Deal on EU rescue fund nears completion

EFFORTS to put together the so-called bazooka to ringfence the euro and its vulnerable member states from the markets were inching their way towards a conclusion last night, but the final deal will have to wait until the EU leaders return to Brussels on Wednesday.

There are a number of apparently conflicting demands from France and Germany for putting together a fund big enough to protect Spain and Italy from market speculation.

France and Germany do not want to have to guarantee any more than they have already committed to the European Financial Stability Facility (EFSF) — Germany because its public won’t tolerate it, and France because it too is already under pressure from the markets.

France has an additional problem in that its banks need additional capital to meet the new, higher capital requirement, which is expected to be in the region of 9%. The state does not wish to have to provide this money but the banks themselves are under additional pressure because they hold large amounts of Greek debt — which is about to lose around 50% of its worth.

France and its banks are under threat from the credit rating agencies of being downgraded, with the state losing its Triple A status. So any solution to increasing the firepower of the current EU rescue fund, the EFSF, must not add debt to the bottom line of the French state.

The French proposed turning the EFSF into a bank with a licence from the European Central Bank, which would have access to the ECB funds. Since the ECB can print any amount of money, the fund could be as large as it needed to be, offering the bazooka solution many said was required.

France continued to lobby for ECB involvement at yesterday’s summit. The ECB opposes this as they believe it would mean they lose their independence.

Germany opposes this for the same reason and believes its parliament and people would not accept it.

A number of options have been put on the table to get around this. They involve forming a special fund that would attract money from anybody wishing to invest in it. It would be attractive because it would have a Triple A rating and because the EFSF would secure the first loss. The amount to be guaranteed was not yet decided, but 20% was mentioned.

One proposal is that this fund could be in the form of a trust, perhaps managed by the IMF.

Sovereign funds or any other investor would be able to invest in this — the BRIC countries and Brazil in particular, have already expressed interest in putting money at the disposal of the eurozone. The issue of asking China and India — the EU’s main competitors outside of the US — to buy eurozone member state debt raised eyebrows among some diplomats and politicians

Such a fund would not be limited to a certain sum, as the EFSF is currently. The EFSF is also a type of SPV set up as a company in Luxembourg managing euro funds at a step removed from the intricacies of the European treaties and being a creature of the eurozone governments.

Other variations of such a fund is to use the €440bn EFSF to leverage more money from the markets — increasing it by four of five times.