Wall Street Journal
October 4, 2011
The shelf-life of Europe's bailout plans is getting shorter. European parliaments have nearly finished ratifying the expansion of the euro zone's €440 billion ($588 billion) bailout fund. But already the debate has shifted to whether the European Financial Stability Facility needs to be expanded again given the escalation of the crisis. There are no simple fixes.
The fear is the EFSF isn't big enough to halt contagion, particularly if Greece defaults. Loans to Ireland, Portugal and now Greece add up to €120 billion. A bigger bailout for Greece and loans to help some euro-zone countries recapitalize their banks could leave just €250 billion to fight contagion by buying bonds. The European Central Bank has bought around €85 billion of bonds since mid-August alone but is expected to stop buying when the EFSF is ratified.
Germany, among others, opposes increasing the size of the EFSF. Turning the EFSF into a bank that could borrow to boost its firepower, as suggested by U.S. Treasury Secretary Timothy Geithner, also seems a non-starter. The private market can't provide cheap enough funding while the ECB is clear this lending lies outside its mandate. Besides, it could threaten the triple-A rating of the facility and its key sovereign guarantors.
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