Euro zone starts talks on long-term crisis plan

Eurogroup Juncker Rehn Jan 2011.jpg

Eurozone finance ministers discussed on Monday (17 January) having more money in their rescue fund and cheaper emergency loans as part of a package of measures to end the sovereign debt crisis. But they made no firm decisions.

The chairman of eurozone finance ministers, Jean-Claude Juncker, said the ministers discussed many possible options under the package, but favoured none at this stage.

"We started discussions on a comprehensive package of measures to stabilise the euro zone. These talks have to continue," Juncker said after a monthly meeting of the finance ministers.

He vowed to accelerate work on the package, but was careful not to commit to being ready in time for the 4 February or 24-25 March European Union leaders' summits.

"I wouldn't give a date for conclusion of our work, but the work will be done at the highest speed possible," Juncker said.

He said the ministers discussed a European Commission proposal to increase the effective lending capacity of the eurozone rescue fund, the European Financial Stability Facility (EFSF), to 440 billion euros from about 250 billion now.

The EFSF was set up in May 2010 to borrow money on markets with eurozone government guarantees of up to 440 billion euros.

But because it wants to have the top credit rating of triple A, the effective amount the fund can lend to countries in need is around 250 billion euros. 

"The decision taken in May said that the facility will make 440 billion euros available. We are looking at the different ways we can actually do that," Juncker said.

Markets want to see more money available in the EFSF because they estimate that the current amount would not be sufficient if both Portugal and Spain applied for eurozone emergency financing – which some see as a possibility.

Markets worried

Both Greece and Ireland have been bailed out during the debt crisis and markets are worried that Portugal and possibly Spain could be next.

Markets want to see more money available for the fund because they estimate the current amount would not be sufficient if both Portugal and Spain applied for emergency financing.

Eurozone policymakers are expected eventually to increase the firepower of the EFSF by 260 billion euros to reach 700 billion, a Reuters poll shows.

Last week, the European Commission and the European Central Bank (ECB) called not only for the EFSF to have more money but also to use it in a different way – for example to buy government bonds on the secondary market, like the ECB does now.

Germany has so far opposed the idea and Juncker would not give any details on what support that idea had among eurozone finance ministers on Monday.

German Finance Minister Wolfgang Schaeuble said there was no need to increase the size of the rescue fund at this point.

"Portugal doesn't want or need a bailout at all. There's enough funds for Ireland and the rest is speculation," he told German radio on Monday ahead of the finance ministers' talks.  

Effective lending capacity increase

Juncker praised the budget consolidation and reform efforts of both Lisbon and Madrid and said markets had noted them too.

"Markets remain volatile, but related developments were encouraging. The spreads on sovereigns have moved in ways that illustrate this. The measures taken so far seem to be working, particularly those measures taken in Portugal and Spain, because those measures seem to have borne fruit," he said.

The rescue fund is already financing Ireland and the euro zone also has bilateral loan commitments to bankroll Greece for three years. EU Economic and Monetary Affairs Commissioner Olli Rehn was optimistic on boosting the EFSF's firepower.

"I am confident that the effective lending capacity of the EFSF will be expanded," he told reporters.

Juncker also said that there was a general discussion about cheaper loans from the EFSF to countries cut off from market financing. The EFSF now adds a punitive 300 basis point margin for its loans on top of the average market rate.

"We were discussing in general terms the question of lowering the interest rate for countries concerned, but we did not discuss this point in sufficient detail that I would be able to give you the outcome of that debate," Juncker said.

Many economists and policymakers believe a lower rate on emergency loans would help the struggling countries return to more sustainable debt levels.

A change decided now for EFSF loans would most likely mean lower borrowing costs also for Greece and Ireland under programmes agreed last year, a eurozone source said.

Germany sees no rush

Growing realisation that a deal to widen the bailout fund was not imminent caused the euro to retreat on Monday from a one-month high reached after successful debt auctions by Portugal and Spain last week.

The euro fell as low as $1.3250 in Asian trade on Tuesday before finding some support and bouncing up to around $1.3315 at 0530 GMT.

A Reuters poll of bank analysts across Europe found most expect eurozone policymakers to eventually increase the firepower of the EFSF by 260 billion euros to 700 billion.

But German Finance Minister Wolfgang Schaeuble said that with bond markets calmer, there was no rush to take action now and work was being prepared for a late March EU summit.

The ECB said it bought 2.3 billion euros in euro zone government bonds last week, its biggest weekly purchase for more than a month. The buying helped calm markets, enabling Spain and Portugal to stage successful auctions.

Madrid cancelled another planned bond auction on Monday and decided instead on a 10-year bond sale through a syndicate of banks, to raise six billion euros.

The decision would help it to sell more debt while the going was relatively good, an analyst said, though the increased amount meant investors pushed up Spanish risk premiums slightly.

Belgium the latest test

Belgium provides the latest test of investor sentiment over eurozone debt on Tuesday with an issue of three-month and 12-month treasury certificates.

The country was largely untouched by the euro zone's debt crisis until November, when contagion concerns grew.

The lack of a government for seven months is feeding market fears that political paralysis will undermine efforts to cut a public sector debt that is almost as large as annual economic output. 

(EURACTIV with Reuters.)

After Greece and Ireland received EU-IMF bailouts last year to cope with their swollen public debts and deficits, Portugal is seen as the next candidate for a rescue despite efforts to put its public finances in order.

Germany, France and other eurozone countries are reportedly pushing Portugal to seek an EU-IMF assistance programme to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.

But both Germany and France say they see no need to boost the 440-billion-euro European Financial Stability Facility (EFSF). 

"If you start that discussion at a time when not even 10% of the fund has been used [...] then you wake the concern that one should expect it will be used," German Finance Minister Wolfgang Schaeuble said last week.

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