EUROZONE leaders are hoping to stimulate demand for the debt of their bailout fund by rushing out newly drawn-up plans for how it will work.
The European Financial Stability Facility (EFSF) was forced to cancel an auction of its debt recently due to little interest from investors, with details scarce on how its capital will be deployed.
However, Eurozone officials have now made some progress in working out how the fund’s €250bn available cash will be leveraged.
The fund will guarantee losses equal to 20-30 per cent of a Eurozone government bond’s value by issuing a certificate to buyers of the debt, according to Reuters.
The certificate could then be bought and sold separately. It would pay out, either in cash or EFSF debt, if the International Swaps and Derivatives Association determined that a “credit event” had taken place or if Eurozone ministers agreed that a significant voluntary restructuring of debt had occurred.
However, the EFSF will also keep around €10bn in un-leveraged capital on standby for unforeseen events.
There were also reports yesterday that the IMF is putting together a €600bn rescue for Italy with the aim of seeing it through the next year so that new Prime Minister Mario Monti has some breathing space in which to bring down the country’s huge debt pile.
The loan would be put together by the IMF and European Central Bank (ECB) and would charge a 4-5 per cent interest rate, according to an Italian newspaper.
A 1.4 per cent rally in the Nikkei 225 as of midnight last night was put down to reports of the IMF rescue and EFSF progress.
However, the IMF would need significantly increased resources at its disposal in order to make such a loan. It is not clear where the funds would come from, with its biggest backer, the US, battling its own debt crisis.
The IMF is currently reviewing Italy’s finances with its new government hoping its verdict will boost market confidence in its debt reduction plan.