No agreement on strengthening bail-out fund

Negotiations on boosting EFSF to continue before leaders meet again on Wednesday.

France drops bail-out fund proposal

A meeting of leaders of the eurozone’s 17 member states broke up tonight (23 October) without an agreement on how to boost the firepower of the bail-out fund.

Herman Van Rompuy, the president of the European Council, said that two options were on the table and more work needed to be done before a deal was reached.

He said that the two options, both aimed at increasing the lending capacity of the European Financial Stability Facility (EFSF), which currently stands at €440 billion, might yet be combined.

Van Rompuy was speaking at the end of three days of meetings in Brussels aimed at solving the eurozone crisis. But it is clear that many issues still need to be thrashed out by officials over the next 48 hours, before the finance ministers and then the government leaders meet again on Wednesday.

Van Rompuy said: “We defined two models and we will now go into details to make this concrete. It could even be that we combine the models and we have a cumulative effect.

“The discussion is going on, but in a positive way and I think we have made progress.”

One of the two options being discussed is the creation of a separate fund using an EFSF loan and external international financing, principally through the International Monetary Fund. This would then be able to buy sovereign bonds from countries in trouble.

The other is to use the EFSF to insure against losses on sovereign bonds. 

Neither plan would use the financial muscle of the European Central Bank (ECB) to fund the EFSF, which was an earlier idea proposed by France but opposed by Germany and the ECB itself.

Van Rompuy said that the ECB would, however, still play a role. “You have a broad range of options where the ECB is involved, fully in charge, and so on; so to say the ECB is not involved in anything is too much to say.”

The idea of leveraging the EFSF is attractive because it means it would be able to lend much more without needing countries to inject additional capital. However, critics warn that it could threaten the top-class credit-ratings of countries, particularly France, because it would burden them with extra liabilities.

Separately, Van Rompuy announced that Silvio Berlusconi, Italy’s prime minister, would be required to present to the European Council on Wednesday a package of measures aimed at boosting growth and reducing debt in the country. (See ‘Italy under pressure to reduce debt’.)

Demonstrating to the financial markets that Italy can sort out its public finances is crucial to prevent contagion from spreading to the eurozone’s third largest economy.

José Manuel Barroso, the president of the European Commission, said all member states had “commitments” to make and he did not want to single out Italy.

He said: “All member states need to be clear. This is understood by everybody so I don’t want to single out one country, but I’m sure that all member states are committed to ensure fiscal discipline, fiscal consolidation, [and] structural reforms.”
 
Asked whether further commitments were being demanded of Belgium,Van Rompuy, a former prime minister of Belgium, said that they were not.