AppId is over the quota
AppId is over the quota
September 23, 2011, 1:53 PM EDT By James G. Neuger
(See EXT4 for more on the European debt crisis.)
Sept. 23 (Bloomberg) -- European governments are exploring speeding the setup of a permanent rescue fund as the urgency mounts to halt the debt crisis, an internal working paper shows.Drawing on paid-in capital, the fund will wield a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.Senior finance officials next week will examine the cost advantages of creating the fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.As Greece’s prospects darken and the 18-month debt crisis threatens to tip Europe back into recession, the euro area’s managers have gone into overdrive in pursuing measures to contain its spread.Faster ESM enactment would yield a “more effective financing structure” that cuts the extra debt of donor countries by 38.5 billion euros, saving Germany alone 11.5 billion euros, the paper said. “This gain is to be considered as a minimum,” it said.Discussions of the ESM timeline and further enhancements to the temporary rescue fund are proceeding at the technical level to maximize the crisis-fighting options for the political leadership.Temporary FundPublic debate has broken out over what to do after the upgrade to the temporary fund, the 440 billion-euro European Financial Stability Facility, in about mid-October. The EFSF depends on national guarantees in contrast to the ESM’s capital pool.One option, inspired by the U.S. response to the 2008 financial crisis, is to use leverage to add to the EFSF’s firepower, European Union Economic and Monetary Commissioner Olli Rehn and French Finance Minister Francois Baroin said yesterday.While U.S. Treasury Secretary Timothy Geithner pitched that idea at a Sept. 16 meeting with euro-area finance chiefs in Poland, it met initial resistance from Germany, Europe’s dominant economy.Another variant, proposed by economists Daniel Gros and Thomas Mayer, is for the EFSF to operate like a bank and borrow from the ECB, using the bonds it purchases as collateral.‘Increase Unavoidable’Boosting the EFSF is “unavoidable” in the long run and may be followed by joint euro bonds, Klaas Knot, the Dutch representative on the European Central Bank’s policy council, said in a De Telegraaf interview published today.Set up in May 2010 after stopgap loans to Greece failed to restore market confidence, the EFSF was given a three-year lifespan amid expectations that the crisis would run its course.As Ireland and Portugal succumbed to speculative attacks, Germany then pushed for the permanent fund. Its statutes need to be approved by the 17 euro-area countries and it requires all 27 EU countries to pass a treaty amendment to become operational.Ratification discussions have barely gotten under way. Germany won’t consider its ESM approval timetable until the reinforced EFSF is in place, the government said last week. German lawmakers vote to ratify the package next week.European Commission spokesman Amadeu Altafaj said the current focus is on the EFSF upgrade and declined to comment on measures beyond that.While speedier enactment would require donor countries to pay in as of 2012, those costs would be more than offset by switching away from the EFSF’s guarantee system, the working paper said. However, aid recipients would also have to contribute.
--With assistance from Mark Deen in Paris, Rainer Buergin in Berlin and Martijn van der Starre in Amsterdam. Editors: James Hertling, Patrick Henry
To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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