PERMANENT RESCUE FUND:EU LEADERS were poised last night to bring forward the introduction of Europe's permanent new rescue fund by one year and remove compulsory private creditor participation in any bailout it supports.
The expected decision will see the European Stability Mechanism (ESM) come into force around the middle of next year, providing a new €500 billion credit line for distressed euro zone countries.
Although such a development would mark tangible progress in drawn-out talks to boost the euro zone’s “firewall” against the crisis, a senior diplomatic source said last night that European powers remained deeply divided over core elements of the new response.
The summit talks will continue throughout today but many participants believe a deal might not be possible until late tonight.
By removing the German-inspired condition that private bondholders automatically participate in future bailouts, EU leaders hope to provide an additional measure of credibility to their assertions that Greece’s debt arrangements represent the only exception to the principle that all European countries repay all their debts.
This manoeuvre marks a big turnaround by German chancellor Angela Merkel, who insisted since her Deauville declaration with French president Nicolas Sarkozy that the private sector should carry a burden in the effort to stabilise the euro zone.
That condition, built into the ESM, is widely held to have undermined confidence in the weakest euro countries.
Officials involved in Ireland’s campaign to avoid an EU-IMF bailout last year believe the State’s survival prospect dimmed appreciably once Dr Merkel and Mr Sarkozy made their pact in Deauville.
The early introduction of the ESM reflects anxiety about the failure of the effort to boost the firepower of the European Financial Stability Facility (EFSF) temporary bailout fund to achieve the targeted lending capacity of about €1 trillion.
With the EFSF’s lending capacity set to expand to some €500 billion or €600 billion via a leveraging of its assets, EU leaders believe more funding will be required.
At Germany insistence, however, they were set last night to reject a proposal promoted by European Council president Herman Van Rompuy to have the ESM and the EFSF operate simultaneously until the EFSF’s resources were used up entirely.
In addition, a push to remove the requirement for unanimous euro zone support for any ESM interventions has been strongly resisted by Finland.
Most countries were willing to accept the principle that an 85 per cent support threshold would be needed under qualified majority voting rules but a senior diplomat said Helsinki’s stance raised questions over that.
Last night’s summit dinner in Brussels was convened by Mr Van Rompuy amid fears that the euro could collapse in the absence of a comprehensive new response to the two-year-long debt crisis.
Still in question after weeks of preparatory talks was the extent to which EU leaders would grant Berlin’s push for a second reopening of the Lisbon Treaty in as many years.
Mr Van Rompuy and a majority of member states are reluctantly prepared to go down that road by executing a fast-track treaty change procedure which would not require ratification in most member states.
At high-level diplomatic meetings in the run-up to the summit, Germany is said to have pushed back quite “harshly” against that suggestion and was continuing to insist that nothing other than full-blown treaty change would meet its needs.
This was far from the only question dividing the leaders as they descended last night on Brussels. There was little support for the French-inspired notion that the 17 euro zone countries would sign a new treaty if support from all 27 member states for an amendment to the Lisbon pact was not forthcoming.
Many governments have pushed back against Mr Van Rompuy’s proposal to have countries that fail to meet economic reform targets subjected to sanctions and they ruled out the introduction of euro bonds.
