EFSF

As a bank, the European financial stability facility would be able to access ECB liquidity in a refinancing crisis.

It would also have been a good idea to fold the EFSF into the new mechanism right from the beginning, rather than letting them coexist.

EU finance ministers last week were unable to agree on how, or by how much, to increase the EFSF's resources.

In any case, Mrs Merkel has made it clear that she has no intention of linking the EFSF to a vote of confidence.

Germany wants the market to help fund the bailout with the EFSF acting as a backstop to any further bank runs.

After the last summit the financial markets' enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours.

In July leaders agreed to let the main bail-out fund, known as the EFSF, recapitalise banks and buy bonds.

They would have to reorient their thinking if the EFSF were to be used to guarantee the banking system.

The new EFSF rules will only make sense if the rescue mechanisms are allowed to develop into a European debt agency.

"Neither the ECB nor the EFSF (European financial stabilization facility) would buy any more bonds in the market, " he said.

Private banking sources said the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank.

In fact, if it's a reallocation away from the peripheral bond markets to the EFSF bonds, then it could prove to be euro negative.

Chinese officials can be expected to ask smart questions about the souped-up bail-out fund, the European financial stability facility.

Even a fully operational, leveraged EFSF would not be in a position to give a "whatever it takes" bond purchasing guarantee.

The EFSF and its successor, the European Stability Mechanism, have been set up to handle small countries.

But once they make such a declaration, there should be no obstacle to endowing the EFSF with a banking licence.

Regling, chief executive of the EFSF, said the fund could sell bonds in yuan in future if Beijing so desired.

Technically, the EFSF monoline insurer would provide a first-loss tranche insurance for government bonds up to an agreed percentage.

In a test vote of CDU and CSU deputies yesterday, 11 opposed expanding the EFSF and two abstained (another dissident did not show up).

The facility's resources would be magnified, private investors would be drawn in and the price of bonds would still be set by the market.

He may be hoping that the SMP is just a bridge until the EFSF obtains the agreed authorisations from national governments to buy bonds.

China has bought bonds issued by the European Financial Stability Fund but has not agreed to wider intervention to help the eurozone.

But Chancellor Angela Merkel has been fighting for weeks to quell a rebellion by some of her backbenchers against the EFSF expansion.

Officials also say the ESM would be a much more robust structure, with a governing board and paid-in capital, than the EFSF.

The alternative to a bigger EFSF would be the issuance of Eurobonds that are jointly and severally underwritten by euro-zone members.

China would be happy to invest in EFSF bonds in a measured way, as it has already done.

The idea is to turn the EFSF into a monoline insurer for sovereign bonds.

The typical situation where an EFSF loan would be useful would be a case of egregious market failure.

'I am not here to discuss concessions, ' he said, noting that China already buys EFSF bonds and gets no special considerations.

If it is, then the EFSF or even the ECB may buy as many bonds as it takes to stabilise market interest rates.

The new vehicle would be capitalised by a first-loss layer from the EFSF, and then a second layer of the IMF's own capital.

How to expand the EFSF again is at the heart of the troubles vexing European leaders.

Klaus Regling, the EFSF's head, is wrong to say that market volatility has made it impossible to reach the leverage target.

This would not constitute an illegal monetisation of debt, as long as the endgame for the EFSF is credible.

Plan C would widen the EFSF umbrella, to make it big enough to shelter Spain and Italy.

That statement will be flung back at her if her "Christian-liberal" coalition does not itself provide enough votes to pass the EFSF bill.

In July, when the EFSF was first proposed, it would have been large enough to take care of Greece, Portugal and Ireland.

The borrower essentially pays the sum of the EFSF's funding costs, an administration margin and a lending margin.

By concentrating on the new issuance and not the existing stock of debt, the EFSF's task would be significantly less daunting.

The EFSF would then be able to inject capital into banks and purchase bonds of distressed governments on the open market.

I would expect Portugal to be the next country to fall under the umbrella of the EFSF.

An ersatz form of eurozone bond issued by the European Financial Stability Facility already exists.

And if the conditions attached to any EFSF deal were too onerous, the Irish might yet be able to play the IMF against Berlin.

When the ECB restarted the programme in August, it made clear it was a stopgap until the EFSF assumed responsibility.

Most seek to leverage the EFSF by turning it into a bank or an insurance company or by using a special purpose vehicle.

