EU Said to Weigh Combined $1.3 Trillion Fund

By James G. Neuger - Oct 21, 2011 3:15 AM GMT+0700

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said.

Negotiations over pairing the two funds as of mid-2012 accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders.

Disclosure of the dual-use option helped reverse declines in U.S. stocks and the euro on speculation it could help break the deadlock among European leaders. Their wrangling led to the scheduling of a summit three days after an Oct. 23 gathering.

“Incrementalism is better than holding pat,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co., in a telephone interview from London. “This is incrementalism.”

The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece that will run for up to 30 years. It is slated to be replaced by the European Stability Mechanism, which will hold 500 billion euros, in mid-2013.

Permanent Fund

A consensus is emerging to start the permanent fund in mid-2012, the people said. During the transition between the two funds, euro-area governments originally agreed to cap overall lending at 500 billion euros, a figure deemed sufficient when Greece, Ireland and Portugal were the primary victims of the debt crisis.

Widening bond spreads in Italy, Spain, Belgium and France have thrown off those calculations, with multiple uses --primary and secondary market bond purchases, credit lines and bank aid in addition to loans to governments -- now planned for the rescue instruments.

Officials have discussed scrapping Article 34 of the ESM treaty, which sets the combined lending cap, the people said. A revised treaty is due to be signed by the end of November and requires approval by the 17 euro-area governments, usually in parliamentary votes.

Parliamentary ratification has snagged Europe’s crisis response so far. Germany’s parliament attached conditions to its approval of the EFSF’s latest upgrade and the ratification fight in Slovakia cost the prime minister her job.

U.S. stocks gained today, with the Standard & Poor’s 500 Index adding 0.5 percent after losing as much as 1 percent. The euro climbed to $1.3781 in New York from as low as $1.3656.

ECB Opposition

The focus on the lending ceiling came after central bankers ruled out giving the EFSF a banking license, blocking the most potent option for scaling it up. France has pushed Germany to go beyond a less powerful, ECB-backed option of using it to insure 20 percent to 30 percent of new bond issues.

Still, the 280 billion euros left in the EFSF cannot be wholly committed to bond insurance, since that would drain the fund to zero, the people said. Instead, finance ministers are likely to decide on the use of the EFSF’s instruments on a case- by-case basis, the people said.

Faster startup of the ESM would widen Europe’s options and save money, the people said. The ESM will operate with paid-in capital, moving away from the guarantee-based system that complicated the EFSF’s use.

While speedier enactment would require donor countries to pay in as of 2012, those costs would be more than offset by switching from the guarantee system, the people said. Donor countries would save 38.5 billion euros, with Germany saving 11.5 billion euros and France 8.6 billion euros, according to staff estimates reported by Bloomberg News on Sept. 24.

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