Exclusive: Germany open to ESM changes if budget rules tightened

Sun Dec 4, 2011 3:08pm EST
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By Julien Toyer and Luke Baker

BRUSSELS (Reuters) - Germany is prepared to soften language in the euro zone's permanent bailout mechanism compelling bondholders to accept losses in exchange for much stricter budget rules, four sources have told Reuters.

The shift would not completely remove the possibility of private bondholders having to accept losses in the future, but it would align the statutes of the European Stability Mechanism more closely with IMF rules, creating a more-level playing field for private buyers of euro zone sovereign debt.

The hope is that will reassure private bondholders that they are not being singled out for losses by European policymakers, bolstering their confidence in buying euro zone bonds - and potentially helping Italy and other under-pressure borrowers.

Following the insistence earlier this year that private bondholders should share the cost of a second Greek bailout, investors had feared that a precedent had been set which could be repeated any time another euro zone sovereign ran into trouble.

The ESM, which will have a capacity of 500 billion euros, is scheduled to come into force in mid-2013 and will replace the current bailout fund, the European Financial Stability Facility, which the euro zone is struggling to leverage into a more effective fighting force.

While acknowledging movement in Germany's position, a senior euro zone source emphasised that it depended on securing agreement among the 17 euro zone countries on stricter budget oversight, including sanctions for those that miss macroeconomic targets and the possibility of taking transgressors to court.

The source said private sector involvement (PSI) -- the ability to have banks and insurance companies share losses when a sovereign defaults or restructures its debt -- would not disappear from the ESM, "but the wording could be eased."

The changes are being discussed as part of wider negotiations about deeper and more rapid fiscal integration in the euro zone, which German Chancellor Angela Merkel sees as critical to combatting the sovereign debt crisis.   Continued...