Germany signs on to EU capitalization plan

By Reuters
Posted Dec. 14, 2010 at 11:59 a.m.

European Union paymaster Germany said on Tuesday that  it would support giving the European Central Bank more capital to help fight a sovereign debt crisis that continues to shake the euro zone.

ECB sources told Reuters the bank’s governing council would consider at a meeting on Wednesday and Thursday whether to seek a capital increase from euro zone members to cover the risk of losses on government bonds it has bought to support the 16-nation single currency area.
A Berlin government official, briefing reporters before an EU summit Thursday and Friday, said ECB President Jean-Claude Trichet might raise the matter at a dinner with EU leaders.

“The government supports the ECB in all that it deems important … If such a request comes, we will judge it positively,” said the official, speaking on condition of anonymity. The ECB declined comment.

The German official said a bigger capital base would show financial markets that the central bank had the firepower to buy new government bonds if needed.

One euro zone central bank source said the ECB was eying a doubling of its subscribed capital of almost 5.8 billion euros, which compares to a balance sheet of 138 billion euros, according to its latest annual report.

The summit is due to approve a German-driven treaty change to create a permanent crisis-resolution mechanism that could force private investors to share losses with taxpayers if a euro zone country was unable to repay its debt after 2013.

Trichet called in comments released on Tuesday for EU leaders to give maximum flexibility in size and scope to the euro zone’s existing financial safety net, known as the European Financial Stability Facility.

The rescue fund is limited by rules that specify it can only be used as a last resort and a requirement to maintain a cash buffer to preserve its top-notch AAA credit rating.

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