Debt crisis requires bigger loans and bond buy-ups

Proposals to overhaul the eurozone’s €440 billion emergency rescue fund are being prepared for the approval of government leaders at their European Union summit in Brussels on 4 February.

The European Commission wants to add to the ways that the fund can help governments with growing debt problems. Since it was set up in May, the European Financial Stability Facility (EFSF), which has the financial backing of the eurozone states, has been able to issue loans. Now the Commission is ready to float the idea of the EFSF buying up the debt of eurozone governments whose bonds are not finding buyers on the markets.

“We need to ensure the effective capacity of this mechanism and we need to widen the scope of its activities,” José Manuel Barroso, the president of the European Commission, said yesterday (12 January).

Commission allusions to “effective lending capacity” acknowledge that the fund cannot currently lend as much as €440bn.

Didier Reynders, Belgium’s finance minister, the International Monetary Fund and some members of the European Central Bank’s (ECB) governing council have all suggested that the fund should be increased to two or three times its current size.

But government spokesmen in France and Germany said yesterday that they considered the fund as it stands to be sufficient.

Barroso said that he believed an agreement was possible in time for the next European Council on 4 February. “We are asking member states to make an effort to reach consensus on this matter,” he said.

Increasing the size of the fund is less likely to win political support than changing the rules to make better use of the existing fund.

The total capacity of the EFSF was set in May at €440bn, but the amount that can be used as loans is estimated to be between €250bn and €255bn.

In order to attract and maintain a triple-A credit rating, the fund has been guaranteeing the bonds that it wants to issue at 120% of their book value, which reduces its lending capacity.

Sharon Bowles, a UK Liberal MEP who chairs the European Parliament’s economic and monetary affairs committee, said: “The problem with the fund is that once you have used about half of it you can’t use the other half.”

Olli Rehn, the European commissioner for economic and monetary affairs, said that there were “several alternatives” being discussed with member states to “reinforce lending capacity” and widen the scope of the facility.

Options include requiring countries to put up more collateral, for example by using national assets such as gold reserves, shares in publicly owned companies or revenues from roads, and for a large increase in credit guarantees from countries with strong credit ratings.

Eurozone finance ministers are likely to discuss these ideas when they meet in Brussels on Monday (17 January).

Officials yesterday played down suggestions that the fund is being bolstered to prepare the ground for bail-outs of such countries as Portugal and Spain. They reiterated that they do not envisage the EFSF being used, but that it needs to be strengthened to show the bond markets that there is no shortage of money.

Barroso said: “We believe it is important to have this instrument, as we have said, to give reassurances to the markets that the euro area stability is not in question.

“It’s a precautionary measure that makes sense when we have a common currency with different budgetary or fiscal positions. We are not with this implying in any way that we will use it for country A or country B.”

Yesterday, Portugal raised €1.25bn in an auction for four-year and ten-year bonds, the maximum amount up for sale. The yield on the ten-year bond was 6.719%, below what is deemed the critical level of 7%. The European Central Bank (ECB) had intervened this week to buy bonds and keep the yield down.

Although pressure on Portugal eased slightly, market analysts believe the country will need to follow Greece and Ireland in seeking emergency loans.

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