Europe gets serious. May double the EFSF, may burn bank senior bond holders

The Wall Street Journal are speculating that the size of the EFSF may double to almost €1trn, if German opposition can be overcome. This is an effort to assure markets that Europe can bail out Spain if neccessary.

Doubling the EFSF’s capacity to €880 billion would remove any doubt about whether the facility has enough firepower to prop up Spain’s government. Such an expansion would require a bigger financial commitment from Germany, where many lawmakers and voters are skeptical about bailing out European countries whose finances are in tatters.

Ireland became the first country to apply for help from the EFSF last week, and is negotiating a bailout package from Europe and the IMF that is expected to total roughly €85 billion. Greece received a €110 billion rescue package from the EU and IMF in May, before the creation of the EFSF.

Earlier today on RTE radio (5 minutes in) a spokesperson for European Commissioner Olli Rehn suggested that the EU may countenance restructuring of senior bank debt. Discussion on the Irish Economy website suggests that this restructuring may occur at the EU level (that is, little old Ireland may not be taking on the senior bond holders by herself).

These are both interesting developments, indicating that European leaders are beginning to consider measures of the scale required to ensure the survival of the Euro and Eurozone economies.

Update: The BBC report that Mohamed El-Erian CEO of PIMCO (the world’s largest bond fund and hence the biggest bond holder) is calling for the private sector to share some of the pain. From the BBC

“It is unreasonable to expect the Irish taxpayer… to bear all the costs,” he told the BBC World Service
“Our assessment…. has been that you need a broader burden sharing that also involves the European Union, the IMF and private creditors,” he told World Business News on BBC World Service radio.

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