Tuesday, 18 October 2011
The idea is for the operation to boost market confidence in the paper of euro zone sovereigns, turning sentiment back in its favor after nearly two years of adverse conditions.
"You get leverage if investors are reassured and trust the scheme. If, for whatever reason, investors are not convinced, you get nothing," a second euro zone official said.
When it first presented its proposal several months ago, Re-Define suggested a possible guarantee on the first 20 percent of losses -- giving rise to talk of the EFSF being leveraged five times. But market conditions have deteriorated since then.
A third euro zone official confirmed the amount of guarantees under discussion was between 20 and 30 percent.
Kapoor said a balance needed to be retained in making the EFSF more credible in terms of size, which calls for higher leverage and lower borrowing costs, without threatening France's triple-A credit rating, which calls for lower leverage.
"A leverage of around three times may provide a suitable compromise to try to square this circle," he said.
"There will be specific mechanisms and we might get a range of numbers, but it would be premature and irresponsible for the EFSF to bind itself to a specific number, because it needs to retain flexibility to react to changing circumstances."
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