EU Leaders Face Busy Fall, Tight Deadlines

The Wall Street Journal

By CHARLES FORELLE

When Europe's leaders return from their summer break next week, they'll find plenty of work waiting. And, once again, little time in which to do it.

The European Central Bank held back a destabilizing rout that flickered earlier this month in Italian and Spanish government bonds, by continually buying them on the secondary market. But that, as a top ECB official said in a magazine interview this week, is "not a permanent structure."

It will be up to euro-zone politicians to build one. Their pre-vacation summit on July 21 laid a few bricks, but the rest exists just as conceptual drawings.

There are at least four major items on the to-do list.

The Finnish collateral pickle. One sentence, inserted into the July 21 agreement at the behest of Finland, has caused August heartburn for the officials working on the details of the second, €109 billion ($157 billion) Greek bailout.

That sentence reads: "Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising to euro area Member States from their guarantees to the EFSF."

The EFSF, or European Financial Stability Facility, the euro zone's bailout facility, acts as a special-purpose vehicle that raises money on financial markets backed by the guarantees of euro-zone countries.

Finland insists that collateral is appropriate now, and it had been discussing with Greece a plan under which Greece would set aside some of its bailout cash as a security for Finland.

Other countries wanted some, too. Since that would entail the euro-zone countries raising cash backed by their own guarantees in order for that cash to be held for them as collateral, the idea stumbled.

But Finland insists it still wants something, and discussions have turned to other options such as Greek state assets, including company shares and real estate. "We should still look for a model for collateral," Finnish Finance Minister Jutta Urpilainen said in a statement Thursday. "All the euro countries should look for a model that works for all parties."

The expansion of the euro-zone bailout fund. On March 11, euro-zone leaders agreed that the EFSF would be able to lend €440 billion to countries in trouble, instead of the roughly €250 billion it had available. They instructed finance ministers to "complete their work" in two weeks.

More than five months later, it's still not done.

Changes to the EFSF require parliamentary approval in the vast majority of the 17 euro-zone countries, and officials now say that they'll make the legal changes necessary for the lending expansion at the same as they modify the EFSF to take on new powers.

Parliaments are scheduled to begin voting on all the changes next month; Belgium will be bringing parliamentarians back from vacation to begin debates in early September; the German government says its vote will be Sept. 23.

That timeline implies that bureaucrats have only days to hammer out a legal text.

The replacement of the ECB's bond-buying program. The most important new power of the EFSF will be its ability to buy bonds on the secondary market. Such market intervention by the ECB has been critical to keeping yields of 10-year Italian and Spanish debt near 5%, a figure that permits those countries to continue raising cash from financial markets at relatively modest cost.

The ECB won't do this forever, and the EFSF is expected to pick up the baton.

But there are few details on how this will work. As it stands now, the EFSF has little of its own cash—it must borrow every time it disburses aid to a country.

Will it prefund itself before embarking on a big purchasing binge? And who will decide when to buy? Must every country agree?

These details need to be worked out.

The conclusion of Greece's private-sector debt restructuring. As part of the July 21 deal, the Institute of International Finance, a financial-sector trade group, agreed with EU authorities that 39 financial institutions holding €135 billion in Greek debt maturing through 2020 would have their repayments extended—in some cases by 30 years, and in some cases accepting losses on their principal.

Pushing those repayments far into the future is essential to alleviating Greece's refinancing crush in coming years. But since July there's been scant further detail on how many creditors are actually willing to do it, and Greece's finance minister this month suggested Greece was having trouble finding enough takers.

The IIF estimates that between 60% and 70% of bondholders intend to participate, a spokesman said, adding, "we expect participation to rise as the concrete details emerge in the near future."

If it doesn't, it's a problem: Every euro in debt that isn't extended is a euro that has to come from the rescuers, unless Greece makes a miraculous return to financial markets.

Those markets aren't confident. Yields on Greek two-year government bonds this week shot up above 40%, a level that implies investors believe a messy default is not far away.

Write to Charles Forelle at charles.forelle@wsj.com