Last evening the euro was pressured on the back of news that there were disagreements between France and Germany. The main contention is whether the EFSF should be turned into a bank and therefore would be able to borrow from the ECB expanding its firepower. Such a step would open the door for France to use the EFSF as part of its bank recapitalization plans, but runs into the problem of the central bank pretty much undertaking quantitative easing.
From Bloomberg: French Prime Minister Francois Fillon stepped up calls for the 440 billion-euro ($608 billion) European Financial Stability Facility to be turned into a bank and given leverage by the ECB which, along with Germany, has rejected using its balance sheet to bolster the fund. Germany has endorsed enabling the EFSF to insure a portion of cash-strapped nations' bond sales.
While yesterday's meeting between French President Sarkozy, German Chancellor Merkel, and outgoing ECB President Trichet did not close the disagreement, the euro managed to recover in the European session we had further details emerging about the plan to be unveiled this weekend.
The first was a figure on how big credit lines offer to countries the of the EFSF could be.
From Bloomberg: The euro strengthened for a third day as draft guidelines showed planned changes to the euro- region's bailout fund may open the door to increased credit lines for countries such as Italy and Spain. The European Financial Stability Facility may be able to offer loans up to 10 percent of a member states' gross domestic product, according to the document obtained by Bloomberg.
The move may cause friction within Germany's coalition, but we have not heard from Merkel on the matter, which may mean she will agree to these changes even against opposition from her own coalition.
From Bloomberg: Lawmakers from German Chancellor Angela Merkel's coalition said the changes, if approved at an Oct. 23 European Union summit in Brussels, may shift intolerable burdens to German taxpayers.
If you open the door to credit facilities of this enormous scale, they'll be tapped, Frank Schaeffler, a lawmaker specializing in finance affairs from Merkel's Free Democrat Party junior partners, said in an interview today. This is not what we mean by ring-fencing Italy andSpain. How can we create a fund big enough for this? This is surely not in Germany's interest.
The second important development was further guidance on how the EFSF will be used in buying bonds on the secondary market.
- EFSF can buy bonds on secondary market if EU country has sustainable debt, respects commitments to its deficit reduction and has a sustainable current account
- Also must have no bank solvency problems and must make a request with agreement from the ECB and other EU Fin Mins
- Amounts available would be equal to lending capacity of the bail out fund remaining
- Would then have ability to sell them back on the market, or use for repos with commercial banks
While details still have to be hammered out, these initial reports of progress helped to stabilize the Euro and brought the EUR/USD back into the middle of its range for this week as we continue to digest the latest headlines in anticipation of the Summit.