Rescue plan could take weeks to fund, draft warns

EURO ZONE governments have warned it could take weeks to finalise the means to give their debt-crisis rescue fund the firepower it needs to protect countries such as Italy and Spain from speculative attacks.

The draft of the terms for the “optimisation” of the European financial stability facility (EFSF) submitted to the German parliament states that the fund would choose between two tools on a case-by-case basis.

To multiply the impact of remaining resources – €250 billion out of the original €440 billion, following bailouts of Greece, Ireland and Portugal – the EFSF could insure portions of new sovereign bond issues. It could also tap a special fund fed by global private and public investors.

But the governments warn that winning investors for the latter special purpose investment vehicle, or SPIV, could “require a period of some weeks”, should EU leaders give the proposal the green light at their summit today.

Who the euro zone hopes to enlist to help it fight the crisis has been the focus of speculation over recent days as the 17-member bloc attempts to find a response that will soothe nervous investors.

There has been talk that it could try to tap the IMF and emerging market nations such as China, India and Brazil, which may have an interest in maintaining a stable euro as an alternative currency to the US dollar.

But the four-page draft only talks broadly of “international public and private investors” – which might include bond funds, “sovereign wealth funds, risk-capital investors, and potentially some long-only institutional investors”.

Each SPIV would fund a nation by buying sovereign bonds on the primary or secondary markets. Funding would come through “different classes of instrument with distinctive risk/return characteristics”, the draft says.

These could include “a senior debt instrument” – which could be credit-rated and suitable for “traditional fixed-income investors” – and a more junior “participation capital instrument”. They would be “freely tradeable”.

Both these types of paper would be superior to an investment by the EFSF itself, which would “absorb the first proportion of losses incurred” by the special purpose fund – which could attract sovereign wealth funds.

According to the draft terms, the other tool would allow the EFSF to offer “partial protection” to investors buying new sovereign bonds being issued by a government. The EFSF, in effect, would post its own bonds as collateral.

The document says the tools are “not mutually exclusive”, suggesting their use could be blended according to the needs of the country involved.

As the “partial protection” model could raise government debt or breach a government’s past pledges to investors – so-called negative pledge clauses – the SPIV-option could be the only way to proceed in some cases.

In a sign of political difficulties ahead for proposals to boost the EFSF, the main opposition party in the Netherlands has threatened to block any agreement to emerge from today’s summit unless it had sufficient scope to solve the euro zone crisis once and for all. The shift reflects the opposition’s frustration at being forced to support measures that have failed to stem the crisis.– (Copyright 2011 The Financial Times Limited)