EU bailout facility to be discussed

PLANS to change how the EU’s bailout facility works could help push down the rates markets request for loans to Ireland and other hard-pressed euro area countries.

The proposals on how to make the mechanism more flexible will be discussed on Monday by finance ministers from the euro area countries including Finance Minister Brian Lenihan.

There are also unconfirmed reports that the six euro area countries with a triple A credit rating — France, Germany, Austria, Finland, Netherlands and Luxembourg — are due to meet on Monday morning before the general meeting and may be joined by the EU’s three other non-euro countries with the highest rating, Sweden, Denmark and Britain.

Markets continued to respond positively yesterday to the more comprehensive plan both the European Commission and the big member states of France and Germany were backing over the past few days. Portugal’s successful sale of bonds below the strategic 7% rate on the markets on Wednesday also helped.

There were a number of ideas floating around Brussels last evening as to how the €750 billion fund put together by the IMF, the European Commission and the member states last summer would be made more flexible.

German finance minister Wolfgang Schaeuble said the fund would not be increased but he supported taking steps to increase the amount of money that it could lend. Currently the €440bn guaranteed by the member states, known as the European Financial Stability Facility (EFSF) is effectively limited to lending €250bn and the expectation is that changes will be made to ensure the full sum is available.

Suggestions by Belgium’s finance minister Didier Reynders that the fund could be doubled were dismissed by French officials also. The fact that such a move would require parliamentary approval would make it very difficult for Germany to deliver.

But perhaps the most significant change being discussed would be to extend the role of the EFSF to allow it to buy the debt of euro area governments on the secondary market. The French are particularly supportive of such a move which could have the effect of cutting the cost of borrowing on the markets for countries like Ireland.

The French finance minister, Christine Lagarde, said in Paris yesterday: “Our work includes looking at a variety of instruments. It is not just the fund coupled to a figure,” adding that using the fund to buy euro area government debt was also being considered.

The issue of the interest rate was raised in Brussels earlier this week when officials from the member states were discussing the fund.

Whether the countries would also consider reducing the margin charged to Ireland was not clear. However people with knowledge of the European Financial Stability Facility said that reducing the margin would not need a rule change or to be agreed by national parliament, but could be done with political agreement by finance ministers.