Euro zone agrees bigger 'firewall'

Fri, Mar 30, 2012, 01:00

Euro zone finance ministers agreed today to raise their financial firewall to prevent a new flare-up of the sovereign debt crisis, but it was unclear if markets and Europe's G20 partners would see the boost as sufficient.

The 17-nation currency area agreed to combine its two rescue funds to make €500 billion of new funds available in case of emergency until mid-2013, on top of €200 billion already committed to bailouts for Greece, Ireland and Portugal.

The executive European Commission had proposed raising the total amount to €940 billion, of which €740 billion would have been as yet uncommitted funds, but EU paymaster Germany resisted a higher number.

Initial market reaction was positive, with the yields on Spanish bonds falling as investors weighed the ministers' decision and awaited a draconian Spanish austerity budget.

An official statement said ministers had lifted the combined lending capacity of the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) to €700 billion from €500 billion.

"The current overall ceiling for ESM/EFSF lending ... will be raised to €700 billion," it said. "All together, the euro area is mobilising an overall firewall of approximately €800 billion, more than $1 trillion."

However, the highest headline number included money already disbursed from the EFSF, a smaller bailout fund controlled by the European Commission and bilateral loans which euro zone countries extended to Greece under the first bailout.

The €500 billion in fresh lending capacity for the combined funds until July 2013 takes account of the fact that the ESM will not start its operations at full capacity, but only grow into it as capital is paid in over three years.

It means €240 billion of uncommitted funds in the EFSF could be tapped if necessary until the ESM becomes bigger.

French finance minister Francois Baroin said the decision gave Europe a stronger hand to persuade other major economies to increase the International Monetary Fund's resources to fight contagion from the euro zone crisis if necessary.

"We are now in a strong position for discussion on the IMF in April. It is a good signal," Mr Baroin said.

Some bond market players questioned whether the compromise would provide sufficient money to help Spain, the euro zone's number four economy, if it needs a bailout to overcome a banking crisis due to the collapse of a real estate bubble.

After tempers flared, Eurogroup chairman Jean-Claude Juncker today called off a scheduled news conference, saying Austrian finance minister Maria Fekter had already announced the outcome.

Mr Juncker said the appointment of a new European Central Bank executive board member had been postponed until mid-April. He had earlier said fellow Luxembourger Yves Mersch was the strongest candidate for the ECB job.

The delay may have been due France's request to hold off on choosing a successor to Mr Juncker until after the April-May French presidential election.

Diplomats said French president Nicolas Sarkozy wanted to avoid political embarrassment from the likely choice of German finance minister Wolfgang Schaeuble, which his opponents could portray as a sign of German dominance in the euro zone.

Countries sharing the euro have already agreed to adopt more strictly enforced balanced-budget rules in an effort to convince markets that their public finances will be sustainable.

They also agreed to slap fines on countries that run excessive budget deficits or have large imbalances in their economies.

After a deal with investors this month to restructure Greek debt, increasing the amount of money the euro zone can provide to help members cut off from markets is seen as the next step to boost investor confidence.

The European Commission and several of the world's biggest economies have been pushing to increase the euro zone bailout capacity as much as possible, in the belief that once investors see a wall of money supporting euro zone debt, confidence would return and the rescue funds would never have to be used.

But Germany, where public opinion is hostile to bailouts, has been against raising the contingency funds, noting that markets have calmed down from the peak of the debt crisis.

Yet market concern about Spain, which badly missed its budget deficit target in 2011 and negotiated with the euro zone a softer target for 2012, have put the bailout capability discussion back on the table.

A higher euro zone bailout capacity is a pre-condition for most G20 countries to contribute more money to the IMF.