bailout fund

France's Hollande urges ECB to lend to states via bailout fund

5/2/2012

* Says ECB should lend to ESM fund rather than banks
* ECB, Germany would reject such a plan

* Has sparred with Sarkozy over economy ahead of runoff

PARIS, May 2 (Reuters) - The European Central Bank should more actively help struggling euro zone states by lending them money via the region's bailout fund, the man on course to be France's next president said on Wednesday.

In comments likely to raise hackles among ECB policymakers and in Berlin, Socialist Francois Hollande said that, since the central bank was not inclined to offer loans to governments, it should instead lend to the European Stability Mechanism (ESM).

Tipped to easily beat incumbent Nicolas Sarkozy in Sunday's election runoff, Hollande said in an
interview with French media that, with its current policy, the ECB had chosen the most expensive way of supporting states.

It was lending at 1 percent to banks that could in turn pass those funds on Spain for close to 6 percent and to Italy for slightly less, he said.

"Either the European Central Bank should lend directly to states, which it refuses to do for the time being, or there is another option," Hollande told BFM TV and RMC radio.

"...Rather than the central bank lending to banks, it could lend directly to this (ESM)."

The 500 billion euro ($661 billion) rescue fund is due to be activated in July.

France's outgoing conservative government has called for the ESM's predecessor, the temporary EFSF bailout fund, to be given a banking licence so that it can borrow from the ECB.

But the idea has been rejected by the ECB and by euro zone powerhouse Germany, which says granting bank licences to the rescue funds would contravene provisions in the bloc's treaty banning the ECB from directly financing states.

The ECB has helped ease pressure on struggling countries' borrowing rates since late last year by injecting more than 1 trillion euros of cheap three-year funds into the banking system - cash that many banks have used to buy government debt.

That funding programme ended in February.

Battling for his political survival, Sarkozy has repeatedly said in the run-up to the election that the ECB should do more to drive growth by directing exchange rate policy, though that idea too has been rebuffed by Germany.

With French unemployment at a 12-year high, growth weak and fears about Europe's debt crisis looming larger for many voters, Hollande and Sarkozy have sparred furiously over the economy.

The latter has frequently warned that his Socialist rival would lead France down the road to a Greek-style debt meltdown.
From reuters.com