The International Monetary Fund has offered a slate of options to European Union authorities as they work to revamp the euro area’s main rescue fund, said Antonio Borges, the IMF’s European department head.
The IMF is in a position to work “alongside” the European Financial Stability Facility on rescues, such as possible efforts to restore confidence in Spain and Italy, Borges told reporters in Brussels today.
“The most important and immediate help that we could provide” is precautionary lending, as the EFSF also will be able to do once the euro region’s parliaments have finished approving an upgrade, Borges said. Other options, including investments in the primary and secondary bond markets, might also be “hypothetically” possible.
“To be able to do this we’d have to create a special purpose vehicle, which we have done in the past in other circumstances,” Borges said. “It could be done, it’s not to be excluded.”
In a subsequent statement, Borges retreated from some of these suggestions. “We are not contemplating any market involvement with the EFSF,” he said. “Any alternative lending modalities to what we do now would require a different legal structure and the use of a different source of financing. We have not discussed these issues with our membership.”
Borges said the EFSF needs to be a “catalyst” for drawing investors back to the market. He said the 440-billion euro ($586 billion) fund doesn’t need to be greatly expanded, just used efficiently, perhaps with the aid of leverage or additional guarantees from some nations.
“The most important thing in our view is that as soon as the authorities know how they want to use the EFSF, if that is clearly communicated to the markets, can have a very important stabilizing effect,” Borges said. He said it will take some time to implement those policies, since the EFSF will need to raise money once the EU decides how to proceed.
In its new role, the EFSF will have the option of buying bonds on the secondary market, “in ways that would be very helpful for Spain and Italy,” whose bonds were bought by the European Central Bank, though they didn’t require bailout packages, Borges said.
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