The eurozone's 750-billion-euro safety net isn't enough, according to the group's finance ministers, who met Monday in Brussels. Analysts fear Portugal could fall the way of Greece, bringing others down with it.
The euro dropped in value Monday as ministers stalled on reforms
Eurozone finance ministers urged an increase to the currency bloc's bailout capacity on Monday, in a bid to assuage market fears that Portugal and others might need rescue.
Finance ministers from the 17 eurozone countries achieved a "very high level of convergence" on how to shield debt-laden member states such as Portugal or Spain, said Eurogroup President and Luxembourg Prime Minister Jean-Claude Juncker.
Eurozone finance ministers began two days of talks Monday on an overhaul of the currency zone's 750-billion-euro ($1 trillion) safety net, in a bid to calm market fears that Portugal and other countries might need financial rescue. A permanent rescue mechanism for the currency bloc is set to come into force January 1, 2013.
Despite pressure from other countries to increase the effective lending capacity of the fund, purse string holder Germany remained firm going into the ministers' meeting that reforms should not be rushed.
Schäuble assured that there was time to make the reforms
"For now there is no urgent need to make a decision," German Finance Minister Wolfgang Schäuble told reporters.
Schäuble noted that market pressure last week had eased on Portugal and Spain since the two countries staged successful debt auctions last week shortly after the European Central Bank bought 2.3 billion euros in eurozone government bonds.
"Developments in the markets in recent weeks have, thank God, made the discussion less dramatic," Schäuble said, insisting that no decision would be taken at the ministers' meeting.
Raising the ceiling
Analysts have warned the eurozone's bailout fund, known as the European Financial Stability Facility (EFSF), would be too small if bigger economies such as Spain, Italy or Belgium needed help.
The EFSF, established amidst last year's Greek debt crisis, is backed by 440 billion euros in guarantees from the 17 eurozone members - topped with 250 billion euros from the International Monetary Fund and another 60 billion euros from the 27-nation European Union.
However, the EFSF's effective lending capacity is estimated at only 250 billion euros, because it must keep part of its funds in reserve in order to secure a top rating and low interest rates from international investors.
To maximize the EFSF's effectiveness, the six eurozone "AAA" rated members - Germany, France, the Netherlands, Austria, Luxembourg and Finland - met on the sidelines of talks to assemble a package of measures aimed at improving the use of current resources rather than pumping in more money.
Support for lending boost
Several countries, including Germany, appeared ready to back a ceiling lift on lending.
Lagarde wants to see a complete reform package in March
Belgium was among the countries Monday to push a raise to the EFSF's scope.
"I think an increase is necessary because we'll have to show that there can be no room for speculation against the eurozone," said Belgian Finance Minister Didier Reynders.
Reynders also said Monday that the solution should be to "give more capacity to the [post-2013] European Stability Mechanism for the future and maybe already for the facility now."
Spain's Finance Minister Elena Salgado also pushed for increased loans, saying, "If you don't increase it, we should allow it to use all of the 440 billion euros."
France also appeared open to an increase in the fund's lending capacity but, like Germany, wanted to wait for a comprehensive overhaul.
"We can't have a little hike here and some flexibility there, a reinforcement of discipline," French Economy Minister Christine Lagarde told French radio on Monday, adding, "We will need a complete package and I hope that we will submit one in March."
Fighting for a better deal
Ireland says the interest rates on its bailout are too steep
Ireland, meanwhile, asked its eurozone partners for a reduction in the interest rate it must pay on a bailout to its government and banks at the end of last year.
"My intention is to ensure that Ireland gets a better deal," Irish Finance Minister Brian Lenihan told reporters in Brussels ahead of the talks.
Ireland secured 67.5 billion euros of international funding before Christmas, topped up by 17.5 billion euros from the Dublin government raiding its public pension fund.
Dublin agreed to pay an average of 5.8 percent for loans from the European Union and the International Monetary Fund - compared to a 5.2 percent average being paid by Greece for its bailout agreed in May 2010.
Lenihan said he wanted any new rules on interest rates to be extended to existing loans.
Author: David Levitz (AFP, dpa, Reuters)
Editor: Darren Mara