WRAPUP 3-ECB mulls capital increase for euro crisis-sources

* ECB considering seeking capital increase from euro states

* Move reflects growing risks of buying sovereign bonds
* ECB bond buying rose last week, but not massively

* BIS, EIB say talk of haircuts for investors spooked market

* E-bonds, bigger bailout fund off EU summit agenda

(Recasts with ECB mulling capital increase, changes dateline
from previous PARIS/BRUSSELS)

FRANKFURT, Dec 13 (BestGrowthStock) – The European Central Bank is
considering requesting an increase in its capital to help cope
with the rising costs of fighting the euro zone debt crisis,
euro zone central bank sources told Reuters.

“The issue is that the ECB is worried about potential losses
from its bond buying,” one source said. [ID:nLDE6BC0W9]

“At the moment we are buying very modest amounts, but what
if that is increased, and what if the bonds you buy are suddenly
worth 30 percent less?” the source said, referring to the risk
of a writedown on a euro zone government’s debt.

The central bank declined to comment.

The ECB disclosed on Monday that it had increased its
purchases of euro zone government bonds to 2.667 billion euros
($3.5 billion) last week from 1.965 billion euros a week
earlier. It was the biggest weekly total since June but well
below levels seen at the height of the euro zone crisis.

Altogether, the ECB has bought 72 billion euros in bonds —
exclusively Greek, Irish and Portuguese, analysts believe —
since it began intervening in May to stabilise markets.

ECB policymakers have repeatedly signalled that the central
bank cannot bear the brunt of fire-fighting against bond market
attacks on highly indebted euro zone states, urging governments
to increase reform efforts and boost EU contingency funds.

The Frankfurt-based central bank headed by Jean-Claude
Trichet has greatly expanded its lending since the start of the
global financial crisis in 2007. It has a subscribed capital of
almost 5.8 billion euros compared to a balance sheet of 138
billion euros, according to its latest annual report.

All 27 of the European Union’s national central banks
contribute to the ECB’s capital. The 16 countries already using
the euro make up 70 percent with other EU members — including
Britain and Denmark which have opt-outs — making up the rest.

One source said a doubling of the ECB’s capital was among
the options being discussed. Another said it was not clear how
much the bank would ask for. Both said the request would go to
euro zone member states.


Euro zone graphic package http://r.reuters.com/hyb65p

For more euro zone debt stories, click [ID:nLDE6T0MG]

For analysis on E-bonds, click [ID:nLDE6BB0GN]



EU leaders are due to discuss the relentless crisis at a
summit on Thursday and Friday but are not expected to announce
any new measures to ease concerns about the region’s debt.

However, one senior EU source said intense efforts were
under way behind the scenes to find ways to shield Spain from
market pressure expected to mount early next year.

Two major international financial institutions said EU
paymaster Germany had aggravated the crisis with talk about
making bond investors pay in future, but Berlin seems set to get
its way on that issue at this week’s European Union summit.

The Bank for International Settlements (BIS) and the head of
the European Investment Bank (EIB) both said German Chancellor
Angela Merkel’s drive to make private bondholders share losses
in any future euro sovereign default had intensified the crisis.

“The surge in sovereign credit spreads began on Oct. 18,
when the French and German governments agreed to take steps that
would make it possible to impose haircuts on bonds should a
government not be able to service its debt,” the Basel-based BIS
said in its quarterly review. [ID:nLDE6B91BQ]

EIB president Philippe Maystadt said Merkel was absolutely
right to demand a private sector contribution to financial
rescues after an emergency safety net expires in 2013, “but the
way it was presented created total confusion”. [ID:nLDE6BC0LL]

EU leaders are set to approve a two-sentence amendment to
the 27-nation bloc’s Lisbon treaty that would create a permanent
European Stabilisation Mechanism to lend to distressed member
states on strict conditions.

They will also endorse a statement by euro zone finance
ministers that private sector investors will be expected to
contribute, on a case-by-case basis, in any sovereign debt
restructuring after 2013. [ID:nLDE6BA0BE]

But at the insistence of Berlin and Paris, they are unlikely
to increase the existing rescue fund or to take any action on a
proposal for common European bonds to help resolve the crisis.

EU sources said euro zone finance ministers would work in
January on a more systemic response to the crisis, which has
already forced Greece and Ireland to take EU/IMF bailouts and
threatens to spread to Portugal, Spain and even Italy.


Euro zone bond markets have entered an end-of-year lull as
investors close their books, with yield premiums on peripheral
debt just a touch wider on Monday. But EU officials fear another
potential wave of selling early in the new year.

A German government spokesman said indications were that the
summit would not take up a proposal for common euro zone bonds
made by Jean-Claude Juncker, chairman of the currency area’s
finance ministers, and Italian Economy Minister Giulio Tremonti.

The spokesman also told a news briefing he was not aware of
any examination of an extension of the existing European
Financial Stability Facility, as reported by the Financial
Times. [ID:nBAT005871]

The senior EU source said experts were working on ways to
make European crisis management instruments more flexible and
better able to help countries before they get shut out of credit

The crucial aim was to ringfence Spain, the fourth largest
euro zone economy. Madrid was taking energetic measures to avoid
being sucked down with the crisis, the source said.

The EU source said experts were studying how to access the
EFSF’s full 440 billion euros ($580 billion) if necessary,
despite pledges to maintain a cash buffer given to secure a top
notch AAA credit rating for the rescue fund.

Luxembourg Foreign Minister Jean Asselborn said the ‘E-bond’
proposal, designed to reduce the borrowing costs of troubled
euro zone states and prevent speculation against their debt, had
been excluded from the EU summit agenda. [ID:nLDE6BC0R0]
(Additional reporting by ECB reporters around Europe, Jan
Strupczewski in Brussels, Erik Kirschbaum and Annike Breidthardt
in Berlin, Brian Love in Paris; writing by Paul Taylor; editing
by Hugh Lawson)

WRAPUP 3-ECB mulls capital increase for euro crisis-sources