Tue, Oct 25, 2011 - Page 10 News List

European leaders rule out ECB help

DEBT CRISIS:Germany defeated French efforts to bulk up the rescue fund by drawing on the European Central Bank. European leaders are to meet again tomorrow

Bloomberg

European leaders ruled out tapping the European Central Bank’s (ECB) balance sheet to boost the region’s rescue fund and outlined plans to aid banks, inching toward a revamped strategy to contain the Greece-fueled debt crisis.

Europe’s 13th crisis-management summit in 21 months also explored how to strengthen the IMF’s role. The leaders excluded a forced restructuring of Greek debt, sticking with the tactic of enticing bondholders to accept losses to help restore the country’s finances.

“Work is going well on the banks, and on the fund and the possibilities of using the fund, the options are converging,” French President Nicolas Sarkozy told reporters at the Brussels summit on Sunday. “On the question of Greece, things are moving along. We’re not there yet.”

The complete blueprint will not come together until a summit in two days, giving German Chancellor Angela Merkel time to go back to Berlin to brief her lawmakers and seek their approval for the next steps. Like on Sunday, it will start with all 27 EU leaders before the 17 heads of euro economies gather on their own.

“Ahead of the Wednesday summit, there remain many open questions,” Juergen Michels at Citigroup Inc in London said. “It seems that progress has been made over the weekend to get to a ‘comprehensive package,’ but it is unlikely to be a bold one.”

Germany achieved one of its main summit aims, defeating French efforts to bulk up the 440 billion euro (US$613 billion) rescue fund — the European Financial Stability Facility (EFSF) — by enabling it to borrow potentially limitless sums from the independent central bank.

Policymakers are headed toward using the EFSF to guarantee government bond sales as a way to extend its reach. A second option is to set up an EFSF-insured fund that would seek outside investment in troubled bonds.

“We have discussed options for increasing the firepower of the EFSF,” European Commission President Jose Barroso said. “I’m sure that progress can be confirmed on Wednesday.”

The goal is to complete the technical details within 24 hours, a European official said. The next summit will consider the two options, as well as ways of getting the IMF to boost its involvement, the official told reporters.

A separate statement called for “adequate” IMF resources with contributions from surplus countries such as China.

“Is it possible to get some extra funding from IMF, from BRIC countries for instance,” Finnish Prime Minister Jyrki Katainen said, using the acronym for Brazil, Russia, India and China.

Italy, with debt of 119 percent of GDP, came under pressure to find more savings to be eligible for European help in fending off speculators.

Merkel made clear that Italy could not count on unrestricted European support in what she called a “conversation among friends” with Italian Prime Minister Silvio Berlusconi.

“Confidence won’t result merely from a firewall,” Merkel said. “Italy has great economic strength, but Italy does also have a very high level of debt and that has to be reduced in a credible way in the years ahead.”

After a year of wrestling with the ECB over burden sharing for bondholders, Merkel was on the central bank’s side this time, sparing it from a role in financing state deficits.

What was not decided is the fate of bond purchases by the Frankfurt-based ECB. The central bank has bought 165 billion euros of bonds, justifying the purchases as a way of smoothing markets and helping transmit its interest-rate decisions through the economy.

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