France open to increasing EFSF size, bond buys "an option"
By Emma Thomasson and Paul Taylor
DAVOS, Switzerland | Fri Jan 28, 2011 8:35am EST
DAVOS, Switzerland (Reuters) - Europe's rescue fund should be increased in size if needed to tackle the region's debt crisis, and could be retooled so that it can buy bonds, French Economy Minister Christine Lagarde said on Friday.
Lagarde called for the fund to be made more flexible, while
Greece's finance minister said letting his country buy back government bonds at a discount on the market was worth considering.
Those funds could, in theory, be provided by European Financial Stability Facility (EFSF), but some northern euro zone states, including EU powerhouse
Germany, oppose such a move.
Euro zone leaders are discussing ways to strengthen the fund to show it has enough firepower to support states struggling with their borrowings, hoping this will ease the debt crisis.
"We are working on making the EFSF more efficient, more flexible, and if it needs to be bigger for that matter, so be it," Lagarde told a news conference at the annual World Economic Forum in
Davos, Switzerland.
U.S. Treasury Secretary Tim Geithner joined a bevy of European and international executives in voicing confidence that the European Union was on the road to overcoming the crisis.
Lagarde said using the rescue fund to buy sovereign bonds was an idea worth examining.
"Buying bonds is one option," she told Reuters Insider television. "We should look at it. We should weigh the pros and cons and decide what is most efficient."
The fund has a headline value of 440 billion euros but an effective lending capacity estimated at just 250 billion euros because of the need to secure a triple-A credit rating.
The worry is that the fund could be wiped out if a larger European economy such as Spain needed rescuing. If that happened the fallout might not remain contained within Europe.
The challenge is to boost it without raising the headline sum, which would be difficult to sell politically to Germany's parliament and public in particular.
GREEK BOND BUY-BACK?
Finance Minister George Papaconstantinou said Greece could return to the debt market by the end of this year and reiterated that Athens would not restructure its debt to private creditors.
Greece became the first
euro zone country to receive an EU/IMF bailout last May, receiving 110 billion euros in loans after it was shut out of capital markets due to massive debts.
Asked about buying back Greece's bonds below par, Papaconstantinou said: "To do that you need money and so it is one of the ideas that is being discussed, not officially ... It's an idea that that deserves some discussion, like others."
Lagarde was more equivocal and said
Greece should focus on delivering promised reforms.
Ministers are considering possible buy-back schemes to allow the EFSF to buy government bonds or enable Greece to purchase its own bonds with EFSF money at the heavily discounted secondary market price and retire them to reduce its debt pile.
But EU officials say creditors are holding 80 percent of Greek debt to maturity on their banking books and only 20 percent at "fair value" on their trading books, so the take-up for any buy-back could be limited.
Papaconstantinou said a comprehensive package of EU measures to address the
euro zone's debt crisis, due to be adopted at a late-March summit, would help improve market sentiment.
Greece had begun to put its house in order by reducing its budget deficit by six percentage points last year to 9.4 percent but its ability to reduce its debt mountain would depend on its ability to restore growth and generate primary budget surpluses.
GDP SURPRISE?
Separately, Greek Prime Minister George Papandreou said European Union governments were considering the possibility of allowing EU financial institutions to recapitalize European banks that need bolstering.
Papandreou was asked whether a collective solution at an EU level to recapitalize banks that needed funds along the lines of the U.S. TARP program was under consideration.
"These are issues which are being seriously discussed now," he replied. "Who is going to do this if it is necessary? Will it be the EFSF? Will it be the ECB (European Central Bank)? These are issues that are on the table."
His finance minister stuck to an official forecast of a 3 percent contraction in Greek GDP this year after a 4 percent fall in 2010, but added: "Let's see if we can surprise the market."
Athens is committed under its austerity program to cut its budget gap to below the EU limit of 3 percent of GDP in 2014.
Papaconstantinou said he expected the euro zone and the IMF to agree to stretch out the repayment period for rescue loans and reduce the interest rate to help make the debt sustainable.
Greece's public debt stands at 145 percent of GDP and is projected to peak at 158 percent in 2013, according to EU and IMF forecasts, a level which many say is unsustainable.
.