European Officials Now Considering Combination Fund at $1.3 Trillion
October 20, 2011
Bloomberg is reporting that according to sources close to the situation, European leaders are considering combining the current €440 billion EFSF and the €500 billion European Stability Mechanism (ESM), which is slated to replace the EFSF in mid-2013.
In addition, there is reportedly talk of moving up the start date of the ESM to the middle of next year, thus giving European leaders €940 billion or $1.3 trillion to fight the crisis with.
Bloomberg reports that the combination approach may be one way to move the stalled talks between France and Germany forward. Recall that the two countries are at odds on whether or not to leverage the existing EFSF.
Another key part of the discussion Thursday was said to be the idea of eliminating the €500 lending billion cap of the ESM. Recall that the 500 billion figure had been agreed to earlier in the year when the bailouts were limited to Greece and Portugal.
The combination plan, when considered in conjunction with the draft of EFSF usage guidelines presented to German lawmakers on Thursday, would seem to provide leaders with greater firepower than previous proposals.
Recall that one of the important aspects of the draft presented in Germany Thursday is the option that allows the EFSF to engage in limited leveraging of its assets, by allowing it to use the bonds it owns as collateral to raise the liquidity in repo agreements with commercial banks.
If the combination plan were to take the form of the EFSF draft plan, it would seem that EU leaders would have more capital available than many reports recently have suggested.
It is logical to assume that the reason for the second EU Summit next Wednesday is to have time to flesh out this plan and to obtain the necessary data from the Troika on Greece’s progress.
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