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Oct. 27 (Bloomberg) -- European Central Bank council member Jens Weidmann said he’s “worried” about proposals to increase the firepower of Europe’s rescue fund through leverage.
“The leverage instruments that have been tabled are similar in their design to those that helped to cause the crisis,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Munich today. “I consider it very important that all aid extended to member states under threat should only be in the form of loans.”
European leaders at a summit in Brussels early today backed two ways of leveraging up the 440 billion-euro ($622 billion) rescue fund, which was designed last year to bail out smaller countries engulfed by the sovereign debt crisis such as Greece, Ireland and Portugal, and lacked the heft to protect Italy, the euro area’s third-largest economy.
Under plans to be spelled out in November, the fund, known as the European Financial Stability Facility, will be used to insure bond sales and to create a special investment vehicle that would court outside money from public and private financial institutions and investors.
A Bundesbank spokesman said Weidmann’s comments don’t necessarily mean the bank opposes some form of EFSF guarantee on bond sales, which is a proposal backed by the German government.
Still, Weidmann said any aid given by the EFSF must impose strict conditions on the recipients in order to give the correct incentives for sound fiscal policies. He said while plans for the fund are still taking shape, any aid other than loans would be outside the EFSF’s framework agreement. Leveraging would also increase the risk of losses.
“Against this background, I’m worried about the new instruments,” he said.
Weidmann said it remains unclear how some of the decisions taken at the summit, such the agreement by private investors to write down the value of their Greek bonds by 50 percent, will be implemented, making it difficult to give a full assessment.
However, he said the debt restructuring should “under no circumstances” be allowed to set a precedent in the euro area as a “more comfortable way out of self-inflicted problems.”
--With assistance from Oliver Suess in Munich. Editors: Matthew Brockett, Craig Stirling
To contact the reporters on this story: Jeff Black in Frankfurt at email@example.com; Gabi Thesing in London at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com