EU in talks to double rescue fund: Belgium

13th January 2011, Comments 0 comments

A major push to boost eurozone rescue funds gained momentum Thursday, with talk of doubling its firepower to 1.5 trillion euros ($2 trillion) to fend off fears about the fate of vulnerable countries.

Belgian Finance Minister Didier Reynders told AFP that discussions were underway about doubling the system's lending capacity, amid concerns that Portugal and even bigger eurozone economies such as Spain may need bailouts.

"I think that doubling the resources would be a reasonable objective," Reynders said in a telephone interview.

"It must be noted that this does not mean taking money out of our budgets, these are guarantees that we are giving," he said, adding that he hoped the subject would be broached at a meeting of eurozone finance ministers on Monday.

Europe, with the backing of the International Monetary Fund, created last year a 750-billion-euro financial backstop to rescue any country in trouble in the wake of a massive bailout of Greece.

But Europeans are debating whether to boost the size of the fund to appease markets nervous about the financial health of Portugal and Spain, after Ireland became the second eurozone country to get a bailout in December.

Portugal and Spain managed to raise funds from the markets this week, but analysts said this is likely on a temporary reprieve as the rate of returns they had to offer investors were still high and could yet rise to levels where they would need to seek bailouts.

European Commission President Jose Manuel Barroso pressed EU leaders on Wednesday to give more muscle to the mechanism and take a decision by their next summit in Brussels on February 4.

Germany and France initially rebuffed Barroso's call but the finance ministers of the eurozone's economic powerhouses loosened their positions on Thursday.

German Finance Minister Wolfgang Schaeuble said the mechanism's lending capacity should be increased but that the overall size of the fund should remain steady.

French Finance Minister Christine Lagarde said the rescue fund's capacity will be increased if needed in order to "demonstrate our determination to defend the stability of the eurozone."

French Prime Minister Francois Fillon said France and Germany were prepared "to do everything, absolutely everything" to ensure the stability of the single European currency.

In Frankfurt, European Central Bank president Jean-Claude Trichet renewed his call for the eurozone rescue system to be strengthened.

Under the system, eurozone countries provide guarantees of up to 440 billion euros for loans to governments that request aid through the European Financial Stability Facility (EFSF).

The IMF contributes another 250 billion euros and the entire EU can raise another 60 billion euros through a separate vehicle.

EU leaders agreed last year to create a permanent crisis mechanism that would replace the EFSF when it expires in 2013.

So far only Ireland has tapped the temporary facility but there are concerns if Portugal and the much bigger economies of Spain and Belgium are brought down then the rescue funds may not be sufficient.

Analysts have repeatedly warned that the war chest needs to be bigger to calm nervous markets that are concerned the debt crisis could spread.

The primary issue is that th EFSF's lending capacity is estimated at only 250 billion euros as the fund 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.

"I think we should double the current facility and the future permanent mechanism. It would be the logical thing to do," Reynders said.

"If we double it, we would get to 1.5 trillion," he said. Asked whether discussions among EU states involved this figure, he said: "absolutely."

"The European Commission and the European Central Bank are also beginning to invoke this sort of possibility," Reynders said.

In return for boosting the fund, and to win over reluctant countries such as Germany, Reynders said governments should commit to making more efforts to slash their public deficits.

"Otherwise I don't think we will convince, and I understand them, my German and Dutch colleagues," he said.

© 2011 AFP

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