From Wednesday’s FT:
In parallel, we must ensure that the financial support mechanisms put in place last May are fit for purpose. The effective lending capacity of the current European financial stability facility should be reinforced and the scope of its activity widened. Here we need to review all options for the size and scope of our financial backstops – not only for the current ones, but also for the permanent European stability mechanism too.
That quote comes from Olli Rehn, the EU commissioner for economic and monetary affairs, and is a none too subtle hint that Brussels is looking to redesign its rescue mechanism. (And note there’s a Eurogroup meeting on Monday and a ECOFN get together on Tuesday so this might all happen soon than we think).
So what might European Financial Stability Facility (EFSF) 2.0 look like?
Obviously it’s going to be bigger. And it might also be given permission to buy euro zone government bonds.
From the Wall Street Journal:
European Union governments are considering proposals to significantly boost the bloc’s bailout fund for indebted euro-zone countries, an acknowledgment that the fund might prove too small if the region’s debt crisis spreads to Spain, European officials said.
Top civil servants from EU finance ministries discussed an overhaul of Europe’s main bailout mechanism, the €440 billion ($568 billion) European Financial Stability Facility, at talks in Brussels on Monday and Tuesday, the European officials familiar with the matter said. The changes being discussed include raising the fund’s size and letting it intervene in bond markets.
Increasing the size of the EFSF makes sense and is certainly possible — it would require little in the way of parliamentary approval in most countries. Moreover, using the EFSF to conduct bond purchases also might help (although its impact would be limited if it just replaced the ECB buying).
But is any of this enough to finally stop the rot in the eurozone?
Harvinder Sian of RBS, reckons not:
Merely increasing the size of the EFSF is not enough to solve the solvency issues for EMU countries – and so we do not expect markets such as Spain & Portugal to put in a sustainable rally. Remember that once a country accesses the EFSF it will likely see ratings downgrades to BBB levels and so many investors will look to exit rather than having to eventually dump paper on any further negative news. Any country accessing the EFSF also has a high probability of accessing the ESM from Jul-2013 and this will be a senior creditor – such that the hurdle to exit the European support measures is very high and possibly lasting a couple of electoral cycles in these countries.
He says more radical moves are required.
Such as using the EFSF as a bad bank…
A more exotic option would be to somehow turn the EFSF into a EUR bad bank – that is, capitalising the EFSF and getting it to buy troubled assets. This would be a game changer and probably be a significant marker on ending the crisis as it is a fiscal transfer by another name.
… or allowing the EFSF to extend short term credit lines for countries experiencing funding shortfalls:
This is again more exotic and again a potential game changer – because of the increasing solidarity in Europe and because it could be seen as the seed of common issuance in Europe – which as we have said before would be important
Unfortunately, he can’t see Germany, which has already stamped on the idea of eurobonds, doing that:
My feeling is that it is too early for this with Merkel’s election focus part of the calculation.
Politics eh.
Probably best not to chase that rally in periphery debt just yet.
Related links:
Focus sharpens on eurozone bail-out fund – FT Alphaville
Save Europe, tax the banks? – FT Alphaville