Boost for eurozone fund, but Spain downgraded
Slovakia has ratified the eurozone bailout fund, removing the final hurdle to boosting eurozone defences against the debt crisis, as a new ratings downgrade for Spain underlined the need for action.
The Slovak parliamentary vote Thursday to reinforce the fund's powers to help eurozone governments and banks in distress means a second bailout for Greece, agreed in July but frozen by international auditors, can now be re-negotiated at an EU summit on October 23.
Slovakia became the last country in the 17-nation eurozone to agree to expand to 440 billion euros ($600 billion) the European Financial Stability Facility (EFSF), the eurozone's primary weapon against the debt debacle.
An initial rejection earlier this week toppled Slovakia's centre-right government and in order to secure support to approve the EFSF in the second vote it agreed to hold elections next March.
"Although the price was high, I'm glad we made good on our obligations and we're not blocking this tool designed to prevent the eurozone crisis," said Slovak Finance Minister Ivan Miklos.
With the Slovak hurdle out of the way, the European Union can now focus on plans to recapitalise banks amid the rising likelihood that those holding Greek debt will have to take bigger losses.
The vote also saved Europe from an embarrassing setback ahead of G20 talks in Paris this weekend, amid pressure from the United States and other economic powers for the EU to prevent the crisis from triggering a global recession.
However it did not prevent more bad news for the eurozone which has already been obliged to bail out Ireland and Portugal as well as Greece.
Standard & Poor's cut fellow eurozone member Spain's long-term credit rating by one notch to "AA-" from "AA" with a negative outlook, following downgrades to the country's top banks.
S&P cited high short-term external debt, which was at 50 percent of GDP in the second quarter of 2011, leaving "the economy vulnerable to sudden shifts in external financing conditions".
On Tuesday, Standard & Poor's had downgraded the credit ratings of top Spanish banks, including Santander and BBVA, a move followed by fellow ratings agency Fitch over poor growth prospects.
Earlier this month Fitch slashed Spain's sovereign credit rating by two notches.
Meanwhile European Central Bank chief Jean-Claude Trichet said the ECB had done what it could to solve the eurozone debt crisis and it was now up to governments to act.
"I think that the ECB has done all it could to be up to its responsibilities in exceptional circumstances," Trichet told the Financial Times, which stressed the Frenchman made clear the ECB will not be the lender of last resort for governments.
"The ultimate backstop is, of course, the governments. To do anything that would let governments off their responsibilities would be a recipe for failure," he said in the interview published on the British newspaper's website.
The comments from Trichet, who is retiring at the end of October after eight years at the helm of the ECB, came ahead of the Paris meeting of Group of 20 finance chiefs.
Trichet will join finance ministers and central bankers from the world's major economies Friday and Saturday in the French capital.
Steven Maijoor, chairman of the European Securities and Markets Authority, said at a conference in Lisbon that convincing and timely measures were needed to persuade the markets Europe is serious about fixing its debt crisis.
"We need to get the bazooka out to convince markets," he said.
The new-look EFSF will be able to inject money into shaky banks or intervene instead of the European Central Bank to support weaker eurozone countries facing problems in raising fresh funds on the markets.
EFSF chief executive Klaus Regling said afterwards that the fund would "use the new instruments in the near future".
Amid US calls to further boost the fund's firepower, an EU source said the European Commission may propose to "leverage," or increase the EFSF as much as fivefold to 2.5 trillion euros, without governments needing to provide new guarantees.
Portugal, which has already received an EU-IMF bailout this year, on Thursday presented a 2012 budget with toughened austerity measures.
They include pay cuts for civil servants, longer working hours in the private sector, a VAT hike and slashed budgets for the education and health ministries.
"We have to do more, much more than what was initially planned," Portuguese Prime Minister Pedro Passos Coelho said in a televised address.
The spotlight is now on Europe's banking system, with the European Commission pressing banks to urgently beef up their coffers to cope with the crisis.
In Paris, the French finance ministry said banks exposed to Greek debt will probably be forced to write off more than the 21 percent so far proposed in a July eurozone accord on a second bailout for Athens.
"The discussions are on a cut of 50 percent," a source from a European government told AFP.
But the European Central Bank warned against forcing banks to take a hit.
The euro and European stocks nonetheless fell on concerns over the banking system, with London down 0.97 percent, Frankfurt off by 1.45 percent and Paris dropping 1.23 percent.
The head of one major lender, Germany's Deutsche Bank, voiced reluctance to recapitalise, saying the debate was "counterproductive" and that it was up to governments to restore confidence in public finances.
Luxembourg Prime Minister Jean-Claude Juncker, who is also head of Eurogroup finance ministers, insisted that those expecting Greece to be forced out of the eurozone "are misled".
© 2011 AFP