Europe to bump up rescue fund, fresh tests for banks
Michel Barnier - Photo EU Council
(BRUSSELS) - European leaders on Tuesday signaled their readiness to bump up emergency funding for distressed states and vowed fresh and more stringent test of their banks' exposure to sovereign debt following Ireland's bailout.
Two days of talks between European Union finance ministers in Brussels saw six of the 17-nation eurozone's richest nations, those with jealously-guarded AAA credit ratings, express a willingness to put in place more stronger guarantees for the eurozone rescue mechanisms.
In exchange for boosting the actual lending capacity of the temporary 440-billion-euro European Financial Stability Facility by cutting an estimated 200-billion-euro buffer that has to be kept in reserve, they also wanted to see tough reforms to cross-border economic governance from all EU states.
The six -- Germany, France, the Netherlands, Austria, Luxembourg and Finland, who together already contribute over 60 percent of the rescue funding -- also indicated they were in no mood to pour in extra money on top of the 440 billion euros already committed.
"Given the more pleasing situation on financial markets at the moment, there is no need to take urgent action to solve this question in an isolated and over-hasty manner," German Finance Minister Wolfgang Schaeuble said after the talks ended on Tuesday afternoon.
Other leaders, however, maintained their view that the eurozone is not out of the woods yet and more hard cash may need to be forthcoming.
"We cannot afford any kind of self complacency in this situation," said EU economic affairs commissioner Olli Rehn.
"We need to act as soon as possible in order to agree on a reinforcement of the EFSF as part of a comprehensive package," he said.
European bond yields -- the rate of return paid to investors -- rose on Tuesday with markets underwhelmed by the policymakers' remarks at their first gathering of 2011. At the same time, traders said that was likely more due to a shift towards stocks and to the large number of bond sales this week.
The yield on 10-year bonds issued by Portugal, seen by many analysts as most at risk after Ireland and Greece, rose to 6.951 percent, near the seven-percent level considered by many economists as unsustainable.
The EFSF is part of a trillion-dollar international umbrella that also sees the IMF committing 250 billion euros and the 27-nation EU throwing in another 60 billion euros.
The safety net is due to be replaced by a permanent rescue system from January 1, 2013, which aims to address longstanding economists' warnings of fatal flaws in the design of the 12-year-old cross-border euro economy.
Leaders are due to decide on its shape and scope at a summit in March, hence the growing calls for the interim arrangements to be adjusted.
Belgian Finance Minister Didier Reynders, who last week proposed doubling the overall package to 1.5 trillion euros, would still like to see an increase in size, at least post-2013.
Officials also the bloc's banks would face fresh solvency tests soon to see if they are strong enough to cope with any new crisis.
In Ireland, Allied Irish Banks and Bank of Ireland both passed the EU's stress tests in July but months later were shown to need billions more in fresh capital, one of the major reasons Dublin had to seek outside help.
EU financial services commissioner Michel Barnier said new transparent, uniform stress tests on banks would aim to check liquidity levels in the next few months, followed by the results mid-year.
These would focus on their sovereign debt holdings and be accompanied by remedial action for banks that fail to meet safety yardsticks, although it was not spelled out how that might be done.
London-based RBS European Economics analyst Jacques Cailloux warned that EU leaders may have to come up with with concrete figures sooner than the end of March "if market pressures return."
The euro rebounded above $1.34 in London trade Tuesday midday from $1.3294 dollars late Monday as markets welcomed the tougher line taken by the EU on its rescue mechanism.