EU Commissioner Olli Rehn, Eurogroup president Jean-Claude Juncker, and EFSF head Klaus Regling outlined their plans for leveraging the European Financial Stability Facility in a press conference after a meeting of eurozone finance ministers today.The officials appeared to make some concrete progress on plans to expand the firepower of the EFSF, something which analysts once thought would constitute a “big bazooka.”
Regardless of this progress, it is unlikely that this bazooka will truly wipe out the crisis.
Leaders said they will expand the EFSF using two different methods simultaneously:
- First loss guarantees: The EFSF would issue partial risk protection certificate for newly issued bonds, meant to increase demand for new bond issues. Analysts have previously speculated that such certificates might guarantee 20-30% of bonds’ value, but leaders didn’t give specifics in today’s presser.
- A co-investment fund: A co-investment fund would seek to bring public and private funding to a greater EFSF subsidiary (special purpose investment vehicle). There would be three separate “tranches” of the fund: the EFSF would contribute to the private investors could invest in a “participating” tranche, and the IMF could provide funding for the last tranche.
Deployment of either of these measures will only be made after a request from a member state, and will be linked to policy conditionality. The Facility also plans to enter the short-term bond market to increase the facility’s access to cash.
Even so, Rehn, Juncker, and Regling were quick to admit that “no one single silver bullet that will get us out of the crisis.” This statement suggests that EU leaders might already be thinking about more radical intervention—likely by the European Central Bank or in the form of eurobonds.
Rehn told reporters that the facility will fall short of its €1 trillion ($1.4 trillion) firepower goal. Journalists and investors have argued that the fund would need to be expanded further even if it reached that unlikely goal.
Although today’s announcements spurred a slight uptick in futures, we can’t imagine that it’s likely to persist for long.