Eurozone ministers boost firewall to $1tn

BBC: Finance ministers in Copenhagen have agreed to increase the size of the eurozone's rescue funds.

Eurozone countries agreed to boost the joint lending power of the "firewall" from 500bn to 800bn euros ($1.1tn; £667bn).

"The stability and integrity of the Economic and Monetary Union have required swift and vigorous measures," they said.

 

The firewall is the permanent mechanism to bail out troubled eurozone nations.

As Spain and Italy's finances have looked more precarious, investors have been worried about whether the eurozone's firewall could cope with more bailouts.

"Robust firewalls have been established," the eurozone ministers said. "This comprehensive strategy has paid off and led to a significant improvement of market conditions."

In reality, what the eurozone is doing is moving up the timetable of its permanent bailout fund to make it active earlier.

The existing fund - the European Financial Stability Facility (EFSF) - has already been used to rescue the Republic of Ireland and Portugal, and is committed to providing part of Greece's second bailout.

It will have only 200bn euros in remaining lending capacity from the middle of this year, which can only be used for new rescues "in exceptional circumstances".

The European Stability Mechanism (ESM) was originally intended to be a permanent replacement for the EFSF, but now the two will overlap from the middle of this year.

The combined lending of the two funds will be set at a total of 700bn euros.

Including two other loans already made to Greece, the eurozone said the firewall is now above 800bn euros.

 

Debate of size

Earlier this week the Organisation for Economic Co-operation and Development - a forum of the world's rich democratic nations - recommended increasing the bailout funds to 1 trillion euros, or about 11% of the eurozone's gross domestic product.

Its head, Angel Gurria, described this as "the mother of all firewalls".

But Germany favoured only a modest increase at the summit of the finance ministers of the 17 nations that use the euro in the Danish capital.

As recently as this week, German Chancellor Angela Merkel said that she would favour only a temporary increase to 700bn euros.

Speaking before the meeting, the Republic of Ireland's Michael Noonan said: "If we get to 800 or beyond 800, the denominated amount in dollars... presents a very serious firewall to prevent attacks on Europe."

Many eurozone members, including France, were thought to be in favour of a big increase in order to ensure that larger eurozone countries are not drawn back into the crisis.

Concerns have been raised over Spain, which has failed to cut its borrowing as much as promised, and which faces violent protests against labour market reforms intended to boost its flagging economy.

"I am confident of our capacity to reach an agreement, we will reach a consensus," said French Finance Minister Francois Baroin as he arrived for the talks.

"The right size of the fund depends on how you approach the issue."

 

Third bailout?

Meanwhile, Greek Prime Minister Lucas Papademos has raised the possibility of a third bailout for his country in an interview with Italian daily Il Sole 24 Ore.

"It cannot be excluded that some financial support may be necessary, but we must try hard to avoid such an outcome," Mr Papademos said.

"Greece will do everything possible to make a third adjustment programme unnecessary.

"Having said that, markets may not be accessible by Greece even if it has implemented fully all measures agreed upon," he said.

 

The ESM explained

The European Stability Mechanism is the future home for any euro crises - a permanent eurozone bailout fund

It will begin operating in July 2012

The ESM was created through a treaty amendment

The ESM will have a maximum lending capacity of 500bn euros

Therefore, the temporary and permanent bailout funds will overlap for about a year

 

The EFSF explained

The European Financial Stability Facility was set up in 2010 to provide loans to troubled eurozone members

The EFSF has a maximum lending amount of 440bn euros

Less than 240bn euros is left in the fund following bailouts of the Republic of Ireland and Portugal - with loans for Greece still to come

But the EFSF, like eurozone bailouts, was never meant to be a permanent fixture; its mandate will expire in mid-2013

 

Andrew Walker

BBC World Service Economics correspondent