EFSF leveraging, a right direction but with limited firepower

Vanessa Liberson and Chong Dahai, Xinhua, 02.12.2011

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Euro area Finance Ministers agreed on Tuesday two leveraging options to expand European Financial Stability Facility (EFSF) capacity, but analysts doubt whether move could raise enough firepower or restore market confidence.

How much leveraging potentials

The current sovereign debt crisis was largely caused by reckless financial speculation. EU leaders are attempting to solve the crisis by creating more complex financial instruments. Is it going to work?

"The question still remains regarding leveraging potential is: how much attraction the schemes that have been agreed to will be," Janis A. Emmanouilidis, a senior analyst at the European Policy Centre (EPC) in Brussels, told Xinhua. […]

"There are more things which need to be done in order to cool down the markets," warned Emmanouilidis.

Things to be done right now

EU leaders now face two-tier challenges. On the one hand, there is what EU leaders have already agreed on, things to be done right now: leveraging the EFSF, the restructuring of Greek debt, and national reforms.

On the other hand, more long term measures shall be taken.

"There are three elements which are going to decisive beyond things which are already on track," said Emmanouilidis.

First of all, the EU has to move towards an economic and fiscal union, which will involve a change to the 27-member bloc's founding treaty.

Secondly, the so-called eurobonds will have to be made available. And thirdly, European Central Banks (ECB) involvement may also be needed.

"The ECB has to stabilize financial markets by being lender of last resort for banks and trying as much as possible not to get into financing governments," commented Gros.

Emmanouilidis also said the ECB needed "to intervene more strongly on markets in order to provide the liquidity net which is necessary to calm down things." […]

For the entire article see here.

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