BRUSSELS: Eurozone finance ministers head into a meeting Monday under pressure to ramp up the firepower of a debt rescue fund even after markets backed off pressure on vulnerable nations.
Europeans are divided over how quickly they need to act and how much added muscle they should give to the financial safety net that was created last year to provide cover to weak countries, following a huge bailout of Greece.
European Commission president, Jose Manuel Barroso, who heads the European Union’s executive arm, urged leaders to take a decision by their next summit on February 4 to appease markets nervous about the fate of Portugal and Spain.
The EU’s rescue mechanism was used to pull Ireland from the abyss last November after a banking disaster, but analysts have repeatedly warned it would be too small to rescue Spain if it ever needs a bailout.
Belgian Finance Minister Didier Reynders called this week for the safety net to be doubled to 1.5 trillion euros ($2 trillion) and said he hoped to raise the issue at the eurozone ministers’ monthly meeting in Brussels.
“I think that doubling the resources would be a reasonable objective,” Reynders told AFP in a telephone interview.
But German counterpart Wolfgang Schaeuble, whose country has the biggest commitment in the European Financial Stability Facility (EFSF), the main component in the rescue mechanism, said a debate on increasing the size of the pot was “not realistic.”
The rescue mechanisms combine the 440-billion-euro EFSF, plus 250 billion euros from the IMF and another 60 billion euros from the entire EU.
Germany and other countries have noted that only 10 percent of funds have been used so far to help Ireland.
But the EFSF’s effective lending capacity is estimated at only 250 billion euros as the fund, backed by gurantees from eurozone members, borrows money on the markets and, in order to secure a top rating and low interest rates, it must keep part of funds raised in reserve.
Schaeuble indicated that increasing the EFSF’s lending capacity may be necessary. Bringing it up to 440 billion euros would mean an increase in loan guarantees from eurozone states.
“Even if the German government is officially still reluctant to change the ‘rules of the game,’ an increase in the size and scope of the EFSF has become likely,” ING banking group said in a note to clients.
If Portugal taps the EFSF, then the fund would not have enough funds to cover Spain, which would need support of around of around 300 billion euros, ING estimated.
Portugal and Spain managed to raise funds from the markets this week.
But analysts warned that the countries’ successful bond issues were likely a temporary reprieve as the rate of returns they had to offer investors were still high and could yet rise to levels that would require bailouts.
The head of the Luxembourg-based EFSF, Klaus Regling, said in an interview with German newspaper Bild Zeitung that “there is no urgency” to modify the fund.
French Finance Minister Christine Lagarde said Friday it was “premature” to put a new figure on the fund but admitted that increasing its size was among several options being debated.
She confirmed one idea would be to enlarge the EFSF’s toolbox to allow it to buy the debt of troubled eurozone members on the secondary market, taking over a role that the European Central Bank has reluctantly taken.