EU divided over debt crisis fund boost

12th January 2011, Comments 0 comments

A plea by the European Commission Wednesday to act fast to boost a eurozone debt crisis fund hit immediate opposition from France and Germany despite fears Portugal might need a bailout.

Commission President Jose Manuel Barroso called for an increase in the size of the 440-billion-euro European Financial Stability Facility (EFSF) to reassure nervous markets the stability of the eurozone "is not in question."

"We believe that the financing capacity must be reinforced, the scope of activities of the EFSF should be widened," Barroso said.

"And in fact I see no reason why we should not take a decision on these matters at the latest by the next" European summit on February 4, he told a news conference on the launch of a new economic governance programme.

But divisions quickly emerged as Berlin and Paris immediately hit the brakes, saying there was no need to expand the fund.

"The German government finds at the moment that it makes no sense, and first and foremost that it is unnecessary, to talk about expanding the rescue mechanism," government spokesman Steffen Seibert told reporters.

French government spokesman Francois Baroin said the fund was "sufficiently big to meet requests" and that it would not be on the agenda at a meeting of EU finance ministers next week.

The temporary fund was created last May to provide cover for countries in financial distress after Greece became the first eurozone country to be rescued from the threat of bankruptcy, followed by Ireland in November.

But analysts have repeatedly warned that the war-chest needs to be bigger to calm nervous markets concerned the debt crisis could spread to even bigger economies such as Spain, Italy or smaller Belgium.

Belgium, itself hit by higher borrowing costs due to a marathon political crisis, has called for the fund to be given "unlimited" resources.

Talk of boosting the EFSF came as the borrowing costs of Portugal rose to dangerous heights.

Portugal has resisted pressure to seek a bailout. In a test of its ability to remain financially independent, the country managed to raise 1.25 billion euros at a bond issue Wednesday which attracted strong demand.

European economic affairs commissioner Olli Rehn said talks were underway with EU states on the possibility of increasing the EFSF, which expires in 2013, and a mooted, permanent successor -- the European Stability Mechanism.

"We must ensure that the financial support mechanisms that were put in place last May are fit for the purpose," Rehn said.

He said discussions with member states about increasing the fund were "currently going on" and that "progress is being made."

The bailout mechanisms total capacity on paper is 750 billion euros (one trillion dollars) when contributions from the entire EU and the International Monetary Fund are added.

But the EFSF's effective funds are consderably less than 440 billion euros. Its lending capacity is estimated at 250 billion euros as the EFSF in fact 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.

Europeans are weighing the possibility of bringing the EFSF's effective capacity up to 440 billion euros, which would mean a significant increase in the fund and guarantees from eurozone states, the Wall Street Journal and Germany's Die Welt newspaper reported.

Another idea being invoked is to allow the fund to buy the public debt of troubled economies to ease the burden on the European Central Bank, which has been buying sovereign bonds to keep the rates of countries like Portugal low.

Senior officials from EU finance ministries discussed the crisis fund during meetings on Monday and Tuesday in Brussels ahead of regular talks at the level of ministers next week, according to diplomats.

© 2011 AFP

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