The mostly likely method for leveraging the euro zone’ bailout fund involves using it to provide bond insurance while combining its firepower with a special purpose vehicle drawing in funds from China or Brazil, European Union officials said.
After a summit of EU leaders on Sunday to try to come up with a comprehensive solution to the crisis, officials indicated that twinning two of the options for scaling up the 440 billion euro European Financial Stability Facility might end up securing broad backing, and the summit’ conclusions reflected that.
One official indicated that the special purpose vehicle could be attached to the EFSF itself, while others said it would involve the IMF. The options will have to be narrowed down by another summit on Wednesday. But Sunday’ summit conclusions referred to the IMF as a possible partner.
“The G20 should ensure that the IMF has adequate resources to fulfill its systemic responsibilities and should explore possible contributions to the IMF from countries with large external surpluses,” the conclusions said.
Export-giant China, which has the world’ biggest foreign currency reserves, is often referred to in G20 statements as an external surplus country. It has a sovereign wealth fund managing assets of over $230 billion.
The euro zone wants to boost the firepower of the EFSF, which relies on member state guarantees to raise funds on markets, to ensure it has the capacity to safeguard Spain and Italy against the threat of further bond market turmoil.
But euro zone countries do not want to put more money into the fund as public opinion is against it and such a move could endanger the triple-A rating of France. Paris wanted to turn the EFSF into a bank so that it could tap European Central Bank funds, but Germany ruled out such a move, saying it would violate the EU treaties. The ECB was also opposed.
Germany therefore advocates the EFSF could boost market confidence in new issues of Spanish and Italian bonds by guaranteeing to cover the first 20-30 percent of potential losses investors could suffer in the unlikely event of either country defaulting on its debt.
To turbocharge such an insurance scheme, the IMF could set up a special purpose vehicle, which could use funds from countries around the world, euro zone officials said.
It was not clear yet how much money such an SPV could put together, one euro zone official said.
“This is one option. Hard to say if it is the most likely, but it is on the table,” one euro zone official said.
In exchange for helping the euro zone, China has signaled Europe would have to keeping investment and trade flows open and recognize China’ market economy status, the lack of which now makes it easier for its firms to be found guilty of dumping goods on overseas markets.
China joined the World Trade Organisation in September 2001, after 15 years of negotiations, and under WTO rules will only be treated as a market economy starting 2016.
The non-market economy status allows other countries to impose additional duties on China’ products until 2016. Chinese politicians have repeatedly called for the EU to alter its position sooner.