October 19, 2011
Berlin and Paris appear to be close to an agreement ahead of this weekend's euro summit. Media reports indicate that the impact of the EFSF euro backstop fund is to be increased to as much as 2 trillion euros by leveraging the fund. Meanwhile, Greece may have found a vast source of new tax revenues.
With just days to go before European Union leaders gather in Brussels for a summit aimed at finding a way out of the euro zone's ongoing debt crisis, an agreement appears to be taking shape. But renewed concerns about the state of France's fiscal health are creating fresh hurdles in the effort to save the common currency.
The Financial Times Deutschland reported on Tuesday evening that euro-zone leaders have come up with a plan to increase the impact of the European Financial Stability Facility (EFSF) over and above the €440 billion ($608 billion) lending capacity it currently has. The paper said the leveraged EFSF will be able to martial aid worth up to €1 trillion. A similar story in the British daily the Guardian indicated that the ceiling was to be even higher, as much as €2 trillion.
Rather than granting the EFSF a bank license, an initial idea to which there was widespread opposition, the backstop would become a kind of insurance fund providing first-loss guarantees to both public and private investors. Essentially, investors will be insured against the first 20 percent to 30 percent losses on their investments in state bonds. The move would allow the fund to stretch further than originally envisioned.
Such a leveraging of the EFSF has come to be seen as inevitable in recent weeks. Even as euro-zone parliaments were voting to expand the EFSF to its current size in September and October, a consensus had developed that, given the acceleration of the euro crisis this autumn, €440 billion would not be enough.
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