Germany may allow bailout funds to run parallel, boosting lending scope

GERMANY IS reportedly ready to boost the euro zone’s lending capacity to crisis-hit members by allowing its two bailout funds to run in parallel.

A final decision is likely at an EU finance ministers’ meeting in Copenhagen in 10 days’ time but indications emerged yesterday of a shift in Berlin’s position.

Until now Berlin has resisted pressure from its EU partners and the International Monetary Fund to agree to a boost beyond the agreed €500 billion in the European Stability Mechanism (ESM) permanent bailout fund.

Chancellor Angela Merkel has refused to be drawn on the other option – allowing the European Financial Stability Facility (EFSF) run beyond the ESM start-up date.

In recent weeks, however, German officials have conceded that they are isolated and have been looking for a compromise.

Yesterday a senior Merkel confidante conceded it would be “sensible” to allow the temporary EFSF fund to operate in parallel to the permanent ESM fund.

To date some €190 billion of the EFSF’s €440 billion has been earmarked for bailout countries Greece, Ireland and Portugal.

Norbert Barthle, budgetary spokesman for the ruling Christian Democrats (CDU), said a parallel solution was possibly to boost the ESM.

He insisted the added capacity might not be required, pointing out that the relative calm of bond markets indicated that the euro zone had “passed the height of the crisis”.

Allowing the EFSF and ESM run simultaneously would place a lending capacity of €250 billion in addition to the ESM. During this time – German officials suggest a year – Berlin’s share of loans and guarantees to the fund would increase from €211 billion to €280 billion.

When the ESM starts operating, Berlin officials suggest transferring the unused EFSF capital up to a so-called special purpose vehicle for a limited time, and allow it be topped up, if needed, with further private capital.

Yesterday the Berlin cabinet passed a supplementary budget for this year, including an extra €8.8 billion in borrowing. This money is required to finance Germany’s capital pay-in to the ESM, the operation of which was brought forward by a year.

German opposition to a permanent ESM capital boost stems in part from its ambitious “debt brake” obligation to present a near-balanced budget by 2016.

Amid strong economic growth, the federal structural deficit is expected to drop from 0.5 per cent of GDP this year to just 0.35 per cent – around €1 billion in borrowing – by 2016.

“Germany is the stability anchor and the growth engine of Europe,” said Wolfgang Schaüble.

He added that he “does not expect” Germany’s bailout guarantees would lead to actual financial losses.