This week's market upheaval in Europe has made it difficult to increase the firepower of the eurozone's €440 billion rescue fund to the €1,000 billion that the bloc's leaders had hoped for.
Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses – the centrepiece of a plan agreed in Brussels on October 26 – would now probably use up more of the fund’s resources, Klaus Regling, head of the European Financial Stability Facility, said.
His concerns underline Europe’s difficulties in putting in place mechanisms to contain the debt crisis and, if necessary, help Italy cope with soaring refinancing costs. “The political turmoil that we saw in the last 10 days probably reduces the potential for leverage”, Mr Regling told reporters. “It was always ambitious to have that number, but I’m not ruling it out.”
Leveraging the EFSF’s dwindling resources is the cornerstone of a plan to increase so-called “firewalls” to prevent the turmoil in Greece from spreading to European banks and its largest economies, particularly Italy.
One of the two options being explored – a plan that some officials say is the most developed – would guarantee Italian bondholders against part of their losses. Officials had hoped new investors could be enticed by a guarantee against a 20 per cent loss, but those investors may now be seeking up to 30 per cent – which would limit the expanded firepower of the fund to about €800 billion. Mr Regling said he believed confidence in eurozone bond markets would return, particularly after Greek and Italian politics becomes more settled, meaning the fund may eventually reach the €1,000 billion mark.
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