* Leaders aim to quadruple emergency fund’s firepower
* Countries eye insurance model, special vehicle for investors
* Final firepower depends on appetite for euro debt
By John O‘Donnell
BRUSSELS, Oct 27 (Reuters) - Euro zone leaders plan to scale up their emergency rescue fund, the European Financial Stability Facility, to give it an estimated firepower of about 1 trillion euros ($1.38 trillion), euro zone leaders said on Thursday.
The 440 billion euro EFSF will have between 250 and 275 billion euros available after providing aid to Greece, Ireland and Portugal, and that money could be quadrupled using a combination of a special purpose investment vehicle and a debt-insurance scheme.
“We believe we will have a lot of flexibility to protect the euro and avoid contagion risks,” German Chancellor Angela Merkel told journalists after the end of a meeting of euro group heads of state and government, adding that the aim was to get a leverage effect for the EFSF of four or five times.
“We say that we can achieve around about 1 trillion euros,” she said.
The final firepower of the fund -- which is designed to convince markets that the euro zone can cope with potential borrowing problems in Spain and Italy -- can only be finalised after finance ministers talk to investors to judge their appetite for European debt.
The ministers will want to see what risk premium cautious investors, ranging from countries like China to fund managers, will demand to buy government bonds in the euro zone.
The premium could rise, depending on how investors judge a deal announced on Thursday morning that lumbers holders of Greek debt with a loss of 50 percent on their investments.
Two models are on the table to bolster the fund’s firepower, and Merkel said finance ministers would now have until the end of November to work out how they could be used.
One would be a type of state-sponsored insurance scheme offered to buyers of Spanish bonds, for example, that would make a payout if Spain were to default. Euro zone leaders hope that by giving this guarantee they could encourage otherwise reluctant investors to buy government bonds.
The second model involves setting up a special purpose investment vehicle, giving foreign investors a less risky way to buy euro zone debt.
“It is very difficult, without having ever used the instruments, to say what this really means,” said Merkel. “We have agreed that by the end of November the... framework ... will be worked out by the finance ministers.”
Private owners of Greek bonds are set to receive an offer to swap their bonds at a discount for new ones backed by a guarantee from the euro zone, similar to the so-called Brady bond scheme used in Latin America.
Sony Kapoor, managing director of financial think tank Re-Define, who is close to the discussions on leveraging, said it was too early to specify the potential firepower of the fund.
“It’s good to have targets, but that is all they are,” Kapoor said. “Until they have talked to investors, they will not know what level of guarantees are needed to get Spanish and Italian borrowing costs down to reasonable level...The leveraging effect depends on the risk premium investors want to invest in euro zone debt.”
To read the leaders’ full statement, double click on: