November 28, 2011 / 11:46 PM / 8 years ago

Eurogroup set to fix EFSF leveraging rules, deal with Greek aid

BRUSSELS (Reuters) - Euro zone finance ministers are to agree on Tuesday on details of leveraging their EFSF bailout fund so it can help Italy or Spain should they need aid, and are likely to approve the next tranche of emergency loans for Greece and Ireland.

Documents obtained by Reuters on Sunday showed the detailed guidelines for the European Financial Stability Facility (EFSF) were ready for approval by the ministers, opening the way for new operations and multiplying the fund’s effective size.

The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.

“I would expect we will be in a position to approve the guidelines at a political level,” a euro zone official involved in the preparations for the ministers’ meeting said.

President Barack Obama pressed European Union officials on Monday to act quickly and decisively to resolve their sovereign debt crisis, which the White House said was weighing on the American economy.

The EFSF guidelines will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks.

The scale of potential private interest in the co-investment funds is unclear, as investors said they would look closer at the possibility when the operational details were made public.

The bailout fund will also be able to offer partial protection for private investors on their purchases of euro zone sovereign bonds, like those of Spain or Italy, at primary auctions, boosting demand and lowering sovereign funding costs.

Depending on interest in the schemes, they could even boost the EFSF’s impact to 1 trillion euros. But the EFSF has recently played down that number, saying it was difficult in current market conditions of high aversion to euro zone debt exposure.

The European Central Bank, which is now buying bonds of Spain and Italy on the market to prevent borrowing costs for the two countries to get out of control, has been urging euro zone ministers to finalise the technical work on the EFSF quickly.

Officials have told Reuters that once the details are agreed the leveraging mechanisms could become operational in January.

That may be too late. With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.


The ministers will also discuss the release of the next 8 billion euro tranche of emergency aid for Greece.

The ministers have made the money conditional on written commitment from Greek parties that they would support reforms that will underpin a second financing package for Athens worth 130 billion euros.

One of the Greek party leaders, Antonis Samaras, long refused to provide such written commitment, but finally sent a letter last Wednesday.

“This will be third time that we will decide on the sixth disbursement, so I guess it is third time lucky,” one euro zone official said.

“I understand we should be in a position to acknowledge the receipt of commitments in a written form by the main political forces in Greece,” the official said.

“We have to look at it, what it means on substance — the fat lady has not sung yet, but if all goes well we should be in a position to agree on that.”

A second euro zone official cautioned that while Samaras supported the goals of the reforms in his letter, he had distanced himself from some of the methods to achieve them.

But the official also noted that cross-party agreement on the precise ways of achieving the targets of the new Greek programme was not required for the release of the tranche and said that, with the letter, “it looks much better than before.”

Euro zone ministers will also release the next tranche of emergency loans to Ireland, praising the country’s performance.

“The Irish case shows that with the right determination and political constellation, what the international community is asking of countries is actually doable. It is a positive message in an otherwise not so positive environment,” the official said.


The likely release of the money will not end Greece’s problems, however. Athens, the euro zone, the International Monetary Fund and private bondholders still have to put together the next Greek financing programme, which includes a 50 percent reduction of privately held Greek debt.

Banks involved in a rescue plan for Greece have set up a steering committee to push forward talks on a voluntary bond exchange before the end of the year.

Euro zone leaders said on October 27 that the new financing programme would be put in place by the end of the year, but some euro zone officials expressed doubt that deadline could be met.

“No, I would be surprised. It still needs some work,” the first euro zone official said.

Mario Monti, Italy’s prime minister and finance minister, will attend the meeting to explain to his euro zone colleagues the reforms Italy plans to undertake to regain the confidence of markets and bring down its unsustainable borrowing costs.

Saddled with debt equal to 120 percent of GDP and soaring borrowing costs, Italy has been battling to avoid financial disaster, which analysts say would endanger the whole euro zone.

In a sign of intense market stress, short-term Italian yields last week climbed above those of longer-dated issues. Both are higher than the 7 percent level widely seen as unsustainable for the country’s public finances.

IMF head Christine Lagarde denied on Monday press reports that Italy was in talks for an IMF loan programme.

“At this point in time the IMF has not received any request for assistance from, nor are we negotiating with, either Italy or Spain,” Lagarde said in Peru.

Euro zone ministers are also likely to nominate senior French Treasury official Benoit Coeure as the successor to European Central Bank executive board member Lorenzo Bini Smaghi, who resigned from his post earlier this month.

Reporting By Jan Strupczewski

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