Eurozone finance ministers are to agree today (29 November) the details of bolstering their bailout fund to help prevent contagion in bond markets, under pressure from the United States and ratings agencies to staunch a two-year-old debt crisis.
Documents obtained by Reuters on Sunday showed the detailed guidelines for the European Financial Stability Facility (EFSF) were ready for approval of the Eurogroup (see background), opening the way for new operations and multiplying the fund’s effective size.
The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.
“I would expect we will be in a position to approve the guidelines at a political level,” a eurozone official involved in the preparations for the ministers’ meeting said.
The EFSF guidelines will clear the way for the €440 billion facility to attract cash from private and public investors to its co-investment funds in coming weeks.
The European Central Bank (ECB), which is now buying bonds of Spain and Italy on the market to prevent their borrowing costs running out of control, has been urging euro zone ministers to finalise the technical work on the EFSF quickly.
Officials have told Reuters that the leveraging mechanisms could become operational in January, but that may be too late.
With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the eurozone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.
The OECD rich nations’ economic think-tank said on Monday the ECB should cut interest rates and abandon its reluctance to step up purchases of government bonds in order to restore confidence in the euro area.
The ECB shows no sign of doing so yet. It bought €8.5 billion of eurozone government debt in the latest week, at a time of acute turmoil, in line with its previous activity but well short of what economists say is necessary to turn market sentiment around.
Obama’s message to EU
Sources have said the Obama administration has also urged Europe to allow the ECB to act as lender of last resort as the US Federal Reserve does.
At a EU-US summit in Washington on Monday, US President Barack Obama pressed Herman Van Rompuy, the European Council president, and José Manuel Barroso, the European Commission president, to act quickly and decisively to resolve their sovereign debt crisis, which the White House said was weighing on the American economy.
White House spokesman Jay Carney said Obama’s message, delivered to top EU officials behind closed doors in Washington, was that: “Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so.”
Hopes European leaders were readying plans that could ease strains on the eurozone boosted markets globally on Monday, although investor enthusiasm was more cautious on Tuesday in Asia where shares and the euro were steady.
Franco-German plan for ‘Stability Union’
Germany and France stepped up a drive on Monday for coercive powers to reject eurozone members’ budgets that breach EU rules, alarming some smaller nations who fear the plans by-pass mechanisms for ensuring equal treatment.
Berlin and Paris aim to outline proposals for a fiscal union before an EU summit on 9 December increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.
“We are working intensively for the creation of a Stability Union,” the German Finance Ministry said in a statement. “That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.”
Contagion spreads to France
Rumours about the threat to France’s credit rating, which have circulated for several months, illustrate how the crisis has moved inexorably from indebted peripheral nations such as Greece and Portugal to the heart of Europe.
Economic and Financial daily La Tribune reported on its website that S&P’s was preparing to change its outlook on France’s sovereign rating from “stable” to “negative”.
“It could happen within a week, perhaps 10 days,” La Tribune quoted a source as saying.
The news coincided with the warning on subordinated debt from Moody’s, which said the greatest number of ratings to be reviewed were in Spain, Italy, Austria and France, and knocked the euro a third of a cent before the currency recovered.
“Moody’s believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints,” the agency said in a report.
Rival Standard & Poor’s could downgrade the outlook on France’s top-level AAA credit status with the next 10 days, signalling a possible ratings cuts, a newspaper reported.
Italy’s yields hit record heights
Mario Monti, Italy’s prime minister and finance minister, will attend Tuesday’s meeting to explain the reforms Italy plans to undertake to regain the confidence of markets.
Saddled with debt equal to 120% of GDP and soaring borrowing costs, Italy has been battling to avoid financial disaster, which analysts say would endanger the whole eurozone.
In a sign of intense market stress, short-term Italian yields last week climbed above those of longer-dated issues. Both are higher than the 7% level widely seen as unsustainable for the country’s public finances.
The funding pressure is set to be underlined on Tuesday, when investors are expected to demand more than 7% at auction to buy three- and 10-year Italian debt.
Underlining the threat to tottering European economies, ratings agency Moody’s warned on Tuesday it could downgrade the subordinated debt of 87 banks across 15 countries on concerns that governments would be too cash-strapped to bail them out.