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Tuesday, September 27, 2011

Increasing the EFSF: A view from Europe

Comments on the rumours that Eurozone leaders are considering to top up the EFSF in order to combat the eurocrisis, and even including the ECB in it, seem to be all over the place. However, apart from the IMF, no one seems to be rather supportive of the idea.

German Finance Minister Wolfgang Schäuble seemed to reject the proposal over the weekend, saying “We won’t come to grips with economies deleveraging by having governments and central banks throwing – literally – even more money at the problem. You simply cannot fight fire with fire.” Christian Lindner, the Secretary-General of junior coalition partners FDP, called on the German Chancellor, Angela Merkel, to rule out “very quickly that there are no changes to the rules for EFSF” via the backdoor.

Jens Weidmann, head of the Bundesbank, warned that this would entail a disguised way of funding states through the ECB, and called it a “dangerous path” while questioning whether “financing states is a task for banks.”

Finnish Prime Minister Jyrki Katainen and his Dutch counterpart Mark Rutte both came out against increasing member states contributions. Dutch Prime-Minister Mark Rutte yesterday said during a joint press conference with Katainen that news about further increasing the EFSF is based on “rumours” and “speculation”. He added, “There are no plans in the Netherlands and, as far as I know, in Finland to increase the amount of money we put into the EFSF.” For his part, Katainen doubted there would be support for the move in Finland, saying “obviously it won’t be met positively.”

On Spain’s public broadcaster TVE, Spanish Economy Minister Elena Salgado also insisted that increasing the EFSF to €2 trillion “is not on the table and has not been discussed,” stressing the need for “some verbal discipline.”

David Beers, Head of Standard & Poor's sovereign rating group, suggested that the plan could have “potential credit implications in different ways,” hinting that it could lead to sovereign downgrades in the eurozone. He added, “We're getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road.”

Head of the IMF’s Europe department Antonio Borges on Friday said that there are growing expectations of more expansionary policy in the eurozone and that the IMF "would be very supportive of that." Borges did, however, say that the idea to "leverage the EFSF to the hilt...is not serious in our view."

Clearly, a consensus is yet to emerge...

Update 13:45 - Eurozone governments don’t really look to be on the same page. In contradiction with Salgado’s comments, Austrian Finance Minister Maria Fekter has reportedly said that plans to leverage the EFSF will be discussed at next week’s meeting of eurozone finance ministers. The FT’s live eurozone blog also suggests the issue will be a topic of discussion.

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