Bloomberg News

EFSF Leveraging May Include Investment Fund, Draft Paper Says

November 07, 2011

Nov. 7 (Bloomberg) -- The euro area’s plan to leverage its rescue facility may include the creation of an investment fund that would buy sovereign bonds in the primary and secondary markets with backing from private investors who would share the risk.

The “Co-Investment Fund” would be a subsidiary of the 440 billion-euro ($605 billion) European Financial Stability Facility and be “designed to attract external capital sources,” according to a paper discussed today in Brussels by euro-area finance ministers. Bloomberg obtained a copy of the document, which says risk sharing for the fund -- or CIF -- would be reached through “different capital layers with different loss absorption.”

“The CIF will have a nominal equity capital, together with a first loss layer provided by the EFSF, above which would be a capital instrument which participates in the majority or all of the gains made by the CIF,” says the document. “There is also the potential for a third tranche of rated senior debt instruments. The latter tranches would be freely traded instruments and would mature in line with the life of the CIF.”

The idea is one of two EFSF-leveraging options that also include a guarantee by the Luxembourg-based facility of a portion of new debt sold by a distressed euro-area government. The region’s finance ministers intend to complete “legal and operational work” on the matter by the end of November, according to the paper, which says “implementation” would take place in December.

The question of leveraging the AAA rated EFSF has arisen because of the political hurdles in countries such as Germany, the biggest European economy, to increasing the national guarantees that back the facility. The EFSF, established last year to sell bonds to finance loans for distressed euro nations, has since also gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and recapitalize banks as the Greece-triggered debt troubles have spread.

To contact the editor responsible for this story: Jonathan Stearns at jstearns2@bloomberg.net


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