World Crisis Online

European Central Bank officials and bankers should stop lobbying the European Union to permit its bailout fund to buy back bonds of indebted members, French Finance Minister Christine Lagarde said.

“It is a matter better left to finance ministers than bankers and advisers,” she said at the World Economic Forum in Davos, Switzerland when asked about calls from central bankers and executives to retool the fund.

European Central Bank president Jean-Claude Trichet said in an interview in Davos that it may be ‘useful” for the 440 billion-euro ($602 billion) European Financial Stability Facility to buy government bonds to help ease tensions in financial markets. Deutsche Bank AG Chief Executive Officer Josef Ackermann said that he also supports the idea.

The EFSF is the main part of a 750 billion-euro ($1 trillion) financial backstop created in May to stop the spread of Europe’s debt crisis after Greece accepted a 110 billion-euro bailout. EU leaders are debating how to expand the fund’s mandate by a summit meeting in March after the backstop failed to stop contagion spreading to Ireland. That has also sparked a jump in the borrowing costs of Spain and Portugal.

“The actions the fund can take need to be expanded and I would very much also support the concept that the fund should be in a position to purchase government bonds,” Allianz SE board member Joachim Faber said in an interview in Davos.

Market Involvement “We are discussing it at the moment,” Lagarde said. “I don’t think there is a general consensus yet, but it is one avenue for the stability fund to get involved in markets.”

Finance ministers are also considering allowing the fund to recapitalize distressed banks and may also increase the size of the aid mechanism. EU leaders are committed to making the fund more “efficient and flexible” and if it needed to be enlarged, “so be it,” Lagarde said

EFSF bond purchases would take pressure off the ECB, which Trichet pushed to start buying Greek, Portuguese, Irish and Spanish debt in May to restore order to bond markets. Greece’s debt will reach 150 percent of economic output this year, with Spain’s rising to almost 70 percent and Portugal’s hitting 90 percent, the European Commission forecast in November.

The EFSF “probably should purchase the entire portfolio the European Central Bank is owning at the moment,” Allianz’s Faber said.