Bloomberg News

Euro Rescue Fund Must Await ‘Guidelines’ to Use New Powers

October 14, 2011

(Updates with EFSF debt-guarantee possibility in 11th paragraph. See EXT4 <GO> for more on the debt crisis.)

Oct. 14 (Bloomberg) -- The euro area’s debt-crisis fund will be able to use its new powers, including the right to buy government bonds, as soon as political guidelines on the bigger role are completed, the organization’s deputy leader said.

Christophe Frankel, deputy chief executive officer of the 440 billion-euro ($607 billion) European Financial Stability Facility, also said the EFSF would start selling short-term debt as its funding expands to cover the new tasks as well as a planned second aid program for Greece.

The EFSF has gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and grant aid to banks as the region’s debt troubles have spread. The EFSF’s role so far has been to sell bonds to finance rescue loans.

“We are ready to go, we just have to wait for the guidelines to be finalized,” Frankel, who is also the EFSF’s chief financial officer, told reporters today in Brussels. “We expect the guidelines to be approved soon.”

The euro area is equipping the EFSF with greater authority in a bid to prevent Spain and Italy from being engulfed by the Greece-triggered crisis and to relieve the European Central Bank of secondary-market bond purchases. The process risks adding political layers to the region’s capacity to fight the borrowing-cost rises that have forced the Greek, Irish and Portuguese governments to accept rescue packages.

Euro-Area Capitals

While ratification of the new EFSF powers has been completed in the 17 euro-area capitals after a Slovak parliamentary decision yesterday, the details of the new tools are still being worked out as government heads prepare for a crisis meeting on Oct. 23. The EFSF would use the new instruments only after a request by a euro-area government and after aid conditions are fixed.

“All instruments are linked with appropriate conditionality,” said Frankel.

One question is whether the Luxembourg-based EFSF has enough resources for its new tasks, provoking a debate about possible leverage to enhance the facility’s clout. The AAA rated EFSF is backed by guarantees from euro-area governments.

“We must optimize the efficiency by leverage effects,” European Commission President Jose Barroso said today in Saint- Cyr-sur-Loire, France. The commission is the European Union’s executive arm.

Leverage Options

One option is to let the EFSF guarantee a portion of national debt sales in the euro region.

The EFSF might be allowed to guarantee as much as 30 percent of new bond sales by a distressed euro-area government, said a person familiar with the matter. Any such authority would likely cover at least 20 percent, the European official said today on the condition of anonymity.

A separate idea of tapping the ECB to boost the EFSF’s firepower has been opposed by the Frankfurt-based central bank and some governments.

Frankel declined to comment on specific leverage options, saying “any decision to use the EFSF’s capacity more efficiently will not lead to an increase in guarantees from the member states and there will therefore be no consequence on the EFSF’s triple A credit rating.”

The EFSF may have to finance more than 70 billion euros of the planned second aid package for Greece. The initial Greek rescue of 110 billion euros in May 2010 was composed of loans directly from euro-area governments and the International Monetary Fund.

Portugal’s Rescue

The EFSF is providing 17.7 billion euros under Ireland’s aid package of 67.5 billion euros and 26 billion euros under Portugal’s rescue of 78 billion euros. The facility’s funding strategy so far has been to sell “benchmark” bonds with maturities of five years or 10 years.

“Funding for Greece and the new tasks will lead to an increase in our funding volumes,” Frankel said. “Our funding strategy will become more flexible and more diversified. This also means that we will implement a short-term funding strategy which could be structured around a bill program.”

He declined to comment on the timing of any short-term debt sales. So far, the EFSF has sold two five-year bonds and one 10- year security, all in the first half of this year and in support of Ireland and Portugal.

Benchmark Bonds

Yesterday, the EFSF announced changes to its bond-sale program for the two countries in the second half of 2011. Instead of selling four benchmark bonds in the period, as outlined in mid-May, the fund will sell one security for Ireland valued at 3 billion euros and delay issues planned for Portugal until “early 2012.”

Frankel predicted that spreads on EFSF bonds will narrow following a widening that he linked to “uncertainty” surrounding the ratification process for the fund’s new powers.

“Now that these issues are in the process of being solved, spreads should naturally tighten,” Frankel said. He also said the EFSF intends to continue issuing debt mainly in euros.

--With assistance from Helene Fouquet in Saint-Cyr-sur-Loire, France. Editors: Jones Hayden, Peter Chapman

To contact the reporter on this story: Jonathan Stearns in Brussels at

To contact the editor responsible for this story: James Hertling at

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