EU’s Revamped Rescue Fund In Limbo


Eurozone ministers have decided to wait for the results of an industry consultation to work out how they will boost the financial muscle of their rescue fund, the European Financial Stability Facility (EFSF). A final decision on the revamped EFSF is now expected on 29 November.

Eurozone finance ministers met yesterday (7 November) to discuss how they would secure around €1 trillion in collateral for the EFSF as Greece’s political turmoil and Italy’s soaring borrowing costs continue to rattle markets.

But before the eurozone can agree on how to do that, investors and rating agencies, among others, will be asked what they make of the options at hand to boost the EFSF and ensure the eurozone obtains a market-proof solution.

Details on the two options to leverage the EFSF were put down in a consultation document, obtained by EurActiv.

“In its next meeting, the Eurogroup will decide on the terms and conditions of the [revamped EFSF]. Subsequently the aim is to complete legal and operational work by the end of November, followed by implementation in December,” said Eurogroup chair Jean-Claude Juncker after yesterday’s meeting.

After a wide-ranging summit of the EU’s 27 leaders on 26-27 October, markets reacted badly to the two options laid out by the eurozone to boost the EFSF from its remaining €250 billion capacity to more than €1 trillion.

‘Co-investment fund’

The summit unveiled two ways of engineering leverage for the EFSF, namely a guarantee of up to 30% for distressed sovereign debt and an investment vehicle to buy up the debt and fund bank recapitalisation.

The two schemes are a compromise between Germany’s reluctance to increase its involvement in bailouts and French fears that writedowns of French-held Greek sovereign debt threaten the country’s triple-A credit rating, a diplomatic source said.

But ahead of that meeting, the eurozone had not consulted with market participants on whether these schemes would soothe investor anxiety, the source said.

“They were written by very clever people but they did not emerge as all singing and dancing instruments ready to go,” a diplomatic source said, criticising the lack of market research done by technocrats who work for the treasuries of key countries like Germany and France.

The investment vehicle, previously dubbed a special purpose vehicle and now renamed a Co-Investment Fund, is designed to attract investors from China, Brazil or the Middle East. So far they have shown no interest in putting money on the table.

Klaus Regling, who manages the EFSF, said after yesterday’s meeting that although the two options were still on the table, both might not survive by 29 November, when eurozone finance ministers are expected to finalise the plans.

“While in principle both options are not mutually exclusive, a decision on which of Options 1 and 2 represents the most efficient use of EFSF resource can only be assessed after further dialogue with potential investors and rating agencies – and the answer may vary according to the beneficiary Member State,” the consultation document states.

Uncertainty over the future shape of the revamped EFSF has dampened investor confidence in the EU’s rescue fund, which struggled to attract demand for a €3-billion bond offering on Monday.

Quantitative easing

Meanwhile, Germany continues to rule out the possibility that the European Central Bank (ECB) would simply print money to boost the EFSF, an option preferred by markets, international creditors and countries such as France, Spain and Italy.

As the biggest contributor to ECB funding, Germany would bear the greatest burden of this so-called quantitative easing.

Sources claim that both the United States and Russia emphasised a preference for the central bank’s involvement in the EFSF at the G20 summit in Cannes last week. Both have since come out with statements reiterating their wishes.

“The participation of the European [Central] Bank in the resolution of tasks facing the EFSF would, in the current situation, not be out of place,” Russian Prime Minister Vladimir Putin told reporters in Saint Petersburg yesterday.

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