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Eurozone haggle over firewall size amid Spain concerns

Eurozone finance ministers sparred on Friday over the size of a boost to their “firewall” against the debt crisis as strike-hit Spain faced new budget cuts to fend off market worries.

Ministers were debating options to bolster their defences against the crisis from the current 500 billion euro ($665 billion) maximum in a permanent bailout fund, the European Stability Mechanism (ESM), coming into effect in July.

Options range from about 700 billion euros to 940 billion euros and there still seemed to be scant agreement on how much cash was required to ward off a second attack on the eurozone amid concerns over Spain’s financial situation.

Wolfgang Schaeuble, finance minister of Germany, Europe’s top economy and paymaster, repeated a figure of 800 billion euros, made up of the 500 billion euro ESM ceiling plus about 300 billion euros already pledged to debt-wracked countries.

As eurozone finance ministers entered two days of talks in Copenhagen, Ireland’s Michael Noonan agreed that 800 billion euros “seems to be going into the ballpark of what is required.”

He said: “The market reaction to these is to the dollar amounts so anything that gets you to a trillion dollars looks like a serious firewall and if you’re talking 800, its over a trillion dollars and that is a very serious firewall.”

Noonan added that 940 billion euros would be an “impressive figure and would send a very clear signal to the markets.”

“But if we get to 800 or beyond 800, the denominated amount in dollars … presents a very serious firewall to prevent attacks on Europe.”

However, both Germany and Finland rejected calls — made earlier by France and the European Commission — to combine the ESM with the temporary European Financial Stability Facility (EFSF) to make a total of 940 billion euros.

The EFSF, set up in the eye of the storm but expiring in 2013, has a maximum capacity of 440 billion euros and many have proposed simply combining the ESM and the EFSF to arrive at a fraction under one trillion euros.

But Schaeuble said: “It is more important for the financial markets that we overcome our problems.”

And Finnish Finance Minister Jutta Urpilainen, stressed: “Finland is ready to increase the capacity. But 940 billion is not possible for our side.”

“Now we are looking for a result that Finland and other countries can accept but 940 is not it,” she added.

The head of the eurozone ministers, Luxembourg Prime Minister Jean-Claude Juncker said he wanted a figure “a bit away” from 940 billion euros.

Belgian Finance Minister Steven Vanackere said he was “absolutely convinced” that the ministers would be able to clinch a deal in Copenhagen whereas Dutch Finance Minister Jan Kees de Jager also came out in favour of a higher firewall.

“We’ll get a deal,” said French Finance Minister Francois Baroin, reiterating the position of Paris that “the higher the amount, the more of a deterrent it is.”

Highlighting the main reason to bolster the firewall — fears that the sovereign debt crisis that started in Greece could spread to larger economies such as Italy and Spain — were fresh concerns about Spanish fiscal strains.

“Spain is in a very difficult situation,” said EU Economic Affairs Commissioner Olli Rehn, adding that Madrid had the strength to fix its fiscal position.

Spanish borrowing costs have risen in recent weeks after Madrid admitted it had missed its 2011 deficit target of 6.0 percent of gross domestic product, reporting 8.5 percent instead.

Spain’s right-leaning government unveils Friday huge cuts amid some civil unrest on the streets.

Greek Prime Minister Lucas Papademos also said on Friday that Greece might need a third bailout, although the country would do its utmost to avoid that, while also attacking critics for underestimating progress made by Greece.

Eurozone ministers are under huge international pressure to come up with a convincing firewall.

The European Union’s partners from Washington to Tokyo and including groups such as the International Monetary Fund want to see the eurozone ring-fenced as effectively as possible against a new crisis which would affect the whole world.

The Organisation for Economic Cooperation and Development (OECD) pressed this week for a one-trillion-euro pot, which OECD head Angel Gurria calls “the mother of all firewalls.”

And leading and emerging nations of the Group of 20 (G20) have said they will only consider lending more to the IMF to combat the eurozone crisis if the bloc first stumps up enough cash to tackle their own problems.

Members of the IMF will meet in late April to consider a request to boost the body’s lending capacity by $500 billion in case it is needed to bail out another eurozone country.