Europe moves to raise bailout fund capacity

(BRUSSELS) - Europe strove to reach agreement Monday on boosting the capacity of bailout funding for failing eurozone states in order to soothe market fears that after Greece and Ireland, others might need rescue.

As eurozone finance ministers began two-day talks in Brussels under pressure to find common ground on the size and scope of an overhaul of its 750-billion-euro (1.0-trillion-dollar) safety net, divisions remained on the timing.

Germany, the fund's main guarantor, went into the meeting insisting there was no reason to rush despite calls from European Commission president Jose Manuel Barroso for EU leaders to expand the facility by their next summit on February 4.

"For now there is no urgent need to make a decision," German Finance Minister Wolfgang Schaeuble told reporters, noting that market pressure last week eased on Portugal and Spain, seen as the next possible bailout candidates.

"Developments in the markets in recent weeks have, thank God, made the discussion less dramatic," he said, insisting that no decision would be taken during the eurozone ministers meeting.

But there were also calls for highly-indebted countries to put their financial houses in order, with Luxembourg Prime Minister Jean-Claude Juncker, who chairs the 17-nation Eurogroup talks, and others insisting on the need for both "firmness and solidarity".

To maximise the effectiveness of the rescue fund, the six eurozone "AAA" rated members -- Germany, France, Netherlands, Austria, Luxembourg, Finland -- hammered out a package of measures on the sidelines of the talks, an EU diplomat said.

The measures aimed at improving the use of current resources rather than pumping in more money and included policies for fiscal consolidation, growth and economic reform, the source added.

In recent days the debate on the rescue fund has seen a call from Belgian Finance Minister Didier Reynders to double the size of the bailout chest to 1.5 trillion euros and a proposal to buy debt from struggling eurozone countries to keep their borrowing costs down.

Reynders on Monday said the key was to "give more capacity to the (post-2013) European Stability Mechanism for the future and maybe already for the facility now".

The idea gaining most ground was to raise the effective lending ceiling for the 440-billion-euro European Financial Stability Facility (EFSF), a proposal which Schaeuble and other ministers have indicated they could back.

The safety net was created last year to protect the euro from market upheaval after Greece became the first eurozone country to be bailed out due to its huge public deficit and debt load.

Analysts have warned the fund would be too small if bigger economies such as Spain, Italy or Belgium need help amid fears Portugal could be next to tumble into the financial abyss, causing a domino effect.

The EFSF borrows money backed by guarantees from the 17 eurozone members -- and is topped up by 250 billion euros from the IMF and another 60 billion euros from the 27-nation EU.

The EFSF's effective lending capacity is estimated at only 250 billion euros as, in order to secure a top rating and low interest rates from international investors, it must keep part of its funds in reserve.

"We have an emergency fund in place ... if an increase is needed we are prepared to look at that -- to have the full 750 billion euros ready instead of the lower amount," Dutch Finance Minister Jan Kees de Jager said.

"If you don't increase it, we should allow it to use all of the 440 billion euros," Spanish Finance Minister Elena Salgado also said.

Amid disquiet about diverging rates being paid on the rescue funding, ministers were also to compare the charges for EU bailouts of Greece and Ireland, with Irish Finance Minister Brian Lenihan saying he was looking for "a better deal".

"The whole question of the European facility funds is under discussion this evening," said Lenihan, whose government agreed to pay on average 5.8 percent for its 67.5-billion-euro international bailout in December.

3062nd Council meeting - Brussels, 18 January 2011 - agenda, briefing, background note etc