German Bundesbank sees risks in leveraging EU bailout fund

A Bundesbank board member warned Thursday of risks for taxpayers in leveraging the EU's debt bailout fund and said assigning it a lower credit rating would be a better way of boosting its firepower. "Everybody must be clear on this -- leveraging mechanisms increase the risks for the taxpayer," said Andreas Dombret, a member of the German central bank's executive board. "Contrary to leverage, giving up on the best rating possible would mean the risks for the taxpayer would be lower," Dombret said in a speech in Berlin. "Forgoing the (top) AAA rating would clear the way for an increase in the EFSF’s lending capacity." Europe is looking for ways to beef up the European Financial Stability Facility (EFSF) to prevent the eurozone debt crisis from spreading but its lending capacity is currently limited to 440 billion euros ($602 billion), which experts do not believe is enough. In order for the EFSF to have a triple-A rating, eurozone governments must guarantee it several times over, so lowering the rating would in effect relax those guarantees and so free up more cash. Dombret calculated that the EFSF's lending capacity could be increased by 250 billion euros just by assigning it a double-A instead of triple-A rating. In addition, a lower rating would lead to higher refinancing costs for the EFSF but this would be borne by the country receiving the aid. That would therefore provide an incentive for the country in question to lower its debt and return to funding from financial markets as soon as possible, Dombret argued. There is deep division among EU members over how best to increase the fund's firepower, with Germany reportedly mulling a second postponement of a make-or-break EU summit this weekend until agreement can be reached. "The federal government no longer rules out a postponement of the summit in Brussels due to the faltering talks over the so-called leveraging of the euro rescue fund," the Die Welt daily said in a pre-release of Friday's edition. The summit was originally scheduled for October 17-18 but it was postponed to Sunday to give officials more time to prepare what has been billed as a "comprehensive plan" to save the euro.