Eurozone chiefs discuss ESF fund

The finance chiefs from the eurozone’s 17 countries are in negotiations to overcome differences over how to strengthen a bailout fund, which is key to preventing the union’s debt troubles from spinning out of control.

Giving the €440bno European Financial Stability Facility much more firepower is considered essential before the eurozone can deal with its two other main problems: cutting Greece’s massive debts and forcing weak banks to boost their capital buffers to shore up their defences against worsening market turmoil.

“Once we have the option for the leveraging (of the EFSF) then – building on that – we can develop all other points,” said Austrian finance minister Maria Fekter as she arrived for the meeting in Brussels.

Markets appeared to be giving Europe the benefit of the doubt, trading substantially higher on Friday even though a wide-ranging plan to deal with the crippling debt crisis won’t be in time for Sunday’s summit of EU leaders. A second meeting on Wednesday has been scheduled.

“Considering the importance of the discussions and their potential impact upon the European economy, global capital markets and the future of the EU itself, a delay of a few days is neither here nor there in the overall scheme of things,” said Gary Jenkins, an analyst at Evolution Securities.

“However the suggestions that they are still far apart on how to make best use of the EFSF is of some concern.”

Governments have ruled out increasing their financial commitments, but they acknowledge that with some €140bn already going to Ireland, Portugal and Greece, the EFSF isn’t big enough to both help recapitalise weak banks and keep big economies like Italy and Spain from being dragged into the crisis.

A failure to agree on the best way of maximising the fund’s impact between Germany and France forced European leaders to call another crisis summit for Wednesday – on top of the two-day talks between finance ministers and a first summit of EU leaders this weekend.

Ms Fekter said up to seven technical options for giving the EFSF more leverage were on the table and both she and German finance minister Wolfgang Schaeuble ruled out the possibility that the fund will be able to tap into the vast resources of the European Central Bank. That proposal is still being pushed by France, which sees ECB help as the best way of giving the EFSF the necessary force.

A high-ranking German official, who declined to be named, said that a combination of two options had crystallised as the most likely solution.

The first would involve the bailout fund acting as an insurer for bond issues from wobbly countries like Italy. That would essentially compensate investors against a first round of losses and help to support their bonds and keep the borrowing costs from rising too far.

In addition, the International Monetary Fund – which has already provided about a third of the bailout cash for Greece, Ireland and Portugal – would supply other stragglers with precautionary credit lines to make sure they have a ready access to cheap money.

Last weekend, at a meeting in Paris, the finance chiefs from the G20 leading economies opened the door for a larger role by the IMF, but only if the eurozone first does its part.

IMF managing director Christine Lagarde, who joined the ministers in Brussels today, said her institution would do everything it could to help Europe.

“We will find solutions,” she said, without going into details.

Europe’s leaders have already told their counterparts in the G20 that they will have a plan ready to present to them at their next meeting in Cannes, France, in early November.

But Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said the announcement to delay all decisions until the next summit on Wednesday looked “disastrous” to the outside world. He also cancelled a press conference that had originally been scheduled for after Friday’s meeting, indicating that hopes were low of having clear results to present.