EU Weighs New Fund to Attract Outside Money to Fight Crisis

Greece-Fueled Debt Crisis
A European Union flag flies at the foot of Acropolis hill in Athens. Photographer: Kostas Tsironis/Bloomberg

European finance ministers are considering setting up a fund to entice outside investors to buy troubled euro-area government bonds, as they struggled over how to tame the Greece-fueled debt crisis, said a person familiar with the matter.

The insured investment vehicle was one of two options being weighed, along with using the European Financial Stability Facility to boost the rescue firepower from 440 billion euros ($611 billion) currently, the person said.

“The principle that we leverage the EFSF with private money is being subscribed by everyone, but the level of success is uncertain,” Dutch Finance Minister Jan Kees de Jager told reporters on the second day of crisis talks in Brussels. “How much can we raise, that is being looked at.”

Europe’s room for maneuver narrowed yesterday with a report that Greece’s economy is deteriorating, piling on pressure to build a stronger anti-crisis firewall by a self-imposed Oct. 26 deadline. Measures being considered include a boost in bailout funds to 940 billion euros, deeper writedowns on Greek debt, and a demand that banks increase Tier 1 capital to 9 percent by mid-2012.

Stocks and the euro rallied yesterday on signs that warnings from global leaders including President Barack Obama have jolted European policy makers into action.

European Union office buildings, luxury hotels and a suburban Brussels flower park were the scenes today for a crisis-management convention involving national and EU-level leaders, finance ministers, central and commercial bankers and their aides.

Bank Recapitalization

All 27 EU finance ministers discussed bank recapitalizations in the morning, followed by the second session in two days of the 17 ministers from euro countries. Neither session yielded a formal announcement.

German Chancellor Angela Merkel and French President Nicolas Sarkozy meet privately in early evening before a later sitdown with European Central Bank President Jean-Claude Trichet, EU President Herman Van Rompuy, European Commission President Jose Barroso and EU Economic and Monetary Affairs Commissioner Olli Rehn. International Monetary Fund Managing Director Christine Lagarde will also be there.

The special purpose investment vehicle, the newest option on the table, would buy bonds in the primary and secondary markets, the person said. The purpose would be to attract outside investors and sovereign wealth funds, tapping reserves built up by countries like China.

EFSF Guarantees

A special-purpose vehicle was also discussed at this month’s meeting of the Group of 20 finance ministers and central bankers to be run by the IMF as a way to channel loans from countries such as China and Brazil.

“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,” Antonio Borges, the IMF’s European department head, said Oct. 5. “It could be done, it’s not to be excluded.”

The other option also involves EFSF first-loss guarantees, yet without creating the special fund. It was backed by Germany and was the front-running option until this week, when France complained that it wouldn’t be enough and sought to turn the fund into a bank that could borrow from the ECB.

Aid of 256 billion euros for Greece, Ireland and Portugal has failed to stabilize markets or prevent the turmoil from spreading to France, co-anchor with Germany of the European economy. French bank shares have tumbled on concern they are vulnerable to losses around Europe’s periphery.

France’s climbdown was signaled late yesterday by Finance Minister Francois Baroin. Tapping the central bank “is not a definitive point of discussion for us,” he said. “What matters is what works.”

ECB Opposition

Yesterday’s start of the six-day summit marathon was overshadowed by the report by the EU Commission, ECB and IMF on Greece that highlighted the dilemmas of righting Greece’s finances without sending shockwaves through the banking system.

Divisions over the handling of Greece were thrown into relief by the report, which was obtained by Bloomberg News. It contained a footnote that the ECB, which has lobbied against writedowns, “does not agree” with the inclusion of the bond-loss scenarios.

Officials are considering five scenarios to update a July agreement that foresaw 21 percent losses on Greek debt for private bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so-called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.

A deepening recession and delays in enacting budget cuts have raised Greece’s financing needs by at least 20 billion euros since July, when euro leaders hammered out a 159 billion-euro package, the people said.

“We have to discuss with the private sector and see what is suitable,” Spanish Economy Minister Elena Salgado told reporters. Ministers discussed investor losses of “more than 21 percent,” she said.

The ministers yesterday signed off on the payout of its 5.8 billion-euro share of an 8 billion-euro loan to Greece. It’s the sixth installment of a 110 billion-euro package awarded in May 2010.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE