EURO ZONE finance ministers struggled to settle their differences over an increase in the lending capacity of their bailout scheme and called talks next week to seek a last-minute deal on the fund’s overhaul.
Their meeting on Monday comes three days before a summit at which EU leaders hope to sign off on a package of reforms to the European Financial Stability Facility (EFSF).
These reforms include giving this temporary fund and a new permanent fund – known as the European Stability Mechanism (ESM) – the power to buy bonds from distressed sovereigns on the primary market. “We’ve come further than most people expected,” said German finance minister Wolfgang Schäuble .
“We still have a lot to do but overall we’re on the right track to get to the goal at the end of March.”
Although the agreement by EU leaders late on Friday to expand the fund’s scope and scale surprised some observers, rating agency Fitch expressed caution.
“The potential for the EFSF and ESM to buy government debt in the primary market materially enhance the European policy response to the current crisis,” it said.
“However, the policy response to the current crisis outlined by euro zone leaders will not resolve market concerns over the ‘solvency’ of some highly indebted euro area member states.”
At the same time, euro group chief Jean-Claude Juncker said recent downgrades of Spain and Greece by rating agency Moody’s had aggravated tension in sovereign debt markets.
“We said there should be better regulation for credit rating agencies as we think this is particularly urgent,” he told reporters.
EU leaders have agreed in principle to increase the fund’s lending capacity to €440 billion to €250 billion, but the ministers were unable at a day-long meeting yesterday to settle how this would be done. The EFSF’s current lending capacity is considerably lower than the fund’s nominal value because many of the member states who guarantee it do not have the benefit of a triple-A credit rating.
A condition of the fund’s own triple-A rating was that its lending capacity would be lower than its nominal value.
The euro-zone ministers are now debating whether a higher lending capacity can be achieved through increased guarantees from euro-zone members or through higher guarantees and capital injections.
Mr Juncker, who is Luxembourg’s prime minister, said the increase was likely to be effected by increased guarantees from euro countries. “These are not dramatic questions but we have reasons to discuss further technical details to these two questions,” he said.
“Will this be done by guarantees or could there be other means?
“My personal feeling is that this will be done by guarantees. Then we have to discuss the timing. . . We have to discuss in further details next week what will be the speed, tempo of the increase of the total amount.”
The talks, which continue today as the ministers try to finalise new measures to harden the EU’s system of economic governance, are aimed at setting the stage for a “grand bargain” deal next week.