Germany on Tuesday declared there were no further expansions planned for the EFSF beyond what was decided in July.

I cannot see how the EFSF can offer similarly attractive rates.

It could contribute to the European Financial Stability Facility (EFSF) directly or by providing it with a back-stop on request.

EFSF officials decided to price this week because market conditions could deteriorate if they held off any longer.

But the EFSF still is not authorized to make any purchases -- the plan must be approved by every euro member's parliament.

But the problem the IMF's managing director did not acknowledge is that the EFSF itself is inadequately capitalised.

The European Council should by now have doubled or trebled the size of the European financial stability facility, the rescue umbrella.

For the EFSF itself, there is no reason not to approach China as a potential investor.

They originally envisioned the EFSF as a way of guaranteeing government bonds.

This would involve making permanent the temporary EFSF, while also demanding that bondholders take some of the pain.

This suggests that the G20 expects that the European parliament will pass their individual votes on the EFSF in the next few weeks.

The EFSF has no capital, only guarantees.

The European Financial Stability Facility derives its firepower from the guarantees of its shareholders.

So inviting new inflows of Chinese capital for the EFSF is likely to make economic life doubly difficult for the zone's weaker members.

Since the EFSF is too puny to do the job it has been given, the solution might appear obvious: to bulk it up still further.

France has already given up on its demand to leverage the EFSF through the ECB due to German and ECB resistance.

Only in case of need would the EFSF be involved. This would preserve the firepower of the fund.

Last month, the EFSF was given similar powers and there is now talk that it could step into the breach.

At present, the EFSF can only grant credits. Under the new rules, it will be able to act pre-emptively.

Hopes that the EFSF could be used to facilitate a voluntary reduction in debt, notably Greece's towering 140% of GDP, have dwindled.

The irony is that this risk is made greater by Germany's resistance to more firepower for the European Financial Stability Facility.

The EFSF would take on the main risk of lending to governments struggling to borrow from normal commercial sources - governments like Italy.

Europe's leaders have tried to solve this problem by creating a surrogate institution, the European financial stability facility.

I would thus assume that the EFSF's funding costs exceed those of the EIB by a good margin.

The rescue fund, the European Financial Stability Facility (EFSF), is far too small to be credible.

One would involve turning the EFSF into a bank which the ECB would then help to finance.

Soon though the euro zone may well have to expand the EFSF and allow it to issue jointly guaranteed "Eurobonds" .

It runs out in that year, but all loan tranches paid until then will continue under the old umbrella.

Given the state of Greek public finances, this plan must, first of all, review the European financial stability facility.

If it met targets, the EFSF could underwrite a "voluntary" restructuring at, say 50 cents on the euro.

Countries guaranteeing the EFSF's funds do not want to increase their burden, not least because some cannot afford to do so.

Regling made clear he wanted to determine what it would take for Beijing to put more money in the EFSF.

Had the vote gone against the EFSF, a financial-market meltdown might well have been the result.

Rumours abound of schemes to increase the firepower of the EFSF by expanding its ability to borrow, perhaps from the European Central Bank.

A more modest but effective proposal would be to strengthen the EFSF.

A leveraged EFSF is attractive to politicians for the same reason that subprime mortgages once appeared attractive to borrowers.

Any further increase in the EFSF could begin to negatively impact the credit ratings of the core members backing the fund.

The credit rating of the EFSF, which rests on the six AAA countries, would be at risk.

The ECB would provide leverage, but any initial losses would be borne by the EFSF.

That in turn would have affect the EFSF's own lending capacity, which equals the share of the triple A-rated countries.

First, the European financial stability facility must rescue the banking system as well as member states.

By the time it happens, the European financial stability facility will be empowered to protect European banks directly.

Unlike an independent central bank, the EFSF can be instructed to lend according to conditions set by citizens' political representatives.

s parliament rejected the EFSF enhancements, however; the initial reaction was muted with the EUR weakening only slightly.

A leveraged EFSF would have the worst kind of Eurobond: a tranche in a toxic debt security.

Ratings downgrades would reduce the EFSF's resources or force it to operate as a less highly rated, and more expensive, borrower.

One option he had mentioned was for the IMF to extend a precautionary credit line to Spain and Italy, also alongside the EFSF.

He also added however, that the EFSF is is the embryo of a common treasury.

A ring fenced bond could be held by the existing European financial stability facility.

A senior German government source said Berlin remained resolutely opposed to the ECB backstopping the rescue fund.

