Bloomberg News

Euro-Area Aid Fund Revamp May Allow Loans of 10% of Economy

October 20, 2011

(Updates with euro exchange rate in sixth paragraph, secondary market purchase details starting in 15th. For more on Europe’s debt crisis, see EXT4.)

Oct. 20 (Bloomberg) -- Europe’s bailout fund may be authorized to provide credit lines of as much as 10 percent of a country’s economy, a draft document shows.

The enhanced fund, called the European Financial Stability Facility, may be able to offer loans to countries “before they face difficulties raising funds,” the draft guidelines obtained by Bloomberg News show. Credit lines for Spain and Italy, which required European Central Bank support, could reach 270 billion euros ($371 billion).

The guidelines prompted criticism from some German lawmakers who have opposed bailout aid as France and Germany wrangled over the role of the ECB in tackling Europe’s debt crisis. Finance ministers gather in Brussels tomorrow to set a common strategy, with leaders scheduled to meet Oct. 23.

“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.”

The disagreements are so deep that Germany didn’t rule out delaying the Oct. 23 meeting, Die Welt newspaper reported today, citing people close to the coalition.

‘Massive’ Firepower

Italy’s real gross domestic product stood at 1.6 trillion euros at the end of last year, according to figures published by the International 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.

The euro was little changed at $1.3770 at 3 p.m. Berlin time, after advancing 0.6 percent. The European currency gained 0.4 percent to 106.11 yen.

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.

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.

French Position

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

“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 that Greece 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.

‘Conditioned Credit’

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.

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.”

‘Volatile Markets’

The draft also spells out under which circumstances the EFSF can buy government bonds in the secondary market, citing “unusually volatile markets, unidirectional movements and widening of the bid/offer range for prices as a result of poor liquidity” as potential triggers.

The caps for bond buying programs in the secondary market for individual countries will be determined on a case-by-case basis by an EFSF working group, the draft guidelines say. The EFSF’s overall interventions will have a “more limited scope” than the ECB’s, it said.

There are four ways the EFSF can use the bonds it purchased in the primary and secondary markets. It can sell them back to the market when demand is restored; hold them to maturity; keep them as available for sale; or use them for repurchasing operations with commercial banks, the draft guidelines say.

--With assistance from Patrick Donahue in Berlin and James G. Neuger in Brussels. Editors: Patrick G. Henry, Leon Mangasarian

To contact the reporters on this story: Rainer Buergin in Berlin at; Brian Parkin in Berlin at

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

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