NEW YORK/BRUSSELS: Euro-zone officials are working to magnify the firepower of the region's rescue fund, a senior European Central Bank policymaker said on Monday, while US President Barack Obama piled on pressure for Europe to staunch a sovereign debt crisis that threatens the world economy.
Obama, saying the crisis "is scaring the world," said the leaders of the 17-nation euro zone were not responding quickly enough.
The region has not fully healed from the 2007 financial crisis or fully addressed issues in its banking system, and its problems have been compounded by the Greek debt crisis, he said.
"They are trying to take responsible actions but those actions haven't been quite as quick as they need to be," Obama told a citizens' meeting in Mountain View, California.
ECB Executive Board member Lorenzo Bini Smaghi, speaking in New York, said European policymakers have begun discussing the next steps to shore up its financial system and prevent the crisis from derailing a fragile world economic recovery.
The 440 billion euros in assets of the region's rescue fund -- the European Financial Stability Facility (ESFS) -- could be used as collateral to borrow from the ECB, making more money available to stop the crisis spreading, but it was up to European Union governments to decide how to do this, Bini Smaghi said.
"I know that people are thinking about these things. They may not be willing to admit it in the public, but they are thinking about these things," he said, citing two US programs used to rescue banks in the 2008-09 financial crisis.
"Initially the TARP was used to buy assets and then it was used to recapitalize the banks and it was used to pay TALF, so I think we are now discussing how to do this, how to leverage the money out of the EFSF in a more innovative and efficient way," he told a conference organised by Medley Advisors.
A senior European official told Reuters on Saturday that the aim was to leverage the fund five-fold to shield bigger economies such as Italy and Spain from contagion, but there was no agreement yet on how to do that.
Speculation was rife on what steps Europe might take. US stocks rose on a CNBC television report that a detailed plan was in the works to leverage the fund as much as eight-fold. CNBC also said some EFSF money would go to the European Investment Bank to issue bonds and buy up sovereign debt of troubled countries.
An EU official involved in crisis resolution dismissed the report as "just bizarre." "It's not where the talks are. We are talking to the EIB about scaling up its capacity but only in terms of (infrastructure) project bonds," the official said.
Likewise in Brussels, euro zone officials played down media reports of emerging plans to halve Greece's debts and recapitalise European banks to cope with the fallout, stressing that no such scheme is yet on the table.
PRESSURE
In Germany, Chancellor Angela Merkel urged the European Union to strengthen its power to discipline member states that break fiscal rules. Budget deficits are the source of the debt crisis.
"There should be the right to declare such budgets null and void...otherwise we will not get out of the situation," she said in her strongest language yet on common EU fiscal powers.
Europe came under fierce pressure from the United States and other major economies at weekend talks in Washington to take swift, decisive action to stop Greece's debt woes from engulfing bigger euro zone states and wreaking wider damage.
But officials said reports that planning was already in place for a 50 percent write-down in Greek debt and a vast increase in the euro zone rescue fund were highly premature.
"There is no change to the framework we are working on," said a euro zone official who is involved in decision-making on financial assistance to Greece, Ireland and Portugal.
"All this talk of a specific haircut for Greece or an enlargement of the EFSF, it is all just speculation. We are not working along those lines," said the official.
Merkel, struggling to convince her fractious centre-right coalition to back a strengthening of the EFSF in a crucial vote on Thursday, warned that letting Greece default would destroy investor confidence in the euro zone.
Diplomats said any talk of a fallback plan for Greece that would raise the cost to German taxpayers could only make her task more difficult in parliament this week.
Copyright Reuters, 2011
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