Eurozone's 'big bang' gamble over debt crisis
Under-pressure eurozone officials are considering a ‘big bang’ plan to dramatically increase the size of the European bailout fund to tame financial markets and bring the sovereign debt crisis under control.
A European Central Bank (ECB) board member threw his weight behind a plan, first mooted by the US Treasury, to increase the size of the European Financial Stability Facility (EFSF) by allowing it to borrow additional funds from the European Central Bank.
The comments, by Lorenzo Bini Smaghi at a conference on the sidelines of the International Monetary Fund (IMF), were the first hints that a plan to leverage up the EFSF is being considered by the ECB and the eurozone governments which are contributors to the fund.
The EFSF was conceived as a fund to channel bailout money to eurozone countries that were having trouble servicing government debt, but its ability to fully contain the sovereign debt crisis has been in doubt almost since its inception.
Contributors have pledged up to €780bn (£675bn), though ratification through member countries' parliaments is slow and uncertain.
The plan emerging last night would widen the scope and dramatically increase its size, providing additional funds to buy government debt from any countries that might be frozen out of the financial markets, a major fear for core eurozone members Spain and Italy.
It would also be able to inject money into any European banks that get into trouble because of losses on government debt, such as are likely to occur if Greece defaults on its debt — something that markets now view as inevitable.
Markets around the world achieved a degree of calm yesterday on rumours of the big bang approach from the eurozone, and new reports on the details of the wider, bigger EFSF sent the US stock market soaring last night.
Turmoil in the eurozone is the biggest single threat to the global economy, traders believe, and they have watched the political wrangling on the Continent with alarm.
That the solution is by no means secure was underlined when Germany's chancellor Angela Merkel took the rare step of appearing on a television chat show in an attempt to halt a dramatic decline in public support for her coalition's plans to contribute to the Greek bailout.
Opinion polls suggest that between 75% and 80% of Germans oppose more cash injections for Greece.
Several leading members of Ms Merkel's coalition also oppose the plan.
Europe's banks would go into meltdown if Greece defaulted in a “disorderly” way because they have large holdings of bonds.
A full default would leave Greece's bonds worthless, causing banks huge losses.
France's banks have sparked the greatest alarm because of fears about their exposure to Greek debt. UK banks have smaller holdings of Greek bonds but would face trouble if panic spread to Ireland and Spain.