Merkel playing for time on eurozone firewall deal

Angela Merkel vision_Picnik.jpg

Germany may not be ready to back an increase in Europe's bailout fund at a summit in Brussels this week, delaying efforts to meet international demands for Europe to strengthen its defences against the region's sovereign debt crisis.

Eurozone officials said they do not expect a decision at a European leaders' 1-2 March summit on combining the resources of two European rescue funds – the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM).

Olli Rehn, European commissioner for Economic and Monetary Affairs, said he expected an agreement on stronger European firewalls will come next month.

"The negotiations are now going on, I am confident that in the course of March, we will be able to take a decision on the reinforcement of the combined lending capacity of the ESM and the EFSF," Rehn told reporters, referring to the two euro zone bailout funds.

Bundestag vote on Greece bailout

Germany, which has stated strong opposition to increasing the bailouts, appears to be playing for time.

It faces a critical vote on Monday (27 February) to win support in the German parliament for Greece's second rescue package. Many Bundestag members are sceptical that Greece can meet tough fiscal conditions required to bring it budget deficit down to 120% of GDP by 2020.

Hans-Peter Friedrich, a leader of the conservative Christian Social Union (CSU) that is the sister part of Chancellor Angela Merkel's Christian Democrats (CDU), told Der Spiegel that Greece's chances of restoring its fiscal health would be greater outside the euro.

"Greece's chances to regenerate itself and become more competitive are certainly greater outside the currency union than they are if it stays in the eurozone," Friedrich told the news weekly in comments released ahead of publication.

"I'm not saying that Greece should be thrown out but rather to create incentives that it can't say 'no' to," he added.

Although the Bundestag is widely expected to endorse the Greek bailout plan, Merkel may be forced to rely on opposition support to overcome a determined band of rebels in her coalition.

At least a dozen members of parliament in Merkel's centre-right coalition said they would vote against the €130 billion rescue package. If the number of rebels rises to at least 20, the measure will pass only with opposition support.

That would be a humiliating defeat for Merkel, which analysts and opposition leaders said would raise doubts over whether her coalition can survive.

Clearing the way for IMF funding boost

Similar votes are scheduled in the Netherlands and Finland next week. Germany also wants to see whether enough investors sign up for the Greek debt swap, which Athens wants to complete by 12 March, a eurozone official said.

"Most eurozone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag," the official said.

After mounting these political hurdles, international diplomats and eurozone officials expect Germany will concede to an enlarged EU bailout fund. That in turn would clear the way for G20 countries to agree to add more resources to the International Monetary Fund when they next meet in Washington at the end of April.

"Everybody says there is a pre-condition that Europe makes more efforts first," South Korea's central bank governor Kim Choong-soo said on Friday from Mexico City.

Increasing IMF resources is on the agenda when G20 finance ministers and central bankers from leading economies begin their meetings on Saturday but a deal will have to wait.

The EU's Rehn said the G20 would probably lay out a roadmap for getting to an agreement by late April.

Strong firewalls

At issue is whether Europe will agree to combine its temporary bailout fund, the European Financial Stability Fund (EFSF), with a permanent fund, the European Stability Mechanism (ESM), that takes effect in June.

The ESM has a €500 billion limit but merging the two would create a firewall of €750 billion and go a long way towards convincing markets that Europeans are committed to bringing the crisis under control.

In addition, the IMF is seeking additional resources of up to $600 billion (€446 billion) which would provide an even bigger wall of cash to fight the sovereign debt crisis that has already pushed three eurozone countries – Greece, Portugal and Ireland – into IMF bailouts and has threatened to spread to the much bigger economies of Italy and Spain.

The United States has said it will not provide more funds for the IMF. Canada is reluctant too, unless the eurozone makes a bigger effort. That leaves China and Japan as the two candidates that potentially would make the largest contribution to IMF resources through bilateral loans.

One G20 official said there were hopes that China, the world's second-biggest economy, could contribute some $100 billion (€74 billion) to the IMF and Japan another $50 billion (€37 billion). Both countries have said that the eurozone must move first.

A draft set of conclusions prepared ahead of next week's EU summit in Brussels showed eurozone leaders will call for an international deal to increase IMF resources in April, implying a deal within the eurozone on its bailout funds in March.

"What we can expect, at most, is a reference in the conclusions suggesting Germany is not closing the door," one senior eurozone official said.

The concern in Germany has been that bolstering bailout resources would cause countries to lose the impetus to carry out badly needed belt-tightening reforms. "It makes no sense, and is rather harmful," said one German official.

For Germany, rather than quickly combining the funds, one of the options could be to allow the permanent ESM to reach full capacity of €500 billion more quickly than over five years from July 2012, as envisaged now.

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 1-2 March summit.

If they decide to merge the funds, they would create a firewall of €750 billion which would help convince markets that they were 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 IMF'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 International Monetary Fund (IMF).

This should to provide an even bigger wall of cash to fight the crisis that has already claimed three euro debtor countries and now threatens the much bigger economies of Italy and Spain.

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