Banks, insurers says EFSF should insure sovereign debt

21st October 2011, Comments 0 comments

Leading European banks and insurers believe the EU's bailout fund can make most effective use of its firepower by insuring sovereign debt, according to a document obtained by AFP on Friday.

In a letter addressed to the head of the European Financial Stability Facility, Klaus Regling, the groups -- including insurers Allianz, Axa and Generali, and banks Deutsche Bank, Commerzbank and UniCredit -- argued that the EFSF could make make best use of the 440 billion euros ($610 billion) available to it by insuring sovereign bonds.

Europe is currently deeply divided over how to maximise the EFSF's firepower to prevent the eurozone debt crisis from spreading without increasing the financial burden on states.

The issue will top the agenda at a crunch summit in Brussels this weekend.

France argues the fund can be leveraged by awarding it a banking licence, thereby giving it access to the funds of the European Central Bank.

But Germany is vehemently opposed to any such option.

Another way of beefing up the fund would be to use its pool of funds to insure part -- say 20-30 percent -- of a country's sovereign debt so as to encourage investors to buy its bonds, allowing it to secure fresh funding.

"The task is now to put these taxpayer funds to the highest and best use in order to solve the sovereign debt crisis in the eurozone," the letter to EFSF chief Regling said.

"The undersigned European financial institutions strongly believe that the proposal to allow the EFSF to 'insure' parts of sovereign bonds is a viable instrument to assure such an outcome, if implemented in size.

"The ability of the EFSF to potentially write significant amounts of such iinsurance' without any further increase to the existing commitments should be an important element in any comprehensive plan by the European government to address the crisis," it said.

EU leaders hold a summit Sunday and then another on Wednesday in an effort to come up with a comprehensive accord that will finally tame the debt crisis which has pushed the eurozone to the brink of failure.

© 2011 AFP

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