Euro Ministers Craft Rescue Fund

European finance chiefs return to Brussels today on a mission to convince global leaders that they can shield countries such as Italy and Spain from the spreading debt crisis by bulking out their bailout fund.

As political turmoil envelops governments in Athens and Rome, finance ministers from the 17-member euro area will work on the details of plans to increase the muscle of the European Financial Stability Facility. Leveraging the fund would aim to ramp up spending capacity to 1 trillion euros ($1.4 trillion).

European leaders' failure to resolve the two-year-old debt crisis threatens to drag down the global economy and trigger another financial downturn. World leaders at a Group of 20 meeting last week demanded euro governments do more to staunch the turmoil — including fleshing out how an expanded EFSF would work — before they commit fresh cash to the region.

“The leveraged EFSF may still turn into a bazooka, but so far it looks more like a water pistol,” Joachim Fels, Morgan Stanley's chief global economist in London, wrote in a note to clients yesterday. While ministers may furnish some detail on how the fund operates, “don't hold your breath,” he wrote.

Ministers convene at 5 p.m. in Brussels for talks overshadowed by waning political fortunes of leaders in Greece and Italy. Greek premier George Papandreou agreed to step down to make way for the formation of a unity government. In Rome, Italian Prime Minister Silvio Berlusconi faced pressure to quit as his majority unraveled before a key parliamentary vote tomorrow. He repeated that he plans to stay on through 2013.

Italy's 10-year borrowing costs approached the 7 percent level that forced Greece, Ireland and Portugal to seek bailouts. The euro fell against the dollar, extending last week's 2.5 percent drop. It traded at $1.3710 as of 10:08 a.m. in Frankfurt, from $1.3792 on Nov. 4. The currency has dropped 7 percent since May 2, when it reached a 2011 high, based on closing prices.

Stocks also declined, with the benchmark Stoxx Europe 600 Index slipping 1.4 percent. Italy's FTSE MIB Index fell 0.6 percent.

Although EU officials have said an agreement on EFSF leveraging won't be finalized today, finance ministers will discuss technical details on how to partly insure bond sales and set up a special investment vehicle to draw outside money. European leaders outlined plans at an Oct. 26-27 summit.

Luxembourg Prime Minister Jean-Claude Juncker will chair today's meeting of euro-area ministers. Finance chiefs from the rest of the bloc will meet tomorrow.

IMF Money

Even before the framework for the EU's new tools is fleshed out, European leaders have struggled to entice investment from outside the region. Chancellor Angela Merkel said last week that G-20 nations wanted to know more before pledging money to the International Monetary Fund to lend to the EFSF.

Merkel told reporters at the G-20 summit in Cannes, France, on Nov. 4 that there were “hardly any countries here that said they will join up” with the EFSF. French President Nicolas Sarkozy said a deal may not come before February.

The leaders pledged that Europe will speed the implementation of measures they negotiated at the summit 11 days ago, including recapitalizing banks and writing down Greek debt.

“I think that they are increasingly getting worried that this might not be enough,” Carsten Brzeski, senior economist at ING Group in Brussels, said in an interview yesterday. “This is the weak spot of the October conclusions.”

The ministers' meeting will be attended by newly installed European Central Bank President Mario Draghi, who made his debut last week by unexpectedly cutting the benchmark interest rate by a quarter point to 1.25 percent to aid growth. Draghi ruled out expanding the ECB's purchasing of sovereign debt, calling the program “temporary” and “limited.”

The German government denied a report that G-20 leaders had raised the possibility of using central bank reserves to help bolster the bailout fund. Economy Minister Philipp Roesler told ARD television early today that “the German gold reserve must be untouchable.”

The Frankfurter Allgemeine Sonntagszeitung reported yesterday that using such reserves had been discussed and the issue may be raised again at today's meeting in Brussels.

Bloomberg News

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