As France and Germany battle over whether and how much to modify the European Financial Stability Facility, the European Union has come up with a proposal to merge the existing temporary facility and the coming permanent one, to the tune of some 940 billion euros ($1.3 trillion).
Bloomberg reported that after the failure of an agreement to leverage the EFSF because of opposition from the European Central Bank, a new proposal has taken its place: a merger of the existing facility, which is temporary, with the permanent rescue fund, the European Stability Mechanism, set to replace it in 2013. In addition, a ceiling on bailout spending would be discarded. This would combine the two mechanisms’ resources for a total of $1.3 trillion in available funding.
Five scenarios are currently under consideration to deal with the Greek financial crisis. They range from the July agreement, now largely considered inadequate, to a hard restructuring that would require investors to write down some 50% of Greece’s public debt. The stability facility has already spent or committed 160 billion of its 440 billion euros available; some of that is in 30-year loans to Greece.
The compromise plan being considered at present would, instead of replacing the EFSF with the ESM in 2013, combine the two; the ESM has 500 billion euros at its disposal. At the time the ESM was devised, that amount was thought sufficient—but that was before Spain and Italy joined Greece, Ireland, and Portugal in financial difficulty.
France has been pushing for the EFSF to become a bank with backing from the ECB; however, Germany has opposed such a move. The removal of the lending ceiling came into play when central bankers refused to allow the EFSF a banking license. A summit meeting of European leaders this weekend will consider proposals to deal with the debt crisis, although expectations are not high for a solution.