European governments capped fresh rescue lending at Euro 500 billion ($666 billion), after a Germany-led coalition opposed a further expansion of the region’s anti-crisis firewall.
Adding the Euro 300 billion already committed to Greece, Ireland and Portugal since 2010, euro area finance ministers put the overall size of the firewall at Euro 800 billion. In a statement, they ruled out using the Euro 240 billion left in the temporary rescue fund to go beyond that.
“This sum is important,” Austrian Finance Minister Maria Fekter told reporters at a meeting of European finance ministers in Copenhagen today. “Considering the involvement of the International Monetary Fund as well as the discussions at the G20, joint participation depends on what Europe does — and Europe has now fixed this sum clearly.”
Europe is counting on the sums pledged so far, plus a Euro 1-trillion cash infusion by the European Central Bank (ECB) into the financial system, to demonstrate that it is on the road back to stability and encourage Group of 20 economies to bulk up the IMF’s anti-crisis coffers at a meeting next month.
The funds would be too little to cope with an emergency in Italy or Spain, which have combined gross borrowing needs of Euro 800 billion in the next three years, or to deal with additional bank recapitalisations, said Malcolm Barr, an economist at JPMorgan Chase & Co in London.
Europe’s move “is likely to be a disappointment not only to some within the euro area, but also to those outside who wanted to see ‘the color of European money’ before being prepared to commit more resources to the IMF,” Barr said in an emailed note.
As flagged by German Chancellor Angela Merkel, the rich countries endorsed an increase of the overall lending ceiling to Euro 700 billion to cover the planned Euro 500-billion permanent European Stability Mechanism plus Euro 200 billion committed by the temporary fund, the European Financial Stability Facility.
Richer countries refused to go further, tossing out a proposal to make the money left in the temporary fund fully available. Instead, that 240 billion-euro sum will be used only to get the ESM up to its full 500 billion euros during its two- year buildup starting in July.
‘Classic’ Compromise
“Today’s decision is a classic European compromise,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “It was as far as the German government was willing to go and it was the minimum most other euro-zone countries were expecting.”
European officials wheeled out a variety of numbers -- including bilateral loans to Greece in 2010, loans from a now- defunct centrally managed fund and the ECB’s cash infusion to banks -- to defuse international criticism of Europe’s response to the crisis.
“Robust firewalls have been established,” the ministers’ statement said. “This comprehensive strategy has paid off and led to a significant improvement in market conditions.”
Finance ministers also agreed to get the ESM up to full capacity by mid-2014, two years earlier than previously planned. Governments will pay in two installments of capital this year, two more in 2013 and the final tranche in the first half of 2014.
Noonan’s View
Some countries might be stretched to meet that timetable. German Finance Minister Wolfgang Schaeuble told reporters that “some member states said this morning they have difficulties paying these two tranches already this year.”
In his own twist on the mathematics, 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.
To underscore the point, the dollar figure was featured in the statement, in an effort to show emerging countries such as China and Brazil that Europe is on top of the crisis and unlock more IMF support.
Europe now has an “excellent basis” to make that case, Italian Deputy Finance Minister Vittorio Grilli said. In a statement in Washington, IMF Managing Director Christine Lagarde said Europe’s upgraded strategy will “support the IMF’s efforts to increase its available resources for the benefit of all our members.”
Market Tensions
Euro-region national central banks plan to steer 150 billion euros to the IMF as a downpayment toward other countries chipping in. That sum was left out of Europe’s firewall calculation because it would be managed by the global powers that run the Washington-based IMF.
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 5.37 percent from 6.70 percent on Nov. 25.
Spain’s battle against its deficit was another focal point today. Spanish Prime Minister Mariano Rajoy’s three-month-old government presented its budget, after first tearing up the 2012 deficit target, and then bowing to European demands for further cuts. Spain announced spending reductions and corporate tax increases to cut the deficit to 5.3 percent of gross domestic product in 2012 from 8.5 percent last year.
“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.”
