Germany, France come closer to EFSF leveraging deal: officials

Sun Oct 23, 2011 3:57pm EDT
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By Andreas Rinke and Julien Toyer

BRUSSELS (Reuters) - France and Germany are close to a deal to leverage the euro zone bailout fund through first loss insurance for the primary bond market and a special purpose vehicle with an EFSF subordinated loan for the secondary market, euro zone officials said.

There is also wide support for a declaration from euro zone leaders which would welcome continued European Central Bank bond purchases on the secondary bond market, the officials said. The ECB has said it would prefer to take a back seat once the European Financial Stability Facility (EFSF) is fully functional with new powers.

"There is broad backing for a declaration of euro zone leaders supporting continued ECB bond purchases," one euro zone official said.

"France backed down on its demand to leverage the EFSF with the ECB, but insisted the ECB should still be somehow involved through its bond buying programme on the secondary market," a second euro zone official said.

"The ECB would make very clear it will stay on the market," the second official said.

Separately, the 440 billion euro EFSF will seek to get more bang for its buck on the primary and secondary markets to turn investor sentiment back in favor of Italian and Spanish paper.

This, policymakers hope, would prevent the third and fourth largest euro zone economies from running into financing problems that could prove too big for the euro zone to handle.

"There are only two models which are getting more detailed now. The first is the insurance scheme, the second is an SPV of the EFSF, into which third parties could pay in," a third euro zone source said.   Continued...