Finance ministers mull bigger bailout fund, Spanish aid

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Increasing the eurozone rescue fund – and determining the extent to which Spain may need its help – will be under discussion today and tomorrow (30-31 March) as European finance ministers meet in Copenhagen.

The eurozome finance chiefs are set to decide formally to run the €500-billion permanent European Stability Mechanism (ESM) alongside the €200 billion already committed to Ireland and Portugal through a temporary fund, the European Financial Stability Facility (EFSF).

They might also allow the temporary fund’s unused €240 billion to be tapped “in exceptional circumstances” until mid-2013, when the EFSF will be phased out.

That would give the combined fund a potential €940 billion in resources.

Change of tune by Merkel

The higher figure might be approved after a shift in position by German Chancellor Angela Merkel – who originally opposed running the EFSF’s unspent funds alongside the ESM. The increased reserve is designed to boost confidence in the eurozone enough to encourage further investment using the firepower of the International Monetary Fund.

Although not on the agenda of the unofficial meetings in Copenhagen, the worsening economic situation in Spain – which might have to call on the boosted fund for help – is likely to be the focus of discussion.

Prime Minister Mariano Rajoy has ruled out asking for European aid or injecting state money, but loan defaults have reached an 18-year peak, leaving banks owed €1.8 trillion, which may leave little option but to seek bailout.

Reuters reported on 26 March that European Competition Commissioner Joaquin Almunia told Spanish journalists that Madrid has three options to clean up its banking sector: using Spanish public funds, finding private investment or applying for European aid.

Eurozone performance continues to diverge

European Economic and Monetary Affairs Commissioner Olli Rehn has dismissed as "unfounded" reports in a number of Spanish newspapers that the EU was putting pressure on Madrid to accept aid.

The Copenhagen meeting takes place against a backdrop of continuing divergence in eurozone economic performance.

Italy's 10-year borrowing costs fell to 5.24% yesterday, the lowest since August 2011, in an auction that continued a trend of easing tensions.

But the OECD, which produces quarterly figures showing year-on-year growth, warned that the eurozone periphery remained in a fragile state and would struggle to grow for the rest of the year.

The OECD said that German growth would remain firm for the first half of this year, underlining the strong performance of Europe’s chief paymaster.

In March German unemployment fell to its lowest level – 6.7% – since the country’s reunification in 1989.

“Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven,” former German central bank chief Jens Weidmann said of the rescue fund yesterday at Chatham House in London. “If we continue to make it higher and higher, we will, in fact, run into more worldly constraints,” which might include setting “incentives that lead to new problems in the future.”

“I hope that in two days, at Copenhagen's Eurogroup, the finance ministers will reach a deal on the firewall, which would move from having a size of €500 billion to around €750 billion,” Spanish Finance Minister Luis de Guindos told businessmen and journalists at an event in Madrid on 27 March “First quarter GDP will be just as bad but not much worse than the fourth quarter of last year [in Spain]," de Guindos added, echoing Bank of Spain data on Tuesday which showed the economy is still contracting.

Eurozone leaders are set to review the €500-billion limit on the joint lending capacity of their temporary and permanent bailout funds – the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) – at the informal meeting of finance ministers in Copenhagen today and tomorrow (30 and 31 March).

EU leaders hope the more muscular fund would help convince markets that they are committed to bringing the crisis under control.

The European Central Bank supports such an increase as do policymakers around the world who are considering more than doubling the International Monetary Fund's resources by $600 billion (€446 billion).

A bigger European rescue fund is a condition for major non-European economies before they lend more money to the IMF.

  • 30-31 March: Informal meeting of finance ministers in Copenhagen
  • European Financial Stability FacilityWebsite

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