Exclusive: Geithner to float idea of leveraging euro rescue

Treasury Secretary Timothy Geithner is likely to suggest to European finance ministers on Friday that they leverage their bailout fund along the lines of the U.S. TALF program, EU officials said.

"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official said.

"The leveraging of the EFSF -- I think this is something that he will put on the table," the official said. "There could be some openness to the proposal."

TALF -- the Term Asset-Backed Securities Loan Facility -- was set up by the U.S. Federal Reserve and the U.S. Treasury during the global financial crisis in 2008 to jumpstart the frozen Asset Backed Securities (ABS) market.

Under TALF, the New York Fed would lend out up to $200 billion, taking ABS as collateral with a haircut and the Treasury offered $20 billion credit protection for the Fed.

In this way, a little bit of public money leveraged a much larger central bank contribution and the same idea could work for the European Financial Stability Facility, which has 440 billion euros at its disposal, to offer credit protection to, for example, the ECB to buy euro zone sovereign bonds.

"One of the difficulties is that leverage may be seen as a potential liability," a second EU official said. "But it deserves to be looked at in detail."

A third euro zone official said that Canada has made the same suggestion for Europe.

"It could help those countries where the sovereign bond market is still curable," the third official said.

Such a solution would help ease market concerns that the EFSF does not have enough money to bail out Greece, Ireland Portugal and also help Spain and Italy.

"Of course you would have to see if on the basis of the EFSF mandate you can do something similar," the first official said, adding the solution had not been free of hurdles in the United States either and in Europe they could be even bigger.

"From an economic point of view it is a reasonable idea," the first official said, noting however that the ECB would have to play along with such a scheme.

"The issues are more on the institutional and legal side and of course political -- you have to find a way for the ECB not to, de facto, finance fiscal policy, but on the other hand you need to have resources that the ECB has and the EFSF has not."

Leveraging the EFSF, however, would not take place before the fund's new powers of intervention on bond markets, extending precautionary credit lines or lending for bank recapitalization were ratified by the end of September, the official said.

"Once the EFSF becomes more flexible, you can see if there are ways similar or different to try to leverage more the EFSF or find other ways to have a critical mass to ringfence Italy Spain and the others," the official said.

"You can also think about leveraging on other actors, not necessarily just the ECB," the official said.

[Source: By Jan Strupczewski, Reuters, Wroclaw, Pol, 15Sep11]

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