Eurozone summit proclaims bail-out fund of €1 trillion
By Tim King and Ian Wishart - 27.10.2011 / 05:38 CET
Leaders agree in principle on strengthening EFSF.
Banks to take 50% hair-cut on Greek bonds.
● What they agreed
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Fact file
The EFSF will be ‘leveraged' in two ways.
First, it will be used as an insurance that investors could opt for when they buy sovereign bonds in the primary market. Officials hope that this will reduce member states' borrowing rates. The insurance would cover a portion of the principal value of the bond but the precise amount will depend on market conditions and circumstances of the country. Officials say that a widely reported figure of a 20% portion “will have to be confirmed”.
Second, one or several special purpose vehicles (SPVs) could be set up which will be able to fund EFSF operations. A dedicated SPV would have a mandate to fund member states in trouble and buy sovereign bonds. Its capital would come from existing EFSF funds as well as international investment from the private and public sector. Officials say that this could attract sovereign wealth funds, risk capital investors and “potentially” some long-term institutional investors. The SPV would be able to buy bonds on the primary and the secondary market. Officials said discussions with “a range of investors” would continue “as the scheme is further developed”.
The Eurogroup of finance ministers in the eurozone, the European Commission and the EFSF are to contact the International Monetary Fund to “look into available options of closer co-operation with the EFSF support packages”.
Officials say that “further discussions” will need to be held with investors and the ultimate firepower of the EFSF “will depend on the exact structure of the new instrument”.
They say that the leverage “could be up to €1tr under some assumptions about market conditions, the instrument structure and investors' responsiveness”.
The exact terms of the EFSF leveraging will be finalised by the end of November by eurozone finance ministers.
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