France says EU pondering larger bailout fund
European governments are considering increasing the size of their rescue fund as part of a package of measures to tackle the debt crisis in the euro zone, France said on Friday.
January 14, 2011 / 21:14 IST
European governments are considering increasing the size of their rescue fund as part of a package of measures to tackle the debt crisis in the euro zone, France said on Friday.
French Economy Minister Christine Lagarde said ministers would also discuss whether European stabilisation funds should be allowed to purchase sovereign debt of the bloc's weaker members on the secondary market."The increase in the European Financial Stability Facility (EFSF) is one option which we are looking at, of course," Lagarde told a news conference.Senior European officials have been calling for an expansion of the 440 billion euros European Financial Stability Facility, established after Greece was bailed out in May, but a French government spokesman said earlier this week it was sufficient.Germany remains opposed to any outright increase though it says a "comprehensive package" to solve the bloc's debt crisis is in the works.German Finance Minister Wolfgang Schaeuble said on Thursday debate about boosting the fund was not realistic. However, he said he was open to discussion about enabling the existing fund to be used in full.Worries about whether the EFSF is large enough focus on estimates that only around 250 billion euros of the 440 billion (USD 592 billion) fund are effectively available to euro zone countries because of a complex loan guarantee system -- not enough to bail out high debtors Portugal and Spain.Analysts say Berlin might agree to raising the effective capacity to 440 billion euros in exchange for stronger commitments to fiscal discipline from its peers.After successful bond auctions by Portugal, Spain and Italy this week, analysts say there is a window of opportunity for euro zone leaders to capitalise with new measures that could mark a significant shift in the crisis.The premium investors demand to hold Italian and Spanish government bonds over German benchmarks fell further on Friday, supported by the successful bond auctions.Euro zone finance ministers meet on Monday. Lagarde said options would be put to an EU leaders' summit in March and these could include whether rescue funds should be allowed to purchase sovereign debt on the secondary market."Sentiment on Europe seems to be improving after the auctions. Sentiment was extremely bearish at the start of the year and once we've seen some of that taken back people are starting to square positions," one bond trader said.The question is whether financial markets will have turned hostile again by the time EU leaders gather in March, although they do meet beforehand, in early February.More neededThat further policy measures are needed to draw a line under the debt crisis is not in dispute.A senior IMF official said the euro zone has not yet convinced investors its debt position is sustainable and further contagion could harm global economic recovery.In an interview with the Bloomberg news agency, Naoyuki Shinohara, deputy managing director of the International Monetary Fund, said the premium investors demand to hold Greek and Irish bonds remained "very high" despite their bailouts."That means that scepticism over the sustainability of their debt in the market hasn't been cleared away," he was quoted as saying."At least for now it looks like the spillover from the European sovereign crisis to areas outside of the region will be limited," Shinohara said. "However, if the European sovereign debt problems were to become bigger, we need to keep in mind that that could bring about considerable downside risks."Asked about how large any increase in the EFSF could be, Lagarde said: "It is very premature (to say). Ministers of economy and finance must submit their proposals to a European Council meeting in March."If a decision is taken to expand the fund, Lagarde said it would be necessary to put a precise figure on the increase so it could be approved by national parliaments. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
