By Gregory Viscusi and Rainer Buergin - Nov 30, 2011 2:31 PM GMT+0700
Euro-area finance ministers approved enhancements to their bailout fund while backing off from a target for its firepower and seeking a greater role for the International Monetary Fund in fighting the debt crisis.
The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.
“It’s very important that the IMF globally will increase its resources either by raising its capital or by bilateral loans so that it can lend more money to euro-zone countries in need,” Dutch Finance Minister Jan Kees de Jager said in an interview with Bloomberg Television after the meeting. “If we open the IMF effort, that will be sufficient together with the leverage options in the EFSF.”
After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, the euro-area ministers are under growing pressure from U.S. leaders and international financial markets to find ways to boost the EFSF’s effectiveness. They agreed on a plan to guarantee up to 30 percent of new bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.
Total Firepower
EFSF Chief Executive OfficerKlaus Regling said it is “impossible to give one number” for the total firepower of the fund, backing off an earlier goal of 1 trillion euros ($1.3 trillion). “Market conditions change over time,” he said.
Juncker said the EFSF’s capacity will be “very substantial” and will be supplemented by the IMF. The ministers “agreed to rapidly explore an increase of the resources of the IMF through bilateral loans,” Juncker said, “so that the IMF could adequately match the new firepower of the EFSF and cooperate more closely with it.”
European Union Economic and Monetary Affairs Commissioner Olli Rehn said the issue “needs to be discussed with the IMF and this work is in progress.” Neither Rehn nor Juncker named who might provide the loans. “We are together with the IMF consulting contributors through bilateral loans,” Rehn said.
The Europeans are “not there yet” in terms of fleshing out their plan enough for emerging-market nations to pledge funds to the IMF that would then aid the euro region, said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered Plc. “It does appear that we are making progress -- the question is are we making progress fast enough.”
Investment Vehicles
The EFSF bond guarantees and investment vehicles can run simultaneously and could be functioning by early next year, according to a document released by the fund. “Many investors are interested and will participate if we have a solidly commercial product,” Regling said. “But don’t expect massive inflows immediately. The needs will come over time.”
European heads of government meet on Dec. 9 in Brussels in a summit likely to be dominated by the debt crisis that began in Greece two years ago, spread to Ireland and Portugal, before driving up Italian and Spanish bond yields over the summer, and now is hurting even Germany’s ability to sell debt and threatening France’s top debt rating.
Short-Term Bills
“These decisions have clearly enhanced the capacity and flexibility of the EFSF,” said Charles Dallara, head of the Institute of International Finance, which represents more than 450 financial companies. “The EFSF can now issue short-term bills and use government bonds it may purchase on secondary markets for repo transactions.”
Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said the moves represent “some marginal technical changes regarding intervention in primary and secondary markets, but overall it’s very similar” to previously published documents on the EFSF’s role. “Dec. 9 might have more meat, hopefully, otherwise markets will be yet again disappointed.”
Germany is pushing for governance changes at next week’s summit that would tighten enforcement of budget rules, a move that might make it easier for the European Central Bank to play a bigger part in supporting euro-area nations.
Greater roles for both the ECB and the IMF are “on the table,” Belgian Finance Minister Didier Reynders said as he left yesterday’s meeting.
“The EFSF alone will not be able to solve all the problems,” Luxembourg’s Luc Frieden said. “We have to do so together with the IMF and with the ECB in the framework of its independence.”
Financial Aid
The ministers have started talks on channeling ECB loans to cash-strapped euro nations through the IMF, aiming to bring the central bank on to the front lines without violating its ban on direct lending to governments, according to two officials familiar with the discussions.
Over the opposition of the two Germans on its 23-member council, the ECB has bought 203.5 billion euros of bonds of three countries receiving financial aid -- Greece, Ireland and Portugal -- plus Italy and Spain. Yet yields have continued to climb.
The U.S. and British central banks have been buying their country’s debt in much larger quantities, and that’s one reason their bond yields are at record lows in spite of debt and deficit figures that in some cases are worse than Italy’s and Spain’s.
Bond-Buying Program
Four weeks after taking over from Jean-Claude Trichet, ECB President Mario Draghi hasn’t tipped his hand about a possible role for the central bank, apart from saying the ECB’s 18-month- old bond-buying program is temporary and limited.
“From our perspective, we see how the Bank of England operates, and we see how the Fed operates, but I understand it’s not legally possible for Frankfurt to operate in the same way,” said Irish Finance Minister Michael Noonan as he arrived at yesterday’s meeting. “So we’ll have to see if somebody has come up with a clever formula to allow that.”
The euro-region finance ministers also approved a 5.8 billion-euro loan to Greece under last year’s bailout after eliciting budget-austerity pledges from Greek political leaders backing a unity government.
They agreed to appoint France’s Benoit Coeure to a soon-to- be empty spot on the ECB’s board and presented new Italian Prime Minister Mario Monti with a report outlining measures the country should take to reduce debt and boost economic growth.
Bond Issuance
The euro-area ministers will be joined today by their counterparts from the rest of the 27-nation EU and will seek agreement on how to temporarily guarantee banks’ bond issuance in order to improve funding conditions for lending. EU leaders agreed last month to provide the guarantees as part of a set of measures to restore investor confidence in banks.
The IMF is co-funding the bailouts of Greece, Ireland and Portugal and is preparing to send a team to Italy for an unprecedented audit of that country’s efforts to cut its debt.
With about $390 billion currently available for lending, the Washington-based IMF may not have enough money to meet demand if the global outlook worsens, Managing Director Christine Lagarde has said.
To contact the reporters on this story: Gregory Viscusi in Brussels at gviscusi@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net.
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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