In Europe: Rescue Fund Overhaul to Enable 10% Lend of National Economy

20 October 2011

Draft of Eurozone bailout plans quantifies the reach of assistance. German lawyers argue that it would shift burden to taxpayers.

Europe’s new bailout fund may be authorized to provide credit lines amounting to as much as 10 percent of a country’s economy, a draft document shows. Some German lawmakers said that would put an intolerable burden on taxpayers.

The enhanced fund, called the European Financial Stability Facility, may be able to offer loans to countries “before they face difficulties raising funds” in bond markets, the draft guidelines obtained by Bloomberg News show. The document also says that the EFSF, which is authorized to buy government debt, should buy no more bonds in the primary market than private investors.

Lawmakers from German Chancellor Angela Merkel’s coalition said the changes, if approved at an Oct. 23 European Union summit in Brussels, may shift intolerable burdens to German taxpayers.

“If you open the door to credit facilities of this enormous scale, they’ll be tapped,” Frank Schaeffler, a lawmaker specializing in finance affairs from Merkel’s Free Democrat Party junior partner, said in an interview today. “This is not what we mean by ring-fencing Italy and Spain. How can we create a fund big enough for this? This is surely not in Germany’s interest.”

‘Massive’ Firepower

Italy’s real gross domestic product stood at 1.6 trillion euros ($2.2 trillion) at the end of last year, according to figures published by theInternational Monetary Fund in Washington. The GDP tally would mean Italy could tap a “typical” precautionary loan of up to 160 billion euros, according to the EFSF draft. Spain’s GDP amounted to 1.1 trillion euros last year.

As the summit approaches, the euro-region’s biggest financial backers Germany and France are still at odds over how to expand the EFSF’s firepower, accommodating new tools from precautionary loans to buying bonds in primary and secondary markets. The draft EFSF guidelines make no mention of how to boost its 440 billion-euro firepower.

France favors creating a bank out of the EFSF, boosting its financial clout with backing from the European Central Bank, a proposal that Germany rejects, Finance Minister Wolfgang Schaeuble told lawmakers in Berlin this week. French Prime Minister Francois Fillonsaid today that the euro region should agree to use leverage to make the region’s financial support fund “massive.”

Don’t Turn to ECB

“Some would favor turning to the ECB. This is ruled out by European treaties,” Schaeuble told reporters in Berlin today. “There can be no doubt that the German government will never agree to such a solution.”

European leaders on July 21 pledged to increase the bailout funds as evidence mounted thatGreece needed further aid and the cost of selling Italian and Spanish debt soared. The German parliament last month approved legislation to revamp the fund while Schaeuble vowed that “efficient use” of its capital stock would not entail raising Germany’s burden of 211 billion euros.

The draft guidelines show that the enhanced EFSF may offer two types of “conditioned credit,” depending on the severity of the threat to their financial health. Member states may access loans “swiftly” to prevent a crisis, with loans not merely to be seen “as a liquidity facility,” the draft states.

Bond Purchases

The draft also addresses bond purchases, advising that the euro-region financial backstop should buy no more government bonds than private investors in any primary market purchase. It proposes four options for using the debt.

Primary-market purchases by the enhanced EFSF generally should be limited to no more than 50 percent of the final issued amount, say the draft guidelines. The EFSF should participate at the weighted average price of the auction, it said.

“That means that EFSF’s share is no larger than the share bought by the market,” the draft says. “It gives an incentive to the issuer to accept market bids, because for each million of accepted market bids the member state will receive an additional million from EFSF.”


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