Europe Moves to Boost Firewall to Shield Spain From Debt Crisis


Mar 30, 2012 4:35 am ET

(For more on Europe’s debt crisis, click on EXT4.)
March 30 (Bloomberg) -- European governments moved to bolster their rescue funds, seeking to shield Spain and Italy from the fallout of the debt crisis without alienating bailout- weary voters in wealthy countries.
Finance ministers neared an agreement to run the temporary and permanent funds in parallel until mid-2013, potentially raising the upper limit on emergency lending to 940 billion euros ($1.3 trillion). Amounts immediately available would range between 340 billion euros and 640 billion euros.
“I can imagine that both instruments run in parallel so that automatically we have a higher sum overall,” Austrian Finance Minister Maria Fekter told reporters before a meeting of European finance ministers in Copenhagen today.
European policy makers are trying to strike a balance between meeting international demands for a more powerful war chest and opposition in donor countries led by Germany to providing additional aid for underperforming economies on the region’s fringes.

Today’s step will lift the maximum aid sum from 500 billion euros. It involves running the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund to Greece, Ireland and Portugal, according to a draft statement prepared for the meeting.
Extra Capacity
Beyond that, the temporary fund’s unused 240 billion euros could be tapped until mid-2013 “in exceptional circumstances following a unanimous decision of euro-area heads of state or government notably in case the ESM capacity would prove insufficient,” according to the draft dated March 23 and obtained by Bloomberg News.
Today’s meeting will deal with the conditions for deploying that extra sum, making changes in the draft statement possible. Finnish Finance Minister Jutta Urpilainen called a 940 billion- euro firewall “too high and now we are looking for a result which we and other countries would accept.”
European officials wheeled out a variety of figures -- including bilateral loans to Greece in 2010, loans from a now- defunct centrally managed fund and the European Central Bank’s cash infusion to banks -- to defuse international criticism of Europe’s response to the two-year-old crisis.
Adding up loans promised since 2010 with sums available under the permanent fund starting in July, German Finance Minister Wolfgang Schaeuble put the size of the firewall at 800 billion euros. His number omitted the unused portion of the temporary fund.
ECB’s Efforts
The ECB’s bank lending and bond-buying brings the total to 2 trillion euros, according to one official’s calculations. Inhibitions about treading on the ECB’s independence have often prevented European leaders from mentioning the central bank’s and governments’ contributions in the same breath.
In his own twist on the numbers, Irish Finance Minister Michael Noonan said a conversion into dollars makes them more impressive. “The market reaction to these is to the dollar amounts so anything that gets you $1 trillion looks like a serious firewall,” he told reporters.
Much of the credit for the lessening of market tensions goes to the more than 1 trillion euros pumped into the financial system by the ECB since December. Ten-year bond yields in Spain, for example, have fallen to 5.44 percent from 6.70 percent on Nov. 25.
‘Fragility’
Stronger government-financed defenses would come after Chancellor Angela Merkel of Germany, the dominant crisis- fighting power, this week warned of “fragility” in Portugal and Spain. It would also be designed to lure the rest of the world into putting more money into the International Monetary Fund’s arsenal.
The language in the draft also emphasizes the political hurdles to tapping the unused parts of the temporary fund, the European Financial Stability Facility. Merkel or any other euro- area government leader could exercise a veto.
In a sign of the political sensitivities, the draft doesn’t spell out the 940 billion-euro figure. It puts the total capacity at 700 billion euros from mid-2012 to mid-2013 and relegates the possible use of the EFSF’s remaining 240 billion euros to a footnote.
An increase in the aid ceiling wouldn’t make the entire sum available upfront. It would require a capital call in an emergency to mobilize the ESM’s entire 500 billion euros before it is fully capitalized in mid-2014.
Spanish Budget
Spain’s battle against its deficit is another focal point today. Spanish Prime Minister Mariano Rajoy’s three-month-old government will present its budget, after first tearing up the 2012 deficit target, and then bowing to European demands for further cuts.
The Spanish government vowed to stick to its labor overhaul yesterday, defying the first general strike since Rajoy took office. He has warned voters to expect a “very austere” budget.
“Spain is in a difficult situation, but it has also strengths,” European Union Economic and Monetary Commissioner Olli Rehn said. It needs “to improve the sustainability of public finances and to boost reforms that will help economy grow.”
--With assistance from Josiane Kremer, Rebecca Christie, Jim Brunsden, Fred Pals, Lorenzo Totaro, Patrick Donahue, Jeff Black, Frances Schwartzkopff, Anabela Reis, Mark Deen and Simone Meier in Copenhagen. Editors: Craig Stirling, Patrick Henry

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