Oct. 20 (Bloomberg) -- Bundesbank board member Andreas Dombret said assigning a lower-than-AAA credit rating to Europe’s bailout fund, the EFSF, would boost its firepower and increase the incentives for sound fiscal policy.
“Forgoing the AAA rating would clear the way for an increase in the EFSF’s lending capacity,” Dombret said in a speech in Berlin today. “Contrary to leverage, giving up on the best rating possible would mean the risks for the taxpayer would be lower.”
The idea of a lower rating for the European Financial Stability Facility was floated by Bundesbank President Jens Weidmann in a parliamentary hearing on Sept. 19. It comes as a split between France and Germany over how to increase the fund’s effectiveness threatens to scotch plans to end Europe’s debt crisis.
The EFSF’s lending capacity is currently limited to 440 billion euros ($608 billion) even though guarantees from euro- area governments amount to 726 billion euros. That’s because in order to achieve a AAA rating, an overguarantee of 165 percent is applied.
Dombret said a lower rating would relax those limits and free up more cash for the fund to lend. This would also result in a higher interest rate on the loans, which would increase the incentives for countries receiving aid to lower their debt and return to funding from financial markets as soon as possible, he said.
French Prime Minister Francois Fillon stepped up calls yesterday for the EFSF to be turned into a bank so that it can leverage itself via the European Central Bank. Germany and the ECB have rejected using the central bank’s balance sheet, saying it would be tantamount to monetizing state debt. Germany has instead endorsed enabling the EFSF to insure a portion of cash- strapped nations’ bond sales.
“Leveraging via a bank license must absolutely be rejected,” Dombret told lawmakers from German Chancellor Angela Merkel’s Christian Democrats in the speech.
The Bundesbank board member added that Greece, which awaits a green light over the payout of a sixth tranche of European Union and International Monetary Fund aid, must fulfill the conditions of its adjustment program.
“Consequently, a Greek insolvency cannot inherently be ruled out,” Dombret said.
--Editors: Matthew Brockett, Simone Meier
To contact the reporter on this story: Jeff Black in Frankfurt at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com