Bloomberg News

ECB’s Noyer Says He’s ‘Open’ to a Leveraged European Rescue Fund

October 02, 2011

Oct. 3 (Bloomberg) -- Bank of France Governor Christian Noyer said he’s “open” to the idea of using borrowed money to enhance the capabilities of a European rescue fund as policy makers turn their focus to the next steps to contain the region’s sovereign-debt crisis.

“It would be unrealistic to expect an increase in the EFSF itself,” Noyer said in a speech today in Tokyo, referring to the European Financial Stability Facility. “But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”

Euro-area finance chiefs will meet today in Luxembourg to weigh the threat of a Greek default, grapple with how to shield banks from the fallout and consider a further boost to the rescue fund. A much-needed “liquidity backstop” for the region must come from governments because the European Central Bank’s mandate requires it to keep purchases of sovereign debt “extremely limited,” said Noyer, who is a member of the ECB.

German lawmakers last week approved an expansion of the rescue fund, setting the stage for the overhauled 440 billion euro ($587 billion) facility to be in place by mid-October. If approved by all 17 euro countries, the facility will obtain the powers to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Growing concerns about the possibility of a Greek default have affected French banks in particular, with shares of BNP Paribas SA slumping 16 percent last month. While French banks’ dependence on dollar-funding has made them vulnerable to the crisis, concerns about their exposure to debt in peripheral Europe is “exaggerated,” Noyer said.

Providing Assurance

Separately, he also that other central banks such as the Federal Reserve and the Bank of England have been buying “significant” amounts of government bonds, providing markets assurances against liquidity shortages.

“At the moment, the kind of insurance that most monetary authorities provide may look cheap because inflation is projected to stay low in the foreseeable future,” he said. “But this equilibrium could be unstable in a different inflation environment” and markets “seem to be aware of some inflation tail risks,” he said.

--Editors: Lily Nonomiya, Ken McCallum

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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