Europe Weighs Speedier Enactment of Permanent Rescue Fund to Stem Crisis
By James G. Neuger and Rainer Buergin – Sep 24, 2011
European governments are exploring speeding the start of a permanent rescue fund for their cash- strapped economies amid fresh signs they may bolster efforts to halt the worsening sovereign debt crisis.
Currently scheduled to start operating in July 2013, senior finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, a year earlier, according to a document prepared for the meetings and obtained by Bloomberg News.
As Greece’s prospects darken and the 18-month debt crisis threatens to tip Europe and the global economy back into recession, the euro area’s managers are stepping up efforts to identify measures that can stop it from spreading. Their strategy to date has been criticized at the annual meetings of the International Monetary Fund and World Bank, which continue today in Washington.
“Patience is running out in the international community,” U.K. Chancellor of the Exchequer George Osborne told reporters yesterday.
That pressure increased after concerns that a Greek default may be inevitable helped push global stocks into their first bear market in two years. Economists at Citigroup Inc. said yesterday they now expect Greece to begin restructuring its debt as soon as December, while those at JPMorgan Chase & Co. said the euro area will start shrinking in the fourth quarter.
U.S. stocks advanced yesterday, trimming the biggest weekly decline since October 2008 for the Dow Jones Industrial Average, amid speculation that policy makers will act to prevent the crisis from spiraling. Yields on 2-year Greek government notes nevertheless rose to 70 percent.
Drawing on paid-in capital, the ESM will have a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.
Faster ESM enactment would yield a “more effective financing structure” that cuts the extra debt of donor countries by 38.5 billion euros, saving Germany alone 11.5 billion euros, the paper said. “This gain is to be considered as a minimum,” it said.
Asked by Bloomberg Television about bringing forward the ESM’s start date, European Union Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility.
Public debate increased this week over how to allow the EFSF to buy bonds in markets and aid banks once it is revamped about mid-October. European lawmakers may face opposition from taxpayers balking at handing over even more cash to the facility.
An alternative option, inspired by the U.S. response to the 2008 financial crisis, is to use leverage to add to the EFSF’s firepower, according to Rehn and French Finance Minister Francois Baroin.
While U.S. Treasury Secretary Timothy Geithner pitched that idea at a Sept. 16 meeting with euro-area finance chiefs in Poland, it met initial resistance from Germany, Europe’s dominant economy.
One route, proposed by economists Daniel Gros and Thomas Mayer, is for the EFSF to operate like a bank and borrow from the European Central Bank, using the bonds it purchases as collateral. Another suggestion is to guarantee ECB loans to investors who buy stressed-country debt, with the EFSF covering initial losses.
Boosting the EFSF is “unavoidable” in the long run and may be followed by the issuance of joint euro bonds, Klaas Knot, the Dutch representative on the ECB’s Governing Council, said in a De Telegraaf interview published yesterday.
The ECB may also step up its own crisis-fighting as soon as next month, Governing Council members Luc Coene and Ewald Nowotny said in Washington. Potential measures include the revival of 12-month loans to banks and Coene didn’t rule out cutting the 1.5 percent benchmark interest rate. JPMorgan Chase and Royal Bank of Scotland Group Plc predict a 50-basis point reduction when policy makers gather Oct. 6.
ECB President Jean-Claude Trichet, attending his final IMF meetings before retiring Oct. 31, said the ECB “stands ready” to keep supplying unlimited liquidity to banks and pressed lawmakers to ratify the EFSF.
Established in May 2010 after stopgap loans to Greece failed to restore market confidence, the EFSF was given a three- year lifespan amid expectations the crisis would run its course.
As Ireland and Portugal succumbed to speculative attacks, Germany then pushed for a permanent fund. Its statutes need to be approved by the 17 euro-area countries and it requires all 27 EU countries to pass a treaty amendment to become operational.
Ratification discussions have barely gotten under way. Germany won’t consider a timetable for approving the ESM until the reinforced EFSF is in place, the government said last week. German lawmakers vote to ratify the package next week.
While speedier enactment of the ESM would require donor countries to pay in as of 2012, those costs would be more than offset by switching away from the EFSF’s guarantee system, the working paper said. However, aid recipients would also have to contribute.
In a separate planning document obtained by Bloomberg News, EU officials said a buyback of Greek debt, part of the nation’s second bailout, should be broad-based and occur at the same time as a bond swap now being negotiated. The document says the operation would be open to all investors and include all of Greece’s outstanding government bonds. It also recommends making the buyback conditional on the debt swap, in order to minimize the amount of time that rating companies would consider Greece to be in “selective default.”
German Finance Minister Wolfgang Schaeuble suggested yesterday the terms of Greece’s international rescue may need to be revised. “One has to see whether what has been envisaged in June, July is still sustainable in the light of more recent developments,” Schaeuble told reporters in Washington. At the same time, he said that “to speculate on this at the current juncture would be wrong.”
Greek Prime Minister George Papandreou said yesterday his government was determined to proceed with the implementation of the July 21 decision for a second financing package.
“Since much is said and written, many scenarios, I want to stress once again, that our decision is to complete the July agreement,” he said.
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