Gonzi heads for critical euro summit, as Fitch confirms Malta's 'A+' credit rating

Today’s talks have been overshadowed yesterday by the cancellation of an Ecofin meeting for EU finance ministers, suggesting that a solution is yet to be reached. The postponement however, is being downplayed by governments.

This year alone,  EU Heads of Government have met 20 times as countries like Greece, Italy and Spain struggle with huge debt and low growth.

The leaders of the richest countries in the 17-member eurozone, France and Germany, are still arguing over how best to calm jittery markets and ensure the contagion does not spread to the banking sector.

Banks hold billions in government bonds, and there are concerns that a default by a country such as Greece could trigger a financial crisis similar to that which followed the Lehman Brothers collapse in September 2008.

The European Council summit will focus on three main pillars: reducing the amount Greece owes to banks and investors, beefing up the bailout fund and pumping more cash into the banks to give them a cushion of capital.

But France and Germany disagree over how the bailout fund, called the European Financial Stability Facility (EFSF) should be given more firepower.

Paris wanted to leverage the €440 billion in the fund by harnessing it to the firepower of the Europeab Central Bank (ECB), but Germany wants the Frankfurt-based ECB to remain independent.

It is likely the leaders will explore ways of allowing the EFSF to insure bondholders from some losses, while creating a "fund within a fund" to allow foreign investors to dabble in the so-called secondary bond markets.

As for Greek debts, banks and investors could be asked to swallow write-downs of up to 60%, much larger than the 21% deemed sufficient in July.

But the banks may have little choice, nor will they be able to resist demands to raise more capital to increase security in the system; a total of 108bn euro is being mooted.

German Chancellor Angela Merkel will be testing her plans for the EFSF at the Bundestag before the full summit, which could give her more sway in negotiations.

Merkel and French President Nicolas Sarkozy have also demanded that Italian Prime Minister Silvio Berlusconi present firm plans to promote growth and reduce Italy's massive debt in time for Wednesday's meeting.

But it appears the broad structure of the rescue package is in place, as separate meetings of foreign ministers from the eurozone countries and from the entire union have been delayed until after the summit.

That could mean more flesh will be put on the bones of any subsequent statement later in the week, perhaps staggering the effects on the markets.

Meanwhile, Malta had its long-term foreign and local currency issuer default ratings confirmed at ‘A+’ by credit ratings agency Fitch.

The news comes as a sigh of relief for Prime Minister Lawrence Gonzi’s government, after last month’s downgrading from A1 to A2 by Moody’s in the wake of the current euro crisis.

Fitch noted that Maltese banks survived the international banking crisis and recession “virtually unscathed” and required no direct financial assistance from the government.

"The authorities' conservative approach to banking and its supervision has served Malta well, as has the banks' own business model which emphasises retail customer deposits as the main source of finance for lending. Credit expansion, which was high up until the recession, is now growing only moderately," the agency said.

"Malta ranks highly in the traditional international governance indicators and is noted for its stable government, effective civil institutions and lack of corruption. Its GDP per head is above the 'A' rated median. Its euro area membership is a source of strength and protects it from currency crises, notwithstanding a large current account deficit which continues to be more than fully funded by foreign direct investment," it added.

The main drivers of future changes in the rating include resolute fiscal consolidation on the positive side. However, on the negative side, Malta remains a small country with a large banking system leaving it vulnerable to the ongoing financial stress in the euro zone. Over the longer term, reform of the state pension system to maintain affordability in the face of a rapidly rising population 'is essential' Fitch added.