- Associated Press - Monday, October 24, 2011

BERLIN (AP) — The eurozone bailout fund will see its firepower increased to more than 1 trillion euros ($1.39 trillion) to enable it to contain the debt turmoil that threatens to rip apart the 17-nation eurozone, according to German lawmakers briefed Monday by Chancellor Angela Merkel.

Eurozone governments hope the 440 billion euro ($600 billion) European Financial Stability Fund, or EFSF, will be able to protect countries such as Italy and Spain from being engulfed in the debt crisis.

To do that, however, it needs to be bigger or see its lending powers magnified.

Frank-Walter Steinmeier, parliamentary leader of the opposition Social Democrats, and Greens leaders Cem Oezdemir and Juergen Trittin said the chancellor informed them that the EFSF’s lending powers will be boosted significantly.

“There will be a leveraging of the EFSF. It is clear that this leveraging will be around a level beyond 1 trillion (euros),” Mr. Trittin told reporters outside the Chancellery in Berlin.

That level would be achieved through a combination of measures. The fund would insure investors against a percentage of possible losses on eurozone government bonds, and the plan also involves the participation of outside organizations such as sovereign wealth funds and the International Monetary Fund, Mr. Trittin said.

The chancellor briefed lawmakers Monday about the progress of the eurozone rescue plans following last weekend’s European Union summit.

Because of the move’s significance, members of Mrs. Merkel’s party proposed that the change receive full parliamentary approval on Wednesday — although it would have been enough for the parliament’s Budget Committee to approve the plan.

Volker Kauder, the parliamentary leader of Mrs. Merkel’s conservative bloc, said the decision to seek a vote was “nothing extraordinary” because “questions of fundamental significance must be decided in parliament.”

Parliament is set to sign off on the eurozone rescue plans and the EFSF’s new powers before Mrs. Merkel gives the final green light at an EU summit in Brussels later Wednesday. The change looks likely to pass by a wide margin in parliament.

Beefing up the bailout fund is one part of a three-pronged eurozone plan to solve the crisis.

The other two parts are reducing Greece’s debt burden so the country eventually can stand on its own and forcing banks to raise more money so they can take losses on the Greek debt and ride out the financial storm that will entail.

Greece’s private bondholders agreed in July to accept losses of 21 percent on their holdings, and getting them to take deeper losses to lighten the country’s debt load is proving particularly difficult.

Experts agree that Greece needs to write off more of its debt — German officials have said up to 50 percent or 60 percent — if it is ever to make it out of its debt hole.

But many also say such a deal with private creditors needs to be voluntary. Imposing sharp losses against the banks through a so-called “haircut” could trigger massive bond insurance payments that could cause panic on financial markets.

Charles Dallara, managing director of a global banking lobby group currently negotiating a wider Greek debt reduction with eurozone officials in Brussels, cautioned, “There are limits to what could be considered as voluntary.”

He insisted any approach not based on cooperative discussions but unilateral actions would be tantamount to a Greek default, isolating the country for years from capital markets.

“It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth,” Mr. Dallara said in a statement.

While European governments finalize their comprehensive plan, the European Central Bank has been taking on the role of firefighter by buying the bonds of financially weakened governments on the open market. That move keeps the bond prices up and the rates down, allowing the countries to borrow on financial markets at lower rates than they otherwise could.

The ECB said it bought 4.5 billion euros ($6.3 billion) in government bonds last week. That was up from €2.2 billion the week before, bringing the total of sovereign bonds held by the ECB to 169.5 billion euros ($236.17 billion).

The ECB hopes it will be able to stop the bond-buying program once the bailout fund’s new powers are active.

French Finance Minister Francois Baroin said France, in a bid to “avoid tensions,” has agreed to abandon its push to turn the EFSF into a sort of bank that would give it access to the ECB’s unlimited source of money. The idea clashes with German traditions of economic management and fears of printing money to pay for the governments’ debt.

“We know that the Germans don’t want this,” Mr. Baroin said.

Differences between Germany and France have been blamed in part for the failure of talks last week and the EU summit Sunday to produce a comprehensive new plan to stem the eurozone’s debt crisis.

French President Nicolas Sarkozy and Mrs. Merkel put public pressure on Italian Premier Silvio Berlusconi in Brussels on Sunday to implement new economic reforms.

But Berlusconi responded on Monday by saying “no one can nominate themselves commissioner” of the EU and “give lessons” to EU partners. Italy’s banking system is stronger than that of France and Germany, he said.

However, Italy’s Cabinet was holding an emergency meeting later Monday to discuss the new growth measures that Mr. Berlusconi promised to his EU counterparts.

Italy is considered to be one of the next weakest links in the eurozone after the three countries already bailed out — Greece, Ireland and Portugal.

Outgoing ECB President Jean-Claude Trichet, meanwhile, renewed his suggestion that in the long term Europe should consider creating a eurozone finance ministry that would stand above national ministries and police them.

“Increasingly, it seems that it is not too bold to consider a European finance ministry,” he said in a speech in Berlin, according to the prepared text of his remarks.

Geir Moulson in Berlin and Angela Charlton in Paris contributed to this report.

Copyright © 2018 The Washington Times, LLC.

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