The EFSF is a lending vehicle of up to 440 billion euros which is backed by euro zone government guarantees.

Nor, in fact, is the European financial stability facility. It, too, was set up to deal with small countries such as Greece and Ireland.

The EFSF would partly guarantee eligible sovereign bonds, or, in other words, insure them against potential haircuts.

But the EFSF is backed by guarantees from euro-zone members, so the burden on France and Germany, the two big funders, would rise sharply.

But instead of buying bad mortgages off the books of crippled banks, the EFSF would buy bad sovereign paper.

The European financial stability facility's purpose is to match these asymmetries.

It would require a new intergovernmental agency to enable the EFSF to co-operate with Europe's central bank.

The 16 other euro-zone countries had already ratified the EFSF deal by the time Slovakia voted.

And when they designed the European financial stability facility, they created a mechanism suitable only for small countries.

The EFSF will be able to purchase the bonds of rescued governments when they are newly issued.

It should be put beyond doubt that the EFSF may fill the gap if Greece sticks to the programme.

Since then, contagion has spread to Italy and Spain and the efforts to leverage the EFSF have run into legal and technical difficulties.

Eventually, the markets will have to contend with what happens after the EFSF is tapped out.

Will the new rules for the European financial stability facility make contagion less likely?

And policymakers' hopes that the EFSF will be part-funded by private sector investors may prove harder to realise.

In any case, the EFSF must be authorised to make secondary-market bond purchases.

Instead we have the European financial stability facility, a curious off-balance sheet lender of last resort.

Yet German central bank Governor Jens Weidmann expressed reservations about the idea of EFSF leveraging on Saturday.

(European Financial Stability Facility, EFSF).

The bloc's rescue fund, the European Financial Stability Facility, relies heavily on France for its triple A status.

What is more, France and the EFSF are like tottering drunks holding one another up. If France is downgraded, the EFSF will be close behind.

And because the EFSF bears the first losses, its capital is at greater risk of being wiped out than under a loan programme.

On a side note, should France get downgraded EFSF’ s AAA rating likely to come under pressure.

But under the European plan, the only backstop is the principal in the EFSF.

The second reason you need a Eurobond is the effective collapse of the silly idea of leveraging the EFSF.

Once the Eurobonds are in place, EFSF liabilities would simply be transformed into Eurobonds.

Expanding the EFSF to 1 trillion euros is central to the euro zone's latest anti-crisis plan, put together at a summit last week.

An enlargement would have been necessary for the new-found flexibility to have any practical use.

To obtain the rating, the EFSF had to agree to an over-collateralisation.

If the EFSF stays small, the ECB will be forced to backstop the Italian and Spanish debt markets indefinitely.

The EFSF would have enough money left to guarantee and recapitalise the European banks.

It also requires strong conditionality to accompany direct EFSF loans to member nations.

Early next year it will vote on the permanent successor to the EFSF, the European Stability Mechanism (ESM).

The EFSF also remains constricted by its own operating rules.

'There are hardly any countries that have said already they will cooperate with the EFSF, ' German Chancellor Angela Merkel said.

Slovakia is the last country in the 17-member currency zone left to approve the revamped EFSF.

Still, experts said it's not a given that China(or other sovereign wealth funds) will make a big bet on the EFSF.

The EFSF must reinvest the buffer in the best triple A rated securities in the market.

The worry is that the EFSF may not now be able to raise enough money to stop the rot.

One widely discussed option is for the EFSF to guarantee the first 20% loss on any new bonds issued by countries under pressure.

To cope with any crisis beyond Portugal, the EU may need to increase both the size and remit of the EFSF.

We are not yet in a position where it would make sense for any country, not even Ireland or Portugal, to borrow from the EFSF.

The EFSF would be used primarily to guarantee and recapitalise banks.

Asked about the chances of boosting the EFSF's size, the source said: "It depends on what the alternative is. "

As each country must approve changes to the EFSF and Germany's approval has been the most difficult to get, German opinions are critical.

The EFSF last week obtained a triple A rating, which will help it raise cash in the bond markets at good rates.

In the short term, the 440 billion euros in the EFSF appears adequate to recapitalize the banks and fund fiscal gaps in Greece and Portugal.

But just imagine if one of EFSF's debtors defaults.

The EFSF held a call with investors Wednesday morning to give an update on the planned 10-year bond, which it announced Monday.

