BERLIN — Germany has backed down from its resistance to boosting Europe’s financial firewalls, after Chancellor Angela Merkel said Monday she was open to temporarily boosting the eurozone’s bailout funds to $930 billion. But the move still falls short of what may be needed to protect Italy and Spain from collapse.
Merkel’s statement is a climbdown for Germany, which has so far insisted there was no need to increase the lending capacity of the bailout funds beyond the planned $668 billion - despite uncertainty over the ability of Rome and Madrid to repay their debts.
However, a temporary increase to $935 billion - of which close to $267 billion have already been committed to previous bailouts - may not be enough to convince markets and global institutions such as the International Monetary Fund that the eurozone is doing enough to stop its debt crisis from spreading.
The 17 euro countries are currently debating how to move from their old bailout fund - the $588 billion European Financial Stability Facility, which is already providing $257 billion in loans to Greece, Ireland and Portugal - to a new, permanent rescue fund - the $668 billion European Stability Mechanism.
The ESM is set to come into force in July, but under current policy, old bailouts would have to be subtracted from its overall capacity, meaning that it could give only a little more than $400 billion in new loans. That is seen as way too little to effectively help large economies like Italy and Spain, which together have more than $3.3 trillion in debts.
Olli Rehn, the EU’s Economic Affairs Commissioner, on Monday again stressed that eurozone finance ministers had to send a strong signal to the rest of the world at their next meeting, set for Friday in Copenhagen.
“We will have to take a convincing decision concerning the reinforcement of the euro-area financial firewalls, in order to also convince our international partners to reinforce the resources of the International Monetary Fund,” Rehn said in Helsinki, Finland.
On Monday, Merkel said her government was open to let the $267 billion in existing commitments run in parallel to the ESM, which would raise the overall capacity to some $935 billion until the old loans have been paid back.
At a news conference at her party’s headquarters in Berlin, Merkel appeared confident that a decision on boosting funds could be taken at Friday’s meeting of eurozone finance ministers. She added that that should also convince other big economies to join the eurozone in sending more money to the IMF, which would give the currency union even more protection.
However, an increase to just $935 billion falls short of demands from the European Commission, the European Union’s executive, and other euro countries, which would prefer seeing the bailout capacity rise to more than $1.2 trillion.
In a paper prepared for the eurozone finance ministries, the Commission also stated that raising the ceiling to $935 billion “would most likely be insufficient to unlock resource from other G20 partners.”
The EU and the IMF want the eurozone to make their bailout funds so big that investors won’t question the bloc’s ability to save even its largest members. A credible safety net, they argue, will be the best way of ensuring no other countries will fall off the cliff.
At a meeting of Group of 20 leading economies in Mexico City last month, most finance chiefs said they would not give the IMF some $668 billion in new resources until the eurozone has boosted its own bailout funds.
Market pressure on the eurozone has receded in recent months, largely thanks to the European Central Bank, which has pumped more than $1.3 trillion of cheap loans into banks across the continent. However, funding costs for Spain in particular have gone up again over the past weeks amid doubts whether the recession-ridden country can cut its large deficits.
Business, Pages 21 on 03/27/2012