Sources in Brussels added that Spain and Italy will only be offered the facility if they commit to further austerity and structural reforms to demonstrate that their public finances can be put in order over the coming years.
Posted by seumasach on October 22, 2011
22nd October, 2-11
Discussions have turned to using the €440bn (£383bn) European Financial Stability Facility (EFSF) as bulk insurance for another fund backed by private investors.
This second “special purpose vehicle” (SPV) would be used to buy new and existing eurozone sovereign debt, with a particular focus on Spain and Italy. The EFSF would provide blanket first-loss protection to the second fund, which the authorities hope could top €2 trillion.
Such a structure would echo the off-balance sheet “conduits” set up by the banks in the build-up to the financial crisis. But the attraction for the eurozone authorities would be the ability to create a larger bail-out fund than by offering specific insurance on countries’ sovereign debt.
Providing 20pc first-loss insurance, for example, would limit the €400bn of uncommitted EFSF reserves to €2 trillion – although insiders fear the current proposals restrict firepower to just €1 trillion.
Under the SPV plan, the fund could be as large as investors were willing to go – the appeal being the promise of higher-yielding debt backed by €400bn of protection. Asked where the funds would come from, a Brussels official said: “Sovereign wealth funds.”
Sources in Brussels added that Spain and Italy will only be offered the facility if they commit to further austerity and structural reforms to demonstrate that their public finances can be put in order over the coming years. In addition, investments made through the SPV may come with conditions that require Italy and Spain to stick to austerity programmes and fiscal targets – an attribute particularly appealing to the Germans.
Debate about how to increase the firepower of the EFSF has been raging in Brussels, though all are agreed that €440bn is not sufficient. French President, Nicolas Sarkozy, wants to create a de-facto bank, with the EFSF supported by funding from the European Central Bank (ECB). However, the German Chancellor, Angela Merkel, is adamant the ECB is not involved. Instead, she supports the idea of first-loss insurance.
Germany appears to have won the battle, with French Finance Minister, Francois Baroin, saying on Friday: “Tapping the central bank is not a definitive point of discussion for us, he said. What matters is what works.” Dutch Finance Minister, Jan Kees de Jager, later added: “The principle that we leverage the EFSF with private money is being subscribed by everyone but the level of success is uncertain. How much can we raise, that is being looked at.”
However, there are concerns France’s credit rating could be jeopardised due to the risk of losses on the €158bn of guarantees it has provided the EFSF. Moody’s last week warned that France’s rating could be threatened by supporting other eurozone nations.
To protect France’s rating, the bolstered EFSF may be restricted to buying just Spanish and Italian debt. Even after recent downgrades, Italy’s rating is A2, Spain’s is A1, while Greeceis rated as junk.