ATHENS — European leaders are hoping that the right mix of financial engineering, salesmanship and perhaps a bit of Chinese largesse can help put an end to the threats of government default that have been roiling the continent’s economy.
Their newly redesigned bailout fund, known as the European Financial Stability Facility, is a crucial piece of the emergency rescue program approved this week at a summit of senior government officials.
Oct. 28 (Bloomberg) -- China is a "good, loyal" investor in European Financial Stability Facility bonds, EFSF Chief Executive Officer Klaus Regling said today.
But there’s a risk. Many analysts already say they’re afraid that the European Financial Stability Facility will prove inadequate and underfunded, and that the new rescue package is at best a stopgap measure until the region’s debt crisis escalates further.
The dangers became clearer Friday when the rate Italy must pay for borrowing money over the long term spiked above 6 percent, a level considered unsustainable for a government. This increase in borrowing costs means investors are worried that Italy, the euro zone’s third-largest economy, could have trouble paying its bills even after the rescue fund has been given more firepower to help cash-strapped governments.
In the plan produced this week after days of marathon negotiations, it will fall to the EFSF to try to keep such elevated borrowing costs from turning into a full-fledged meltdown — in Italy or anywhere else in the euro region.
“If it works, if it functions . . . it costs nothing to Europe,” French President Nicolas Sarkozy told French television in a rare prime-time interview to explain the measures unveiled early morning Thursday.
Also unclear is whether the hefty debt relief being provided to Greece will improve its economic situation — the most precarious in the euro zone. Nor is it clear whether a measure aimed at shoring up Europe’s banks, which are weighed down by troubled government bonds, will prove successful.
Yet the most urgent question may be whether a redesigned rescue fund, envisioned as Europe’s chief firefighting weapon, is up to the task.
The EFSF was approved in May 2010 and has provided bailouts for the heavily indebted governments of Portugal and Ireland. But with Germany insisting that the fund be capped at about $600 billion, it has never been able to come up with the overwhelming financial force advocated by the United States and others as the only way to assure investors that Europe’s debts will be repaid.
Klaus Regling, head of the EFSF, and other European officials will appeal to investors worldwide in an effort to expand the fund’s reach and show it can influence the interest rates of countries as large as Italy.
Regling and other European officials traveled to Beijing this week amid widespread speculation that the Chinese government would be asked to contribute to the fund. Chinese officials welcome the rescue effort approved at the European summit but declined to say whether they would be putting money into the fund.
Officials plan to use two strategies to make sure that governments can continue borrowing money, needed to fund their operations, at affordable interest rates.
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