Germany’s Lower House Of Parl Approves EFSF Leverage Models
–Bundestag Says ECB’s SMP Not Needed Once EFSF Is Leveraged
BERLIN (MNI) – Germany’s lower house of parliament, the Bundestag,
on Wednesday approved with a large majority the broad outlines agreed to
at the EMU leaders’ summit last weekend to enlarge the capacity of the
European Financial Stability Facility (EFSF) without extending the
guarantees underpinning the E440 billion fund.
The overwhelming majority of parliamentarians voted for the joint
motion on the EFSF, which was drawn up on Tuesday by all parliamentary
groups with the exception of the post-communist Left party.
Of the 596 parliamentarians present, 503 voted for the motion, 89
against it and four abstained.
The motion goes beyond Sunday’s Eurozone decisions.
In the motion, the Bundestag states that after the EFSF’s capacity
has been enlarged “there is no necessity for the ECB to continue the
secondary market program (SMP)” of bond purchases.
On Tuesday, Chancellor Angela Merkel said that Germany does not
agree with a paragraph in the draft communique for today’s European
summit that says the ECB is to continue its non-standard measures.
“Germany does not accept this sentence,” Merkel told reporters. “We
are negotiating at the moment to get a statement from the European
Central Bank on what it plans to do and then we will take a position on
The Chancellor stressed that Germany “wants to see in the wording
[of the communique] much more clearly what the European Central Bank
wants to do…in order to prevent the misunderstanding that politics are
expecting something of the ECB.”
In its motion, the Bundestag support the terms of references for
enlarging the capacity of the EFSF agreed at Sunday’s EMU summit. The
broad outlines are to be finalized at today’s European summit.
According to a draft of terms and conditions of the emerging EMU
deal on the EFSF, several models exist in principle to leverage the
capacity of the rescue fund.
“A more precise number on the extent of leverage can only be
determined after contacts with potential investors. Two more specific
options — a credit enhancement approach and the setup of an SPIV
(special purpose investment vehicle) could be further pursued in order
to increase the effective capacity of EFSF in implementing the
instruments as described in the EFSF guidelines,” the draft states. The
options outlined do not exclude each other.
Under the credit enhancement approach, basically a form of
insurance, so-called partial protection certificates would be attached
to a Eurozone member state’s bond issuance.
“Both items could be issued as a combined package, but would be
separable and intended to be freely traded after issuance. The coupon on
the sovereign bond should be lower than current market yields because of
the protection afforded by the attached certificate, and thereby
contribute to the sustainability of financial flows,” the draft
The mechanisms to implement this approach should be compatible with
the operational model of the EFSF, the draft says.
“This could be achieved by the EFSF extending a loan to a member
state in order for the member state to acquire EFSF bonds which back the
effective guarantee. The bond would then collateralize the partial
protection certificate and could be held by a Trust or SPV on behalf of
the member state. In the event of a default (to be defined), the
investor could surrender the partial protection certificate to the
Trust/SPV and receive payment in kind with an EFSF bond,” the draft
Under the second option, one or more special purpose investment
vehicles (SPIV) would be established.
“Each dedicated SPIV would have a mandate to facilitate funding of
member states through loans, and invest in sovereign bonds of a specific
country in the primary and secondary markets. This vehicle could be
funded by different classes of instruments with distinctive risk/return
characteristics,” the draft explains.
The instruments could include a senior debt instrument and a
participation capital instrument, both of which would be freely traded
instruments. In addition there would have to be an EFSF investment,
which would absorb the first proportion of losses incurred by the
vehicle, according to the draft.
“The SPIV structure should be set up so as to attract a broad class
of international public and private investors,” the draft underlines.
For that purpose, the senior debt instrument could be credit rated and
targeted at traditional fixed income investors.
“The participation capital instrument could be junior to the senior
debt instrument but rank ahead of the EFSF investment. This might
attract Sovereign Wealth Funds, risk capital investors and potentially
some long-only institutional investors. This tranche will potentially
share with EFSF any upside generated by the investments,” the draft
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