Leveraging powers for the EFSF would reduce the risk associated with bond purchases

EURO ZONE finance ministers are discussing yet another expansion in the remit of their bailout fund as they explore how it could be deployed to support interventions by the European Central Bank in bond markets.

The talks on “leveraging” the assets of the European Financial Stability Facility (EFSF) bailout fund remain at an early stage.

If brought to a successful conclusion, however, they could see the fund provide a cross-guarantee to the ECB to cover any losses it incurs on its purchases of sovereign bonds from distressed euro zone countries.

A well-placed European source said the idea, modelled on measures deployed in the US bank rescue, was one of several on the table as a “task force” of officials examines how Europe can step up its effort to restore order in the euro zone.

However, the stance of the ECB remains unclear. Although the bank jealously guards its operational independence, the provision of any such support from the EFSF would give it more firepower.

The ECB intervenes only reluctantly in bond markets and would prefer to cease such activities and allow the EFSF to carry on in its place.

Leveraging powers for the EFSF would not provide an exit route for the ECB, but they would reduce the risk associated with the bond purchases.

In recent days, incoming ECB president Mario Draghi warned that the bank cannot continue its forays into bond markets indefinitely.

Minister for Finance Michael Noonan said US treasury secretary Timothy Geithner raised the question of giving the fund powers to leverage its assets when he met euro zone ministers yesterday morning.

“He was very succinct and he referred to a possibility of leveraging,” Mr Noonan told reporters on the sidelines of an EU meeting in Wroclaw, Poland.

“It’s something he suggested that should be examined by Europe.”

The plan would mirror procedures set down in the US Term Asset-Backed Securities Loan Facility, which was set up after the 2008 financial crisis to boost the asset-backed securities market.

In this plan the US treasury offered credit protection when the Federal Reserve Bank of New York intervened in the market for such securities.

The talks on EFSF leveraging come as Europe faces increased global pressure to settle the debt debacle set off by the falsification of the public finances in Greece.

Measures to increase the scope of its operations have proven very controversial in the past.

Moves to empower the fund to intervene in secondary bond markets were quashed at Germany’s behest last spring only to be endorsed by euro zone leaders in July when the debt crisis intensified.

When financial market tensions further escalated in August, European Commission president José Manuel Barroso called for the fund to be given significantly greater lending powers. He was quickly rebuffed by German chancellor Angela Merkel.

According to European sources, the current proposal would provide greater flexibility to the fund and increase its efficiency.

In short, the leveraging process would mean the EFSF would deploy fewer assets up front during an intervention in markets. This would conserve its resources, while providing a level of protection to the ECB.

Its bond-buying programme has proved deeply controversial within the upper ranks of the ECB and with Germany’s economic establishment. It led last week to the resignation of ECB executive board member Jürgen Stark, Germany’s top official in the Frankfurt-based central bank.

He opposed the ECB’s decision to buy Italian and Spanish debt, as did Germany’s other member of the ECB governing council, Bundesbank chief Jens Weidmann.