European finance ministers plan to roll out the new rescue fund next month, leaving Italy and Greece to battle their respective debt crises on their own until then.
Greece has been ordered to provide written acceptance of bailout terms in order to receive its next 8 billion-euro loan installment by the end of November, while Italy is being pressed to institute budget cuts that Prime Minister Silvio Berlusconi’s government agreed to back in August.
European officials are consulting with investors and credit-rating companies over two options for increasing the rescue fund’s 440 billion euros in guarantees into as much as 1 trillion euros.
The first option would bring down troubled countries’ borrowing costs by issuing “partial protection certificates,” a form of insurance for bond sales.
The second option would create one or more special investment vehicles that would seek outside investments in weaker European states’ bonds. The investments could potentially come from sovereign wealth funds, private investors, or cash-rich emerging markets like China or Russia.
Finance ministers plan to have completed all “legal and operational work” by the end of November, while “implementation” is set for sometime in December, according to an EFSF presentation.
However, so far efforts to attraction investors from outside the EU have been less than fruitful. At last week’s Group of 20 summit in France, heads of some of the world’s most cash-rich emerging markets called on Europe to do more to help itself before they involve themselves in any rescue plans. Russian leaders said they would channel more aid through the International Monetary Fund, but only in exchange for more influence on IMF policy decision.
Another matter still left unsettled is whether the European Central Bank will continue to purchase bonds of at-risk countries once the EFSF assumes that task. Since May 2010, the ECB has bought 183 billion euros of bonds. European leaders steered clear of the the issue in their summit communiqué on October 27, instead focusing primarily on Athens.
Europe is asking that Greece deliver a pledge, signed by both parties in parliament, to enact budget cuts before Greece’s next tranche of aid is released. Also being pressed to pare down its budget, Italy last week invited European Commission inspectors to oversee budget cuts and economic reforms required if the ECB is going to continue buying Italian bonds.
In order to push through austerity measures, Greek leaders have agreed to a unity government with a budget-cutting mandate. As part of the agreement, Prime Minister George Papandreou has agreed to resign. Italian Prime Minister Silvio Berlusconi has denied reports that may resign in order to make way for an Italian version of a unity government.