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The paper said neither option would require politically-difficult changes to the existing European Financial Stability Facility (EFSF), which has been approved by national parliaments after some problematic debates. The eurozone wants to boost the firepower of its €440 billion bailout fund without putting more money into it.
With France dropping its idea of turning the fund into a bank to tap European Central Bank funds at a summit this weekend, EU leaders will decide at a second summit on Wednesday which of the two approaches left on the table should be used, with a combination looking increasingly likely. Under the credit enhancement or insurance model, the EFSF could boost market confidence in new debt issued by a struggling Member State by guaranteeing an unspecified proportion of the losses that could be incurred in the event of a default.
This would work via the EFSF extending a loan to a Member State, which would buy EFSF bonds in return. The bonds would be the collateral for a partial protection certificate to be held in trust for the state. Both the bond and the certificate would be freely tradable, according to the paper.
Under the SPIV scheme, one or more vehicles would be set up either centrally or in a beneficiary Member State to invest in sovereign bonds in the primary and secondary markets. Its structure -- the senior debt instrument could be credit rated and targeted at traditional fixed income investors - is meant to attract international public and private investors, according to the paper. "The SPIV would aim to create additional liquidity and market capacity to extend loans, for bank recapitalisation via a Member State and for buying bonds in the primary and secondary market with the intention of reducing Member States' cost of issuance", the paper said.