EU governments are too enamoured of offering guarantees to the banking sector instead of cash, which the EFSF could provide.

China will, rightly, only invest in the EFSF as a lever on other issues.

Some propose bringing the EFSF and the European Central Bank together, to leverage the EFSF's funds.

The EFSF will now be able to use 440 billion ($612 billion) to guarantee about 1 trillion of bonds.

Moreover, the higher coupon ESDRA receives from the Greek government from year 6 would more than pay for the EFSF funds already disbursed.

"I don't think we should assume that option of the EFSF as a bank is ruled out, " said Alastair Newton, an analyst at Nomura.

First, it is not clear yet precisely how the EFSF will be leveraged to 1 trillion euros.

Leveraging the EFSF would raise the risk to the countries that underwrite it.

European policymakers insisted it should have a gold-plated AAA credit rating, lowering its costs but limiting its capacity.

Furthermore, Germany doesn't seem too keen on expanding the size of the EFSF.

France wanted to draw on the EFSF, both to present the problem as European and to share the cost with Germany.

In the new year, it will vote on the European stability mechanism, the successor to the EFSF.

In return for being rid of its thankless bond-buying programme it can offer to repo any EFSF bond at par, securing a liquid market.

Will she not soften her tone once the Bundestag agreed the changes to the EFSF?

The market is rallying on the story that China will buy bonds issued by the EFSF.

The fund must also decide how to design the bond insurance scheme without playing into the hands of speculators.

This matters: a downgrade of France could fatally damage the EFSF.

China has invested in EFSF bonds issued to bail out Ireland and Portugal.

But to do that effectively, the EFSF will need to increase the amount of money it can spend in the fund.

Japan, and to a lesser extent China, have alsoalready invested in the EFSF.

The EFSF would have enough money to guarantee and recapitalise the European banks.

The first step was taken by authorising the European financial stability facility to rescue banks.

Enter Italy and the coverage ratio of EFSF funds to total debt for those five countries declines to about 10 per cent.

The bonds will be extended by 30 years, and their nominal value will be guaranteed by the EFSF.

Japan has been buying EFSF since they were first issued.

I have also heard a proposal to turn it into an insurance company.

The idea of providing the EFSF with more flexibility is good.

That is currently not possible because the EFSF is not allowed to purchase bonds in secondary markets.

The 16 other euro-zone countries hadalready ratified the EFSF deal by the time Slovakia voted.

Government should make haste to enhance the EFSF.

If the borrower is insolvent, the EFSF cannot help.

Euro-zone policy makers have already given up hope of using the EFSF directly to lend to Italy.

On Wednesday, however, 103 Finnish lawmakers voted to approve the EFSF expansion, while only 66 voted against.

The EFSF's credit has equal status to privately held bonds.

The EFSF could guarantee to buy, at a floor price, short-term bonds from programme countries.

The EFSF will expire in 2013, at which point a new, tougher crisis regime will kick in.

Together, these schemes are supposed to extend the value of the EFSF to EURO1 trillion ($1. 4 trillion) or more.

That is why the immediate focus of debate is on how to gear up the EFSF so that even with its limited resources it could do more.

It will be replaced in 2013 by a 500-billion-euro permanent European Stability Mechanism.

That is why the Germans resist the French idea of central-bank financing of the EFSF.

This is planned to replace the EFSF fund in July 2013 and would provide a legal framework for handling government bankruptcies.

Either way, the EFSF looks doomed.

Economists Thomas Mayer and Daniel Gros have proposed that it should attain a banking licence so that it can draw funds from the ECB.

This must now be made explicit, and backed by a big EFSF expansion.

The third is what to do with the European financial stability facility.

The first is that no country would ever want to borrow from the EFSF, unless it was absolutely unavoidable.

How to conjure a bigger EFSF without more taxpayers' money?

Clearly, some EFSF funding must go to recapitalise banks that cannot raise money from the markets.

The July summit did agree to expand the EFSF's remit so that it can buy government debt in secondary markets.

The more pressing need was to bolster the euro area's main rescue fund, the European Financial Stability Facility (EFSF), set up last year.

That is why, in practice, the EFSF could probably support Spain or perhaps even Italy, but not both.

These are set to remain long after the fiscal chasms are papered over by debt haircuts and the EFSF.

The third and biggest reason to worry is that the EFSF is too small.

The EFSF's successor, the European stability mechanism, will scarcely have more funding than the EFSF itself;