EU strikes blow to support of debt-laden nations

Eurozone nations face up to an extra €440bn of liabilities on their public balance sheets after the European Union ruled contributions to its bailout fund must be recorded as gross government debt.

Eurostat, the EU’s statistical office, said the European Financial Stability Facility (EFSF) was a treasury and accounting tool, and lacked the autonomy to be called an ‘institutional unit’.

“Not being an institutional unit, EFSF operations must be partially consolidated in national accounts tables,” Eurostat said.

Debt that the EFSF issues every time it steps in to prop up an ailing nation must be allocated to the public accounts of the states that provide it guarantees.

This will affect gross public debt levels of supporting member states, potentially including countries that are not so sick as to need help themselves, but which might not be in robust fiscal health.

The Luxembourg-domiciled EFSF has capacity for Eur440bn, but only the amounts it actually raises will be chalked as debt to financing countries. The recipient of aid will also count the sum borrowed among its liabilities.

The EFSF already sold Eur5bn worth of bonds, with Asian governments among prominent buyers.

Germany is expected to be a major contributor over time. The EFSF decision could tarnish Germany’s economic data, which has impressed both economists and investment managers recently.

The one blemish in recent data was provisional calculations showing public sector net borrowing of €88.6bn in 2010, the highest figure on record, tipping Germany over the 3% ceiling mandated by the Maastricht Treaty.

David Walker

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