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Future eurozone rescue fund to hold EUR 500bn

15 February 2011, 00:36 CET
Future eurozone rescue fund to hold EUR 500bn

Jean-Claude Juncker - Photo EU Council

(BRUSSELS) - Eurozone leaders decided Monday to almost double the effective lending capacity of future bailout funding, as they cast a worrying glance at renewed pressure from the bond market.

A permanent eurozone rescue fund being set up from January 1, 2013, will have an initial capacity of 500 billion euros, said the head of the Eurogroup of finance ministers, Luxembourg Prime Minister Jean-Claude Juncker.

"I would think that this will be enough," he said after talks among finance ministers from all 27 European Union nations.

The European Stability Mechanism will replace an existing 440-billion-euro eurozone fund already tapped by Ireland, but whose effective lending capacity is estimated at only around 250 billion euros.

The remainder has to be kept back as collateral enabling eurozone states to borrow more cheaply the money they subsequently lend out.

Some have argued that the current fund must also be made fully available, and Monday's decision offers a clear signal that ministers are moving in that direction.

"We are already agreed on the volume of the lending capacity for the ESM," Juncker said, adding that the full sum would be its "effective" capacity.

He also said the size would be subjected to "regular review at least every two years."

The existing rescue funding is topped up by a further 60 billion of EU money and another quarter of a billion from the IMF.

EU economic affairs commissioner Olli Rehn said the "unwritten understanding" with the International Monetary Fund was that it would again offer "50 cents to one euro" put up by the Europeans to go alongside the future ESM.

That was the arrangement with a 110-billion Greek bailout, and also in the case of Ireland, where non-euro states including Britain also offered bilateral loans.

Half a billion is a figure "we know is reasonable," said French Finance Minister Christine Lagarde of what would be needed to keep the wolves at bay.

The announcement, which comes well ahead of a March 25 deadline for concluding negotiations on the size, shape and scope of the permanent rescue fund, followed rising yields on the bond market that Juncker termed "worrisome."

Bond yields for the weakest eurozone states again rose on Monday, after steadily climbing last week, with the 10-year yield for Portuguese public debt issuance hitting around 7.3 percent as against 7.175 percent at close on Friday. It had risen as high as 7.636 percent at one point in the day.

Spanish yields also rose, raising the spectre of renewed panic as European Union leaders try to settle their defences and fix economic policy inconsistencies across the eurozone, the subject of a special summit of eurozone leaders on March 11.

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