Outcome of Brussels Summit: Europe Takes Step Closer to Economic Government - SPIEGEL ONLINE - News - International

The European Financial Stability Fund (EFSF), headed by the German economist Klaus Regling, is being given additional responsibilities and powers. In the future, it will not only be able to help distressed countries; it will also be able to grant loans to countries being targeted by investors, provided this is considered necessary to fend off risks to the monetary union. This measure is aimed at Spain and Italy, in particular. The very existence of the euro zone would be threatened if these two countries were to falter.

With its new powers, the EFSF is becoming more and more like a European version of the Washington-based International Monetary Fund (IMF). In addition, the EFSF -- which was set up in June 2010 in response to the Greek debt crisis and will expire in 2013 -- and its successor organization, the European Stability Mechanism (ESM), will be able to use their billions in the future to protect the banking systems of troubled countries from collapse.

In the future, Regling will have the authority to intervene in the bond markets to stabilize the euro. The EFSF and the ESM will be able to buy the bonds of ailing countries. This measure is beneficial in two respects. On the one hand, it drives up bond prices. On the other hand, it is an active contribution to reducing debt because a country's debt declines to the extent that the bailout fund removes its bonds from the market.

Private investors will participate in the costs of the bailout by relinquishing a portion of their claims. Under a repurchase program funded by Regling, they will be able to sell their securities at prices significantly lower than the face value to which they would normally be entitled.

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