Doubts rise over euro rescue fund's relevance

The European Financial Stability Facility (EFSF), which uses 440 billion euros of government guarantees to borrow on markets for subsequent lending to bailed-out Greece, Ireland and Portugal, “has no credibility” with traders, said Belgian economics professor Paul De Grauwe.

The fund, worth US$595 billion at current exchange rates, was born out of the first phase of the Greek debt crisis 18 months ago but has constantly appeared behind the curve as financial market contagion sucks in country after country.

Eurozone leaders decided at a summit late last month to “leverage” its lending capacity up to a trillion euros just as Italy's 1.9-trillion-euro debt mountain pushed it to the top of investor concerns.

A new “technocratic” government has taken power in Rome, with its public finances put under EU-IMF surveillance while France — the second-largest eurozone economy — is the latest to see its borrowing costs under pressure.

That means a timeframe announced by Luxembourg Prime Minister Jean-Claude Juncker for an upgraded EFSF to be partly operational in December, and fully ramped up in February, is looking increasingly irrelevant, the economists say.

Britain, France and the United States have each urged Germany to allow the ECB to emulate the Federal Reserve or the Bank of England by funding governments and pumping liquidity into the eurozone, in effect printing new money in an effort to get the economy moving again.

“The rescue fund, to begin with, will not have sufficient resources, even with a trillion euros,” said De Grauwe, who lectures at Belgium's Louvain university.

“Italy has almost two trillion in debts and soon we might be talking about Spain and France,” he said.

Yet the newly souped-up EFSF “can't even get out of the (starting) blocks,” with markets already adding premiums to the fund's own borrowings.

So ideas are multiplying on how to change the fund to make it live up to its objectives.

Credit Agricole analyst Veronique Riches-Flores says the various plans put forward to date have each been built on a “rare complexity — so complex, in fact, that they keep changing shape.

“It just doesn't stand up to scrutiny,” she added of moves including an appeal to China or Russia to buy into an as yet non-existent sister fund, or plans for money to be sliced up into insurance policies for specific countries facing problems raising finance on the open market.

Beijing has said it will help but is looking for more information. Moscow has queried the logic of what has been proposed.

Analysts such as the Bruegel Institute's Jean-Pisani Ferry point to weakness in the EFSF's constitution — because any of the 17 eurozone governments can veto its actions.

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