France says euro fund boost 'premature'

14th January 2011, Comments 0 comments

European Union efforts to boost rescue funds for vulnerable eurozone countries are "premature," France's Finance Minister Christine Lagarde said on Friday.

"If we had to increase the European stability fund a figure would have to be calculated (but) ... it is premature" to do so, Lagarde told reporters, after Belgium proposed doubling the fund to 1.5 trillion euros ($2 trillion).

Belgian Finance Minister Didier Reynders told AFP Thursday 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.

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

"An increase of the European Financial Stability Facility is an option we are looking at" among a "range" of others including the structure and conditions of the lending, Lagarde said. "It is not only a question of money."

The minister said no conclusions had been reached yet in the discussions, adding: "I don't thing you should preclude or conclude anything at this point."

The 440-billion-euro European Financial Stability Facility (EFSF) is the main component of the eurozone bailout package. It is not funded direcltly by eurozone countries, who instead give guarantees that will allow the fund to borrow funds on the market.

There has been concern that the EFSF will not have enough if Spain needs to be bailed out as its effective lending capacity has been estimated at around only 250 billion euros as it must keep part of funds raised in reserve in order to secure a top rating and pay low interest rates.

An EU diplomatic source said Friday that a doubling of the funds was just one option being discussed.

"A doubling of funds is being discussed among other things," the source told AFP.

"The doubling is one option, but there are also other options imaginable," said the source, adding "I don't think we are near a deal yet" on the enlargement of the fund.

"We are perhaps closer to an agreement on increasing the volume than on widening the mandate," said the source.

There has also been discussion of enlarging the EFSF's tool box, in particular allowing it to buy the debt of troubled eurozone members on the secondary market.

That would allow it to take over that job from the ECB, which has grown increasingly uncomfortable with that unorthodox role it had to assume during the crisis in order to prevent the sovereign bonds markets from freezing, and which has stressed repeatedly would only be a temporary one.

The EFSF's director, Klaus Regling, will attend the Monday meeting of eurozone finance ministers, but the source said it was unlikely a decision would be taken on increasing its firepower.

On the French economy, Lagarde said estimates showed growth was 1.5 percent in 2010, lower than her 1.6 percent forecast, but insisted "the growth outlook is good." The government is aiming for two percent growth in 2011.

Budget Minister Francois Baroin said separately that France's state budget deficit for 2010 was lower than expected at 148.8 billion euros.

He hoped this would help it meet its aim of an overall 2010 public deficit of 7.7 percent of Gross Domestic Product, more than double the limit set by EU treaties. He said France aimed to get its public deficit below the three percent limit by 2013.

© 2011 AFP

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