Germany plays down ESM leveraging prospects

Last Updated: Mon, Sep 24, 2012 17:01 hrs

BERLIN (Reuters) - Germany played down talk on Monday that Europe's new rescue fund could be leveraged four-fold to 2 trillion euros, but acknowledged discussions were under way in Brussels on giving the so-called ESM certain instruments to lure private investors.

The European Stability Mechanism (ESM) is expected to become operational next month and will build up to its full lending capacity of 500 billion euros over the coming years.

Late last year, euro zone governments opened several leveraging options to the ESM's predecessor, the European Financial Stability Facility (EFSF). They are now looking into doing the same for the ESM, although euro zone member Finland is resisting.

German weekly Der Spiegel reported at the weekend that governments could boost the firepower of the ESM to $2 trillion this way, but Finance Ministry spokesman Martin Kotthaus called that "illusory".

"When I read these figures, specific volumes, then we need to say clearly that this is not feasible in any form," Kotthaus said. "The number is neither understandable, feasible, nor recognisable."

Euro zone governments talked last year about a five-fold leveraging of the 440 billion euro EFSF, and the fund's chief Klaus Regling travelled to Asia to woo investors.

In January, Regling said private investors had pledged to invest 60 billion euros alongside the EFSF.

There are two options for leveraging the EFSF that are under discussion for the ESM. The first would see the fund guarantee a percentage of the value of a bond issued by a euro zone sovereign at primary auction, offering investors partial protection in the event of a default.

The second would be to set up one or more co-investment funds (CIFs) to attract public and private funding - for example sovereign wealth funds, risk capital and institutional investors -- to boost the rescue facility's seed money.

The attraction for investors would be that in the CIF, the ESM would be first to take a loss, should there be one. But both this and the partial insurance scheme clash with the senior creditor status that the ESM is to enjoy.

European Commission spokesman Olivier Bailly told a regular news briefing on Monday that both options were being looked at for the new rescue fund.

"We are in a transition phase between the EFSF and the ESM. Member states are discussing the possibility of the use of the two financial instruments, which currently are attached to the EFSF, and to attach them to the ESM. We are checking point by point what can be transferred from one to the other," he said.

A senior euro zone source told Reuters Finland would ultimately be forced to drop its objections to leveraging options for the ESM as its northern allies, Germany and the Netherlands supported it.

"The Finns will have to accept it," the source said.

(Reporting by Gernot Heller in Berlin, Jan Strupczewski in Brussels; writing by Noah Barkin; editing by Philippa Fletcher)

More from Sify: