European officials are nearing a consensus to enable the euro rescue fund to buy distressed governments’ debt in private placements, while divisions fester over possible acquisitions of outstanding bonds, said three people familiar with the discussions.
Agreement on allowing the 440 billion-euro ($605 billion) European Financial Stability Facility to purchase bonds from the issuers may mark a step toward a broader overhaul of the rescue fund. Moves under discussion include secondary market purchases, using loans for governments to retire traded debt at a discount, and better aid terms, the people said.
Buying bonds directly instead of offering bailout loans, as the fund does now, may enable struggling countries to retain access to markets and avoid the stigma of dependence on rescue financing, said the people, who declined to be named because the deliberations aren’t public.
“The fund should have the greatest possible flexibility and the greatest possible breadth,” Spanish Economy Minister Elena Salgado told broadcaster Telecinco in Madrid today.
Bond buying is part of the crisis-fighting package that leaders will examine at a Feb. 4 summit in Brussels, though decisions on the details will be put off until another summit in late March.
German Chancellor Angela Merkel has called for a “comprehensive” solution that reinforces the EFSF, which expires in 2013, sets up a permanent rescue mechanism and tightens controls over future fiscal slippage.
In what was designed as a stopgap move in May, the European Central Bank has bought 76.5 billion euros of bonds of countries such as Greece, Ireland and Portugal to maintain a lid on their borrowing costs.
ECB Absence
In a sign that the immediate pressure is off, the ECB didn’t do any buying last week, its first absence from the debt markets in three months. The euro notched its 14th gain in 17 days today, reaching $1.3737 as the sense of emergency subsided.
Portugal’s 10-year bond yield fell 15 basis points to 6.90 percent today, dipping back below the 7 percent level that helped push Greece and Ireland into aid packages. Portugal and Spain have brushed aside suggestions that they will have to resort to European Union help.
The worst “could be over,” though it is too early to declare the crisis “dead,” EU Economic and Monetary Commissioner Olli Rehn said in Helsinki today.
Spain’s AA credit rating was affirmed today by Standard & Poor’s, which said its outlook remained “negative.”
As the ECB refocuses on fighting a rise in inflation to a two-year high of 2.4 percent in January, political leaders are looking to relieve it of the bond-market interventions that were never part of its core mission.
Original Intent
Bond purchases were the original declared purpose of the EFSF, which was cobbled together on a May weekend after a hastily engineered 110 billion-euro loan package for Greece failed to calm markets.
The EFSF was then used to offer loans instead, deemed by Germany to be an easier way of making sure that countries receiving aid cut budget deficits and overhaul their economic management.
While a private-placement program wouldn’t necessarily change the aid terms, it would give lending governments a tradable security that they could later offload on the market, the people said.
The EFSF may lack the firepower to buy back enough outstanding debt to make a difference to the most debt-swamped nations. While officials are discussing ways to put all of the fund to use, there’s no proposal under consideration to increase its 440 billion-euro headline figure.
Irish Terms
Ireland, facing elections after the recourse to 67.5 billion euros in aid brought down Prime Minister Brian Cowen’s government, is pressing for EU money on more affordable terms.
Ireland’s loans come at an average rate of 5.8 percent, about 300 basis points more than the EU’s cost of borrowing -- a penalty rate intended by Germany to make aid a last-ditch option.
Lower rates “would be a signal that would provide a lot of relief,” said Alessandro Leipold, a former International Monetary Fund official. “This notion of punishing the country which underlies all this talk about a last resort and penalty rates is rather silly.”
To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net
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