All eyes on eurozone’s EFSF rescue fund

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All eyes on eurozone’s EFSF rescue fund

BRUSSELS — All eyes turned to the eurozone’s EFSF bailout fund Friday for signs of possible action coupled to pledges by European Central Bank chief Mario Draghi to support the beleaguered euro.

By (AFP)

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Published: Fri 27 Jul 2012, 10:51 PM

Last updated: Tue 7 Apr 2015, 11:13 AM

Should the ECB linger in setting a rescue in motion, the troubled eurozone can look to the European Financial Stability Facility, which in the two years since it was set up has steadily acquired additional powers.

Draghi on Thursday said the ECB was “ready to do whatever it takes to preserve the euro.”

“And believe me it will be enough,” he added in remarks that sent markets soaring as traders expected fresh action from the bank to shore up the eurozone.

Spain, which needs to borrow another 50 billion euros by year’s end but still faces high borrowing costs, looks like it might need financial assistance soon.

On Friday, Madrid again ruled out the prospect of a full international bailout. “There is not going to be a bailout and a bailout is not an option,” said government spokeswoman Soraya Saenz de Santamaria

One way forward would be for the ECB to reintroduce its hotly contested programme of buying bonds of struggling eurozone countries on secondary markets, thus reducing the pressure on the interest rates they must pay.

While the powerful central bank intervenes on the sovereign debt market where bonds are traded after they are issued, the EFSF could help relieve the pressure by buying bonds directly from eurozone governments.

According to French daily Le Monde, Draghi is actively involved in talks with eurozone leaders to finesse a plan under which the EFSF would first buy bonds issued by Italy and Spain, followed by ECB purchases on secondary markets to keep costs down.

Amid signs of imminent action to help the single currency, Germany and France pledged Friday to do “everything to protect the eurozone” after talks on the crisis in Spain between Chancellor Angela Merkel and President Francois Hollande.

German Finance Minister Wolfgang Schaeuble meanwhile welcomed Draghi’s vow to “do whatever it takes” to save the euro.

The EFSF currently has a little more than 200 billion euros ($245 billion) to spend, not enough to fly to the rescue of Italy should it need a full-blown Greece-style rescue, but sufficient to have an impact on the market.

Though the fund is also able to buy public debt on the secondary market, it has never yet used that power.

Current rules state the EFSF can intervene on primary markets only for countries that have signed up to an official reform programme in exchange for a financial rescue, such as Greece or Portugal.

The EFSF can also offer credit lines as a precautionary measure or loan money to recapitalise banks.

At the last European Union summit end June, the bloc agreed that the EFSF could recapitalise banks directly, rather than channelling funds through government, which just adds to their pile of national debt.

Spain is hoping a a 100 billion euro credit line agreed for its banking sector will flow directly to the banks, allowing Madrid to avoid the damaging fallout likely from a request for a full-blown bailout.

The EFSF is to be replaced next year by the European Stability Mechamism (ESM), which is expected to come into force later this year.

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