Brussels, 08/11/2011 (Agence Europe) - Eurozone finance ministers are working apace to expand the lending capacity of the EFSF bailout fund (European Financial Stability Fund) as agreed by the eurozone summit on 27 October (see EUROPE 10483) to prevent the sovereign debt crisis spreading to Italy (see separate article). The chair of the Eurogroup, Jean-Claude Juncker, said on Monday evening, 7 November: “The aim is to complete legal and operational work by the end of November.” He hoped the Eurogroup would decide on Monday 28 November on the details of how the EFSF bailout fund was to be increased. In the meantime, key financial stakeholders would be consulted to test out the various options under consideration.
The EFSF's executive director, Klaus Regling, said that two approaches were on the table: - using the fund as insurance for financial bodies investing in struggling eurozone countries' bonds; - creating joint investment vehicles, possibly as part of the IMF, to attract public and private investment from around the world; or a combination of the two options to increase the EFSF's lending capacity to a €1 trillion from the current €440 billion, without changing the national guarantees already provided. On the first option, Regling said it might be possible for the certificates issued by countries as backing for sovereign debt to be sold on the open market independently of the debt itself, like credit default swaps. On the second option, work is continuing in the eurozone hand-in-hand with the G20 on increasing IMF resources and is likely to be complete by February 2012, explained Juncker (see EUROPE 10489).
After postponing the sale for a few days, the EFSF found it difficult on Monday 7 November to shift bonds worth €3 billion because investors demanded higher risk premiums than for previous emissions. Regling said the yield was the highest yet, but market conditions are extremely difficult because of political crisis in Greece and Italy, and lack of information about how the fund will be increased. Some commentators say that the hike in interest rates on EFSF loans is also due to the fact that investors have already calculated in a downgrading in the French debt, which will have a knock-on effect on the European bailout fund.
ECB. The two options for increasing the EFSF emerged from a compromise between Germany and France, the first refusing to countenance the ECB being the lender of last resort (wanting the bank to remain independent) and the second fearing that any increase in national funding for the ECB would lead to a downgrading of France's debt. At the G20 summit in Cannes, the United States put pressure on Germany to reconsider its position. The Guardian newspaper reports that the British prime minister, David Cameron, said on Monday that it was hard to understand “why some in Europe are so opposed to the ECB being more of a monetary activist. The G20 withheld specific IMF commitments at this stage precisely because we wanted to see more concrete action from eurozone countries to make their firewall credible.” In Cannes, the big economic powers agreed to increase the IMF's coffers to enable it to continue to ensure financial stability around the globe, but did not explicitly offer to help the eurozone. (MB/transl.fl)