Ministers consider bigger EU bailout fund

Mon, Dec 6, 2010, 00:00

EUROPEAN FINANCE ministers are debating whether the €750 billion bailout fund for euro zone countries should be enlarged to boost confidence in the currency.

Amid fear that Ireland’s rescue may soon be followed by an intervention in Portugal or Spain, the possibility of increasing the fund is one of a range of options for discussion tonight as euro zone finance ministers try to find a way of gaining the initiative in the sovereign debt crisis.

The ministers are scheduled at this meeting and at a follow-on meeting tomorrow of all EU finance ministers to give their formal approval of Ireland’s EU-IMF rescue programme. This is a largely procedural step as the technical terms of the deal are already agreed.

These routine engagements come ahead of a summit in Brussels next week at which EU leaders want to sign off on plans to create a permanent bailout fund in 2013.

The talks take place against the backdrop of mounting turmoil in markets amid concern about the extent of looming measures to compel private investors to take a share of bailout costs after 2013.

It is widely acknowledged that there would be a push to expand the fund if Portugal or Spain sought external aid, something both countries insist is not in prospect. This reflects concern that any Portuguese rescue would intensify pressure on Spain and fear that the current scheme is too small to withstand any Spanish intervention.

Further anxiety centres on market pressure last week on Italy and Belgium, both of which are heavily indebted.

Belgian finance minister Didier Reynders suggested over the weekend that the temporary fund could be increased once there is agreement on the scale of a permanent scheme.

“We need to increase the total amount of money for the permanent mechanism coming in 2013,” said Mr Reynders, whose country holds the EU’s rotating presidency. “If we decide [to increase it] in the next weeks or months, why not apply it immediately to the current facility?”

A diplomatic source said talks on preparations for the permanent fund are necessarily wide-ranging and they embrace the possibility of deploying other measures to fortify the currency.

This includes the possibility of issuing euro bonds, as sovereign bonds with a common euro zone guarantee would be known, a notion long resisted by Germany as it would increase its borrowing costs. Germany opposes increasing the bailout fund, a stance reiterated by Berlin in the wake of Mr Reynders’ remarks on Saturday.

As they try to co-ordinate their countries’ diverse positions before next week’s summit, finance ministers will be joined at their meeting tonight by IMF chief Dominique Strauss-Kahn.

European Commission chief José Manuel Barroso and economics commissioner Olli Rehn met European Council president Herman Van Rompuy, Eurogroup chief Jean-Claude Juncker and Mr Reynders last night in Brussels.

The possibility of European Central Bank chief (ECB) Jean-Claude Trichet joining the meeting was also under discussion. The ECB stepped up its emergency acquisitions of euro sovereign debt late last week and extended its provision of emergency liquidity for banks into next year.

Although the ministers will discuss market pressure on Portugal and Spain and other countries, they are under pressure to tackle crucial questions around the creation of the permanent mechanism.

Several core issues remain outstanding, among them the precise nature of the treaty change required to ensure the legality of the permanent mechanism.

Mr Van Rompuy has been tasked with formulating a proposal to the summit on this front.