Chief bail-out officer

IT IS registered in Luxembourg, the “offshore” domicile of many hedge funds. It has hundreds of billions of euros with which to place macroeconomic bets. And from July 1st the newly formed European Financial Stability Facility, the special-purpose vehicle (SPV) set up to support ailing euro-zone countries, is even being run by a former hedgie. But this is one fund that will never short its investments.

Klaus Regling owes his appointment as the SPV's chief executive to his nationality as well as his expertise. The fund will be able to borrow as much as €440 billion ($537 billion) to lend to struggling countries. Its borrowing will be guaranteed by euro-zone countries, and Mr Regling's native Germany could be on the hook for €148 billion of those guarantees.

But his past experience also recommends Mr Regling for the job. The 59-year-old has spent the better part of four decades flitting between the IMF, Germany's finance ministry and Brussels. He played a key role in drawing up the Stability and Growth Pact in the 1990s while based at the German finance ministry. The pact, which was a condition Germany insisted on before agreeing to give up its precious D-mark, was intended to rein in profligacy among countries using the euro and prevent the mess that they are now in. Mr Regling then spent much of the past decade trying to enforce it as the director-general for economic and financial affairs at the European Commission. He also did a stint working at Moore Capital, a big hedge fund that specialises in macro strategies such as bets that currencies or commodities will rise or fall.

Mr Regling faces lots of questions in his new role. For such a large fund using public money, there remains a remarkable lack of transparency about how it plans to go about its business. Economists are still unsure whether it will be used to lend directly to struggling governments, buy their bonds, set up a European “bad bank” to take over bad loans or even to invest directly in banks that fall short of capital. That it is so uncommunicative may simply be due to the fact that it is so new. Or it may be no accident. Slightly more than a decade ago Mr Regling told a conference on reforming the IMF that there was a trade-off between transparency and efficiency. In an emergency, he said, the fund had to be able to act quickly even if that reduced the understanding of outsiders.

Today's environment is less forgiving of opacity. It is still not clear at what interest rate the SPV will lend, which removes one source of downward pressure on government-bond yields. Countries backing the SPV have agreed to guarantee 120% of its total borrowings in order to ensure the fund gets an AAA credit rating. In selling such gold-plated bonds the SPV may cause investors to cut purchases of sovereign bonds. Some creditors fret that the facility's loans will be repaid first in the event of a sovereign default. That could make ordinary government bonds even less attractive. Europe's banks remain under close scrutiny: the expiry this week of €442 billion in one-year loans from the European Central Bank to banks caused market wobbles. If the SPV was designed to calm nerves, it hasn't worked yet.