’s government debt contagion.

She told lawmakers that the world is watching to see whether Europe can solve what she described as its “most serious crisis since the end of World War Two.”

Mrs. Merkel called on banks holding Greek debt to forgive 50 percent of the amount the Athens government owes so that it can regain its economic footing over the coming decade.

The Brussels summit is the second in four days for the European leaders. They are attempting to resolve a two-year-long crisis that in recent weeks has roiled international financial markets fearful of a Greek default on its obligations and the spread of the debt contagion to bigger European economies in Italy and Spain.

But agreement on terms of the debt-relief plan has proved elusive, leaving some analysts to question whether the heads of state will be able to keep their pledge to complete the plan on Wednesday.

Drafts of the plan call for European banks to forgive billions of dollars of debt for Greece — perhaps $243 billion or more — and to sharply increase their own cash reserves by about $150 billion. At the same time, the size of the continent’s bailout fund would be boosted to assist other debt-ridden countries.

Greek Prime Minister George Papandreou called the impending decisions “a critical time,” requiring European leaders to “remain clear-headed and calm.”

European leaders want banks holding Greek debt to write off as much as 60 percent of the money they are owed, nearly three times the amount they agreed to in July when Greece’s second bailout in two years was approved. The banks are offering to assume losses of 40 percent.

While the immediate focus has been on debt-ridden Greece, Mrs. Merkel and French President Nicolas Sarkozy pressed Italian Prime Minister Silvio Berlusconi to move faster to adopt new economic reforms to stave off the need for an Italian bailout.

By late Tuesday, Mr. Berlusconi reached agreement with his Northern League coalition partner on austerity measures to send to the European Union ahead of the summit. The governing coalition agreed to cut spending by gradually increasing the country’s retirement age to 67 by 2025.