The World from Berlin: The 'Absurd Logic' of Leveraging the EFSF

Europe has been plunged into further turmoil with the IMF threatening to delay the next tranche of aid for Greece, as France and Germany remain divided over how best to leverage the EFSF ahead of the crucial EU summit this weekend.

German Chancellor Angela Merkiel and French President Nicolas Sarkozy. Zoom
dpa

German Chancellor Angela Merkiel and French President Nicolas Sarkozy.

Following the news that Berlin and Paris remain divided on how to make the euro-zone bailout fund more effective, European efforts to stem the debt crisis have taken another blow thanks to a split between the International Monetary Fund and the European Union.

The IMF has rated EU projections for Greece's debt as too optimistic, and wants to delay approval of the next tranche of aid until after the Brussels summit this weekend to see if a clearer picture emerges, EU officials said.

Without a loan payment of €8 billion euros from the EU and IMF, Greece faces a default next month, a development that could also threaten to drag Spain and Italy into the mire through a contagion effect. Euro-zone leaders are racing to agree on new steps to reduce Greece's debt, strengthen the capital of banks and leverage the European Financial Stability Facility (EFSF) euro backstop fund to stem contagion to bigger economies -- but progress appears slow.

Turning the EFSF into a Bank

France believes the most effective way of leveraging the EFSF is to turn it into a bank which could then access funding from the European Central Bank, but both the Frankfurt-based institution and the German government oppose this.

With a senior German government source saying Berlin remained resolutely opposed to the ECB backstopping the rescue fund, euro-zone officials told Reuters that an alternative model, whereby the EFSF could act as an insurer and underwrite a portion of newly issued euro-zone debt, is also on the table.

By guaranteeing the first 20-30 percent of any losses, the EFSF's lending capacity of €440 billion ($608 billion) could be stretched three to five times further. However, analysts are unconvinced that such a leverage plan would succeed, warning that it could create a two-tier structure in some bond markets and would be meaningless without an explicit commitment from the ECB to go on buying at-risk debt, something it has been reluctant to do.

German commentators on Thursday look at the potential pitfalls of leveraging the EFSF.

The left-leaning Berliner Zeitung writes:

"We do not know where the financial crisis of 2011 is leading us. We only know, no, we sense, that politicians are clueless. As clueless as we are ourselves."

"Why is the rescue package getting ever bigger? Because politicians believe that only a gigantic, completely unsurpassable package will prevent speculators from pulling currencies and countries into war. Why do the leaders of Europe only meet during periods when the stock markets are closed? Because they fear the markets and share prices. Why is the German parliament, the Bundestag, being almost systematically excluded from decisions on the bailout? Because the leaders are not even sure they can convince fellow parliamentarians. Politicians are no longer thinking of their public."

"We are observing the suicide of politics. Politicians no longer make policy. What is making policy? Drawing up rules in the first place, making and enforcing laws. That is, stopping speculators from speculating. It does not entail acting as state-run speculators, speculating against speculators. But the rescue package is precisely that. It is a defensive shield against speculators which must become ever bigger as the supposed risk of speculation grows. Perhaps €2 trillion is much too little? Perhaps in four weeks we will be talking at a new EU summit of €4 trillion? Perhaps there is a way to increase the so-called leverage. The logic is absurd."

The left-wing daily Die Tageszeitung writes:

"Greece is not the only problem in the euro zone. Panic in the financial markets is a significant threat, Italy and even France could be forced into bankruptcy, although they are economically healthy countries. The EU summit will negotiate, therefore, how to increase the impact of the euro rescue package -- to perhaps €1 or €2 trillion euros."

"These are fantastic sums, and yet they will not suffice. Because financial markets are irrational. Investors become nervous when there is an absolute guarantee limit. And they become even more nervous when 17 euro-zone countries vote on it. Other countries like the United States have long understood that fact."

"Therefore, the US Federal Reserve is the 'lender of last resort' and can make unlimited funds available in emergency situations. In Europe, too, the panic will only end when they European Central Bank can intervene without constraint."

The center-left Sueddeutsche Zeitung writes:

"It was not even a year ago that anyone speaking as a matter of course of the 'leverage' of financial products in the style of a banker would have to put up with ridicule. Today, casual television viewers can hear that word being bandied around loosely."

"Chancellor Angela Merkel and her colleagues have now, advised by well-meaning practitioners from the financial world, found a rescue format which must be examined in detail by this weekend, before a reliable judgement is permissible. In the end, two groups usually considered polar opposites must be satisfied with the outcome: The public, who have the right to understand what is happening to their tax money, and the professionals in the financial markets, who will hopefully give the crisis countries a period of grace."

"Both groups have a very keen sense of what is and isn't sustainable. Politics must offer both a perspective."

"European treaties cannot be changed this weekend. But the future shape of Europe must be visible if calm is to return to the markets and in living rooms."

The center-right Frankfurter Allgemeine Zeitung writes:

"If big events cast shadows, the forthcoming EU summit must already be causing dark clouds over the whole of Europe. The expectations centered on it are almost as vast as the sums to be created through a 'leverage' to drown the crisis in money. But because little exactly is known at present on what will be decided on Sunday, a hollow debate is running in Berlin."

"The opposition fears the worst and is calling for the entire parliament to be involved in the decision on the design and 'leverage' of the rescue fund -- also in the hope of once again demonstrating the internal conflict of Merkel's government coalition. The government parties would therefore be happy for the issue to be handled by parliament's budget committee. But even its members, at the very least, want to be able to read what they are supposedly jointly responsible for."

-- David Knight with wires

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