German savings banks in favour of EU debt redemption fund

(FRANKFURT) - Germany's cooperative savings banks, a key pillar in the banking sector of Europe's top economy, called Tuesday for a debt redemption or "sinking" fund to pay down excess debt in the euro area.

"My advice to political Europe would be to think seriously about the model of a debt redemption fund," the head of the DSGV savings banks' federation, Georg Fahrenschon, told a banking conference here.

"Such a fund would demonstrate the serious political will to return to stability, that is to say, national debt of no more than 60 percent of GDP (gross domestic product)," Fahrenschon told the annual congress organised by the business daily Handelsblatt.

The concept entails placing any sovereign debt in excess of the EU limit of 60 percent of GDP in a fund, which would then pay down the debt over a period of 25 years.

Such a mechanism would enable heavily indebted countries to concentrate on bringing their budgets back to balance without incurring new debt in order to repay old debt.

In contrast to the idea of eurobonds -- or pooling of eurozone countries' debt -- a redemption fund "would represent a realistic path to a common and solid Europe," he argued.

"In the short term, it would restore markets' confidence in Europe's ability to act and in its solidity," Fahrenschon argued.

The idea of a debt redemption fund was put forward last November by Germany's Council of Economic Experts or so-called "Five Wise Men".