European bail-out fund doubles
Merkel likely to bow to international pressure; Finland still holding out.
Following reports that Germany has bowed to international pressure, the bail-out fund created to enable the EU to support countries like Spain, Portugal and Ireland is expected to be boosted to almost double its current size,
The European Financial Stability Facility (EFSF) is a €440bn agency with the mandate to "safeguard financial stability in the Eurozone" - by making large loans to troubled nations. Originally, this fund was to be wound down when its permanent replacement, the €500bn European Stability Mechanism (ESM) starts up later this year; now, fears that the short-term may require more liquidity than it alone can guarantee mean that the two will run in tandem until well into 2013, and possibly indefinitely.
Of the €940bn of funding that would be available, €200bn is already allocated to Greek, Irish and Portugese bailouts, but with 10-year Spanish bonds rising to a yield of over 5 per cent (the third straight week of such increases; for comparison, British 10-year gilts are trading at 2.27 per cent) a significant proportion of the remaining €740bn might have to be spread about as well.
The German government has been wary of approving such an increase due to pressure from home, where they are already seen as taking on a unfairly large proportion of the burden of the Eurozone's problems. Even so, Angela Merkel is concerned that she can not resist the international consensus forever.
The only other nation to have publicly expressed doubts over the bailout increase is Finland, another of the four AAA-rated countries left in the Eurozone (the other two are Luxembourg and the Netherlands), whose prime minister, Jyrki Katainen, told the FT:
He was worried that making the system too large could add to the debt loads of creditor countries, destabilising the eurozone.
"It must be high enough but it can’t be too high, because otherwise the liabilities of the firewall easily become too challenging for the member countries and then it would destroy the credibility of the member countries’ economy," he said.
Klaus Regling, the head of the EFSF, has no truck for such concerns, particularly from Germany, as he told the Telegraph:
More money would reassure markets. Wrongly or rightly the fact is that big numbers in the shop window create calm...
The bailouts haven't cost German taxpayers a penny. The belief that this money is gone and will never come back is wrong. These are loans that must be paid back.
One happy outcome of the increase is the the IMF is likely to follow suit, boosting its own resources to $1trn. Katainen has indicated he would be happy with their assurance that this will happen, but we will not know for sure until their spring meeting later this month; the EU decision has to be made this Friday.