Trillions needed to shore up Euro

EUROZONE leaders are close to accepting the market’s view that they will need to throw trillions of euros at the region’s debt crisis to have an impact.

Following an IMF summit in Washington led by Christine Lagarde, the region’s leaders have admitted that Europe’s bailout fund needs to be beefed up and leveraged to have enough firepower at its disposal, with City estimates putting the required amount at €2-€3 trillion.

But ministers are still far from thrashing out a practical deal, according to sources at the summit.

One G20 official present at the IMF meeting in Washington over the weekend told City A.M. that there was “a focusing of the mind” among Eurozone ministers, with the Germans and French now recognising that governments might need to throw €3 trillion at the problem to have an impact.

However, talks to put a new price tag on any rescue have yet to get underway. “There was no proposition but lots of discussion,” said the official. “What happened this weekend was a change in mood.”

As part of their change of heart, European officials are now publicly suggesting that the European Financial Stability Facility (EFSF), the region’s bailout fund, could be leveraged to boost its firepower.

In July, Eurozone leaders agreed to increase its useable capital from €440bn to €780bn: they could now agree to let it leverage that capital, leading to the estimate that it could deploy trillions of euros.

Markets also expect any new rescue deal to factor in a Greek default and to organise “orderly” haircuts on its bonds of around 50 per cent.

IMF officials are also pushing for the European Central Bank (ECB) to maintain its central role in lending to countries and capitalising banks rather than handing it over to the EFSF as planned. The IMF’s European chief Antonio Borges said yesterday that the Bank “is the only agent that can really scare the markets”.

But it is still not clear what the timeline is for pushing ahead with new measures and whether it would require negotiating a new deal or adjusting existing promises. G20 leaders have agreed to implement the July agreement by 14 October, although this deadline could slide further back.

Whether or not the details change, the current strategy could lead to credit ratings downgrades for leading Eurozone nations, according to a top Standard & Poor’s official. David Beers, head of S&P’s sovereign ratings, said last night the plans have “potential credit implications in different ways”.