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Bumping up

November 30, 2011

As Italy's borrowing costs soar to record highs, eurozone finance ministers have agreed to expand the zone's rescue fund, but it's not yet clear by how much.

The eurozone debt crisis
Eurozone ministers agreed to boost the rescue fundImage: K.-U. Häßler - Fotolia.com/DW

As investors flee the eurozone bond market, panicked by doubts about the very future of the single currency, eurozone finance ministers moved late on Tuesday to allay those fears by expanding the bloc's rescue fund. But it's not yet clear quite how much firepower the fund will have.

Initial hopes of boosting the European Financial Stability Facility (EFSF) from its current 440 billion euros to 1 trillion euros appeared to be dashed due to lack of investor interest.

The ministers did agree to use the fund to offer financial protection of 20 to 30 percent to investors who bought new bonds from troubled eurozone nations. That scheme, which comes into force in January, would help those countries get back on track.

The euro coin in a squeeze
Fears about the future of the single currency are spooking investorsImage: picture alliance/ANP

"We made important progress on a number of fronts," Jean-Claude Juncker, chairman of the eurogroup, told a news conference when the meeting closed late Tuesday. "This shows our complete determination to do whatever it takes to safeguard the financial stability of the euro."

Release for Greece

At the same meeting, the ministers agreed to release an 8-billion-euro bailout installment to Greece, part of a package of loans signed off last year. The money is to be made available by mid-December and will help the country avoid an imminent default on its debt.

But with China and other major sovereign funds reticent about investing more in euro zone debt, EFSF chief Klaus Regling said he did not expect investors to commit major amounts in the next days or weeks. He said he couldn't put a figure on the final size of the leveraged fund.

"It is really not possible to give one number for leveraging because it is a process. We will not give out a hundred billion next month, we will need money as we go along," he said.

Dutch Finance Minister Jan Kees de Jager said investors had appeared less eager to put their money in leveraging options than originally anticipated.

"It will be very difficult to reach something in the region of a trillion. Maybe half of that," he said.

Division over eurobonds

Germany is strongly opposed to the idea of the European Central Bank providing liquidity to the EFSF or acting as a lender of last resort.

Jean-Claude Juncker
Juncker told reporters the ministers would do 'whatever it takes'Image: AP

The ECB shows no sign yet of responding to widespread calls to increase its bond-buying program. France and Germany see the solution in closer fiscal union among the 17 eurozone members.

German Chancellor Angela Merkel told lawmakers that Europe was "a long way from eurobonds" and said she would not make a deal to drop resistance to such bonds in exchange for progress on strengthening fiscal rules. The leaders are set to look at such major financial issues at an EU summit on December 9.

Fears over Italy

The troubles in Italy are spooking investors in particular, because, as the eurozone's third largest economy, it is deemed too big for Europe to bail out. Italy's borrowing costs have hit a euro-era high of nearly 8 percent on 3-year bonds, a huge leap from the rate of 4.94 percent paid just a month ago in late October. Such levels are unsustainable in the longer-term.

Juncker insisted Italy's new prime minister, Mario Monti, would come through, saying he has promised to balance Italy's budget by 2013.

Mario Monti presented his reform plans to the ministers before the meeting, but the European Commission warned that Rome would need to impose extra measures and to act faster to stem the crisis.

A report drafted after an EU mission to Rome said Italy could weather a "short-lived" spike in debt refinancing costs, but could fall victim to "a self-fulfilling" market run that would push it to insolvency, posing "very acute" contagion risks for the rest of the eurozone.

The Italian yields were above the levels at which Greece, Ireland and Portugal were forced to apply for international bailouts.

Author: Joanna Impey (AFP, AP, dpa, Reuters)
Editor: Matt Zuvela