Bloomberg News

Brainard Says EFSF Needs to Be Leveraged to Provide Firewall

October 20, 2011

(Updates with more comments from the hearing starting in the fourth paragraph.)

Oct. 20 (Bloomberg) -- Europe needs to “leverage up” the European Financial Stability Facility to provide a sufficient firewall against a spread of its debt crisis, the U.S. Treasury Department’s top international official said today.

“EFSF will need to be leveraged up,” Lael Brainard, the Treasury’s undersecretary for international affairs, said to a Senate subcommittee. “There are a variety of ways of doing that. It’s achievable. These goals are achievable with the capital that they have but that of course is one of the key issues that will be part of their comprehensive plan.”

She said increasing the firepower of the facility is “critically important” and would provide adequate funding to Italy and Spain, backstop European banks and continue funding program countries. In her testimony before the Senate Banking Committee’s security, international trade and finance subcommittee, she called Europe’s financial crisis “the most serious risk today to the global recovery.”

“In order for Europe’s financial stability to return what they categorically need to do is take the risk of cascading defaults and bank runs off the table,” Brainard said. “They need a firewall of sufficient force and size to overwhelm the markets.”

Debt Crisis

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.

The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years.

Brainard said President Barack Obama has been engaged on the issue and on the phone with European Union leaders. Brainard said the plan on the table is the “right set of issues” and they have the capacity to solve the crisis. European leaders are focused on building a substantial firewall, a bank recapitalization plan, ensuring Greece is sustainable, and a longer term set of governance reforms, she said.

Her comments come after the Group of 20 nations’ finance ministers meeting on Oct. 14-15 and before the G-20 leaders meeting in Cannes in November. The European Union announced today that an Oct. 23 summit will now be followed by another three days later.

Subcommittee chairman Mark Warner, a Democrat of Virginia, said dragging out a resolution is not in the interests of Europe or the U.S.

“A further shock to the system coming about from a non structured default by Greece or any other country or even contagion spreading across Europe that can freeze financial markets will have a dramatic effect on our economy, an effect that if not appropriately monitored and dealt with, could even rival the challenges of 2008,” Warner said.

--Editors: Gail DeGeorge, Kevin Costelloe

To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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