Germany is mulling the idea of allowing Europe's rescue fund to buy the bonds of troubled euro members on the primary market but strategists say such a move would be fraught with dangers and do little to ease the burden on financially weak states.
Berlin has openly rejected the idea of giving the fund powers to buy bonds on the open, or secondary market, as the European Central Bank wants, convinced such a move would create moral hazard issues and be difficult to control.
Buying in the primary market - via auctions or private placements - is seen as a more attractive option because it would be easier to make such purchases contingent on strict fiscal pledges by the countries concerned. But direct buying of this kind by the European Financial Stability Facility (EFSF), or its successor fund, could also cause serious distortions in the market and reduce transparency, without providing more than fleeting support for troubled euro members.
German officials have made clear that although they find this option more palatable than secondary market buying, they are not greatly enthusiastic about it.
It would be a surprise if EU countries backed this solution at a summit on March 24-25, where they have promised to unveil a "comprehensive package" for solving the bloc's debt crisis. Portugal, the euro country seen most at risk of a bailout following EU/IMF rescues of Greece and Ireland last year, has used private placements in recent months to plug funding gaps and diversify its investor base. In theory, it could also place bonds directly with the EFSF if the fund were given the green light to make such purchases, but this would be a very short-term solution that would have little impact on Portugal's or any other country's ability to fund itself longer-term.
Direct participation of the EFSF in bond auctions would also risk creating as many problems as it solved. The EFSF could help contain yields in a bond sale, but that would probably have very little impact on broader market prices.
Bid-to-cover ratios would be distorted and the anonymous nature of the auction process would raise serious transparency issues, analysts said.
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