Eurozone finance ministers finally agreed on the guidelines for leveraging the EFSF fund on Tuesday. While the details regarding how much the fund size will be increased remained unclear, the finance ministers did agree on using both the “first guarantee” and “public/private partnership fund” approaches.
But perhaps the bigger story out of the meeting was the fact that the finance ministers said they would seek larger roles for both the International Monetary Fund and the European Central Bank due to the fact that the EFSF alone is unlikely to be sufficient to effectively combat the growing crisis.
As for the much ballyhooed details of the EFSF, the ministers announced that the bailout fund would provide a “first loss guarantee” via what is being called a partial protection certificate to newly issued bonds of Member States. The certificate could be detached after initial issue and could be traded separately. It is estimated that this plan would give the holder an amount of fixed credit protection of 20-30% of the principal amount of the sovereign bond.
The finance ministers also said that the EFSF would simultaneously utilize a CIF (co-investment funds) approach. Co-Investment funds would allow for the combination of public and private investment. It is expected that the EFSF would likely match investment by outside investors such as banks and sovereign funds. The CIF would purportedly be used to purchase bonds in the primary and/or secondary markets in an effort to keep rates low.
Both approaches are expected to be operational by January with about €250 billion available to be used for leveraging the fund. This is after funding a second rescue program for Greece, Eurozone chairman Jean-Claude Juncker said.
Although the ultimate size of the EFSF is still in question, it is estimated that the potential leveraging of the fund will be far smaller than originally estimated. It is for this reason that the finance ministers appear to be turning to the IMF and ECB for additional assistance.
Belgian Finance Minister Didier Reynders said Wednesday, “It’s clear that we can go further through the IMF and probably action by the European Central Bank.” As finance ministers gathered for a second day of talks Wednesday, Reynders added, “For the IMF, we are working to see how to reinforce its action and possibly contribute to a boost in its resources. As for the central bank, it’s for the central bank to make its decisions.”
Reuters reports that the Eurozone faces a crucial 10-day period to save the Euro. "We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union," Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday.
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