Plan to boost eurozone bailout fund

The 17-nation eurozone is set to shore up its bailout fund to contain the debt turmoil that threatens to engulf more countries across Europe.

German politicians said the plan could boost the fund’s lending capacity to more than 1 trillion euro (£869 billion).

A document shows the currency zone wants to boost the €440bn bailout fund by offering sovereign bond buyers an insurance against possible losses and by attracting capital from private investors and sovereign wealth funds.

Eurozone governments hope that the enhanced European Financial Stability Fund, or EFSF, will be able to protect countries such as Italy and Spain from being engulfed in the debt crisis. To do that, however, it needs to be bigger or see its lending powers magnified.

Leading German opposition politicians, who were briefed yesterday by Chancellor Angela Merkel on the plan, said the fund’s lending capacity will be boosted “beyond €1 trillion”.

But the draft document by the eurozone working group – which Germany’s government was sharing with key politicians yesterday – did not provide a headline figure for the bailout fund, stressing “a more precise number on the extent of leverage can only be determined after contacts with potential investors” and rating agencies.

Because of the move’s significance, members of Ms Merkel’s party proposed that the change receive full parliamentary approval tomorrow – although it would have been enough for the parliament’s budget committee to approve the plan.

The changes look likely to pass by a wide margin in Germany’s parliament.

Politicians will vote only hours before an EU summit in Brussels that is set to adopt the new rules for the EFSF.

The enhanced bailout fund rules are meant to guarantee “continued market access of euro area member states under pressure and the proper functioning of the sovereign debt market,” the document said.

Therefore the EFSF is set to have the ability to provide investors with a partial insurance against losses from its member states’ government bonds, thus making them a safer and more attractive investment.

The eurozone document also foresees setting up one or several special investment vehicles that would partly compensate possible losses on sovereign bonds in a bid to attract outside investors such as sovereign wealth funds, combining “public and private capital to enlarge the resources available”.

The draft document stressed that the EFSF would “benefit from the flexibility to deploy both options, which are not mutually exclusive”.

The insurance model is designed to increase the demand for newly issued eurozone government bonds, lower the yields, “thereby supporting the sustainability of public finances,” the document said.

Lowering the yields for troubled eurozone governments is a key step to counter the widening debt crisis because spiralling yields on debt issued by Greece, Portugal and Ireland eventually cut them off from market financing, forcing the eurozone to provide those nations with an emergency loan package.

In the event of a default, “the investor could surrender the partial protection certificate” and “receive payment in kind with an EFSF bond,” the document said, referring to the insurance model.

Any assistance from the fund for member states, however, would come with tough strings attached and the “appropriate monitoring and surveillance procedures,” the document said.