DEBT FINANCING. Germany Approves Euro Rescue Fund

Eropean leaders are turning their focus to the next steps to stem the region’s debt crisis after German lawmakers approved an expansion of the euro-area rescue fund’s firepower.With the European Commission now expecting the overhauled 440 billion-euro ($594 billion) European Financial Stability Facility in place by mid-October, euro finance chiefs will next week discuss accelerating enactment of a permanent rescue fund that provides more capital and a tool for managing defaults.
“I’m not convinced that this bailout package is going to be remotely enough for the euro zone itself,” Wilbur Ross, the billionaire chairman of private-equity firm WL Ross & Co., said yesterday in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “I think it should start with a ‘T,’ not a ‘B,’” he said, referring to trillions instead of billions.
European officials are also studying measures that include leveraging the EFSF, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. There may be “an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalization of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support” for Greece, he said.
Papandreou in Paris
With concern growing that Greece will be unable to avoid default, Greek Prime Minister George Papandreou meets French President Nicolas Sarkozy at 5 p.m. today in Paris after seeing European Union President Herman Van Rompuy in Warsaw.
In Berlin, the upper house of parliament, or Bundesrat, approved the enhanced fund today after the lower house voted 523 in favor and 85 against. Lawmakers approved giving the EFSF powers to buy bonds in secondary markets, enable bank recapitalizations and offer precautionary credit lines. It raises Germany’s guarantees to 211 billion euros from 123 billion euros.
“The situation on the international financial markets is worrying,” Finance Minister Wolfgang Schaeuble told the Bundesrat today. He said the EFSF upgrade is “urgent.”
After the likely ratification by Austria today, four nations will still have to vote on the measure. The European Commission said the expanded rescue fund is set to be in place by mid-October.
Fund Phase-In
Even before it’s in place, European governments are moving toward enacting the permanent fund next year, a year sooner than planned, to replace the EFSF. Phasing in the permanent fund, known as the European Stability Mechanism, would provide a 500 billion-euro war chest. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.
Additional measures now in play include reopening the second Greek rescue agreed in July to increase the financial industry’s contribution and creating a safety net for Europe’s banks.
Merkel’s alliance of Christian Democrats and Free Democrats mustered enough votes in the lower house to pass the changes on the strength of her ruling majority. That meant she didn’t depend on the opposition Social Democrats and Greens, both of which also backed the bill.
“In the end, the unity of the coalition was stronger than the dissent,” Peter Altmaier, parliamentary whip of Merkel’s Christian Democratic Union, told ZDF television. Even so, “we will have to deal with this issue for some time yet.”
Merkel Win
Merkel, who heads the biggest country contributing to bailouts for Greece, Ireland and Portugal, spent weeks cajoling dissenters in her coalition to back the July 21 accord by euro- area leaders to expand the fund. Resistance was most vocal from members of the Free Democratic Party, Merkel’s junior coalition ally that has flirted with an anti-bailout stance.
Provisions inserted into the bill to satisfy Germany’s constitutional court and potential rebels will allow lawmakers to vote on all new aid requests from the fund.
Almost two years into the debt crisis centered on Greece, the U.S. is urging European governments to go further and show more urgency. Europeans haven’t responded “as effectively as they needed to,” President Barack Obama said during a roundtable discussion at the White House this week.

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