A day later, holes in EU 'grand solution'

A trillion euro bailout to save the EU’s single currency is in danger of unravelling after Germany’s central bank warned that the rescue measure was too dependent on the high-risk deals that caused the economic crisis.

Hours after an all-night summit of euro governments ended, flaws began to emerge in a package that was billed as a “grand and comprehensive” solution to the European debt crisis.

The concerns were led by Germany’s powerful central bank, which expressed fears that a plan to leverage a €440 billion euro-zone rescue fund to amass a “fire power” of €1 trillion, resembled the risky finance methods that triggered the crisis in 2008.

EU leaders are expected to sanction the establishment of a so-called special purpose investment vehicle, or SPIV, to be set up in the coming weeks. It is aimed at attracting investment from countries such as China and Brazil.

Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds.

“It is tied to higher risks of losses and to increased sharing of risks,” said Weidmann. “The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”

Bill Gross, the founder of Pimco, the world’s largest bond fund, said the eurozone rescue would be a temporary fix for markets and that the fund could pose a high-risk for investors.

“No bazooka but should stabilize markets for now,” he messaged on the Twitter site on Thursday. “Watch out if the plan is a giant SIV (structured investment vehicle) with levered risk.”

The plan to increase the European Financial and Stability Facility (EFSF) to €1  trillion on paper was attacked by economists as not enough to “stave off” worsening debt problems in Italy and Spain.

In a survey of economists, 26 of 48 thought the firepower was not enough. A plan for a €2 trillion fund was shelved after German and French opposition.

Doubts also emerged over the lack of detail on a proposal to let Greece help pay its rapidly mounting debt burden by negotiating a voluntary “haircut” that would allow it to write off about half of its debts.

Under the deal, private sector banks agreed to start negotiations on a nominal 50% cut in bond investments to reduce Greece’s debt burden by €100 billion, cutting its debts to 120% of GDP by 2020, from 160% now.

At the same time, the euro zone will offer “credit enhancements” or sweeteners to the private sector of €30 billion.

Senior EU officials were left admitting that there was no agreement on how the deal would translate into a reduction in the Greek debt.

Greek opposition parties to the Left and Right united to condemn the eurozone deal amid mounting social conflict.

Antonis Samaras, the conservative opposition leader, said: “We are not closer to the solution but are faced with nine years of collapse and poverty.”

Dimitris Papadimoulis, a Left-wing MP, said new EU powers in the agreement to impose austerity measures on Greece had a conflict of interest. “Those who monitor us do not have our interests in mind,” he said. “Their priority is that we pay back our loans.”