Bloomberg News

Euro Leaders Said to Count on Further ECB Bond Purchases

November 02, 2011

(Updates with cancellation of EU finance ministers’ meeting in 13th paragraph, debate on ESM-EFSF combination in 16th. For more on Europe’s debt crisis, see EXT4.)

Oct. 25 (Bloomberg) -- Euro-area leaders are counting on the European Central Bank to continue buying troubled countries’ bonds as a key element in the debt crisis rescue package to be hammered out tomorrow, three people familiar with the deliberations said.

Leaders are debating how to obtain an ECB signal without appearing to give orders to the politically independent central bank, said the people, who declined to be named because decisions won’t be made until tomorrow’s summit. The central bank has bought 169.5 billion euros ($236 billion) in bonds so far, in an increasingly controversial policy that contributed to decisions by both Germans on its council to quit this year.

The ECB will have to stay committed because mechanisms to leverage the government-financed rescue fund won’t be immediately ready after the summit and may not deliver enough firepower, the people said.

“We are moving in the direction that we would rather have a statement from the ECB on what they would like to do,” German Chancellor Angela Merkel told reporters in Berlin today. The idea is to avoid “a misunderstanding that policy leaders expect something from the ECB.”

Enhanced Bailout Fund

An ECB spokesman declined to comment. Political leaders want the ECB to be bolder than in August when it flagged the restart of the bond purchases in response to reporters’ questions instead of making an upfront announcement, the people said.

On one estimate, it will take until mid-November to ready the scaled-up European Financial Stability Facility, though the leaders will press finance ministers to work out the fine print before next week’s Group of 20 summit, the people said.

Talks on boosting the EFSF’s 440 billion-euro war chest have centered on two models -- using it to insure bond sales and to fund a special investment vehicle that would court outside money.

Discussions of the second option only got under way this week, with little detail filled in, the people said. Its effectiveness would hinge on negotiations with credit-rating companies and international investors, they said.

‘Non-Standard Methods’

The ECB’s role is complicated by the fact that it will be represented in Brussels by President Jean-Claude Trichet, who leaves office Oct. 31. Trichet’s successor, Mario Draghi of Italy, isn’t scheduled to attend the summit.

After chairing his last interest-rate meeting on Oct. 6, Trichet indicated that the bolder crisis-management steps by governments would give the ECB cover to maintain the bond program. Draghi on Sept. 5 called the policy “temporary.”

While Merkel said a line in a draft summit statement about ECB “non-standard methods” doesn’t point to the bond program, the central bank uses the term to refer to a host of emergency steps including the bond purchases.

The ECB was at the center of the leveraging debate as well, with Germany deflecting French calls to turn the rescue fund into a bank that could borrow potentially limitless sums from the central bank.

The scope of tomorrow’s decisions was thrown into doubt when the Polish government said all 27 European Union finance ministers won’t meet beforehand as previously scheduled. That meeting was to focus on bank recapitalization.

Lending Cap

The 17 euro zone countries are close to unanimity on speeding the creation of a permanent rescue fund, the European Stability Mechanism, the people said. It would be up and running in mid-2012, a year ahead of schedule.

Debate is continuing over how to pair the 500 billion-euro ESM with the current rescue fund, which is scheduled to be wound down even though its loans for Greece’s second bailout package will run for up to 30 years.

Leaders will consider amending or scrapping a clause in the ESM statute that caps lending during the transition phase between the two funds at 500 billion euros. One proposal is to leave the EFSF’s commitments -- 150 billion euros and counting - - untouched by the cap.

In case the EFSF is fully spent once the ESM takes over, getting rid of the limit would give Europe twin funds with combined clout of 940 billion euros. Also up for debate is whether to tone down the ESM’s provisions for bondholder burden- sharing, the people said.

All EU leaders meet at 6 p.m. tomorrow in Brussels, followed at 7:15 p.m. by the euro summit.

--With assistance from Jeff Black in Frankfurt and Patrick Donahue in Berlin. Editors: Patrick Henry, Jones Hayden

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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