€440bn EU rescue fund in effect following approval from Italy
Published 30/07/2010 | 05:00
THE European Union's €440bn rescue fund for the single-currency region is now operational after Italy's parliament approved the plan.
The vote in Rome yesterday means at least 90pc of the 16-nation shareholders in the European Financial Stability Facility (EFSF), as the fund is known, have completed legislative approval.
The Oireachtas approved the scheme at the end of May.
The Italian approval allows euro-area governments to issue guarantees for any debt raised by the EFSF, which could then be lent to governments having difficulty borrowing on the markets themselves.
The Luxembourg-based EFSF is the main part of a €750bn package designed to combat a sovereign-debt crisis triggered by Greece's near default. The full aid package includes another €60bn from the European Commission, and an expected €250bn from the International Monetary Fund.
The package has helped calm markets, with the yield premium investors demand to buy Spanish and Portuguese bonds over German debt falling 64 basis points (0.64pc) and 36 basis points respectively since the fund was finalised on June 8.
The EFSF could upset markets if it is required to lead a bailout and sell debt near its borrowing limit, said Frank Will, head of frequent borrower strategy at Royal Bank of Scotland in London.
While the facility will provide aid only to national governments, the money can also be used to recapitalise banks, EFSF chief executive officer Klaus Regling said on July 15.
To ensure the highest AAA rating, and reduce borrowing costs, European finance ministers on June 8 approved a 120pc guarantee of each country's pro rata share for each bond issue.
Each nation's holding in the EFSF corresponds to its share in the ECB's capital, leaving Ireland's at just over 1pc. (Bloomberg)