PARIS, Feb 2 (Reuters) - The euro zone’s EFSF and ESM rescue funds need their combined resources doubled to help keep a lid on the bloc’s debt crisis, a senior OECD official said, adding to pressure on Germany to agree to a strengthening of the region’s bailout firewalls.
Without an increase in the funds to 1 trillion euros and reforms to boost growth, the euro zone remains exposed to the risk of fracturing, wrote Adrian Blundell-Wignall, a special advisor on financial sector issues to OECD Secretary General Angel Gurria, in a research report published on Thursday.
The OECD called for the euro zone’s crisis funds to be boosted as long ago as the Jackson Hole symposium in August, but the comments mark the first time a senior advisor to the organisation has mentioned such a high figure as part of a reform programme.
They also echo appeals from both within and outside the euro zone, with International Monetary Fund head Christine Lagarde and Italian premier Mario Monti recently saying they believed the 500-billion euro ESM may need to be beefed up.
German Chancellor Angela Merkel, mindful of the heavy funding commitments towards euro zone stability that Europe’s dominant economy had already made, has thus far deflected calls for the funds to be strengthened.
Blundell-Wignall also said private investors were unlikely to stump up enough resources for the two funds, which leaves few other options although one would be to grant the European Financial Stability Facility a banking licence so it can borrow from the European Central Bank, Blundell-Wignall said.
Other two means of raising sufficient cash would be tapping the International Monetary Fund and sovereign wealth funds, which would likely require guarantees to get on board.
“The size of resources the EFSF/ESM may need for all potential roles, particularly bank recapitalisation, should not be underestimated,” wrote Blundell-Wignall.
“This is not independent of what the ECB does, but it could be around 1 trillion euros. The current EFSF/ESM resources of 500 billion euro are not enough.”
While the ECB will have to keep supporting euro zone government bond markets, investors will need to accept a reduction in the value of their Greek debt holding of at least 50 percent, Blundell-Wignall said.
The Greek government and private bondholders have been in negotiations for nearly seven months over restructuring Greece’s debts, with the aim of reducing Athens’ debt burden by around 100 billion euros.
A deal is expected to be wrapped up in coming days.
Reporting by Leigh Thomas; Editing by John Stonestreet