Euro Zone Raises Crisis Firewall Ceiling to €700 Billion

Euro Zone Raises Crisis Firewall Ceiling to €700 Billion .By MATTHEW DALTON WSJ

COPENHAGEN—Euro-zone finance ministers on Friday agreed to boost the bloc's bailout lending limit to €700 billion ($930 billion), choosing the least ambitious option on the table for reinforcing its anticrisis "firewall," one some in Europe fear won't be enough to prevent a reawakening of the region's financial turmoil.

After several months of relative calm, tensions are returning to the European government bond markets. Yields on Italian and Spanish debt are rising, as the effects of the European Central Bank's huge infusions of cheap bank funding, which started in December, appear to be waning. Financial markets, governments in the Group of 20 and the International Monetary Fund have been pressing for a convincing increase of the bailout capacity to prevent the crisis from returning in full force.
But Germany, the euro zone's paymaster, beat back lobbying for a more ambitious increase of the bloc's two bailout funds, which have been capped at €500 billion. The European Commission, the EU's executive arm, backed by the euro zone's weaker economies, had argued that raising the lending cap to €940 billion would offer a convincing response to the crisis.

The expansion option chosen by finance ministers at their meeting here Friday will have to be ratified by the 17 euro-zone member parliaments.

In a paper circulated to euro-zone officials last week, the commission wrote that the lower funding level "could be viewed as maintaining the status quo, which both G-20 partners and the markets consider as inadequate. In that context, this option is likely to fall short of providing the necessary credibility to unlock an increase in IMF resources."

Euro-zone governments hope the move will be enough to encourage governments from the Group of 20 nations to contribute more resources to the IMF for anticrisis lending. The G-20 nations have been holding back their contributions pending a bigger commitment from the euro zone itself. Euro-zone governments have already pledged an additional €150 billion for the IMF's global crisis-fighting resources, hoping that other governments will follow suit.

"I welcome the decision of euro-area ministers to strengthen the European firewall," IMF Managing Director Christine Lagarde said. But the final decision about giving more resources to the fund will rest with its member governments.

Friday's decision appears unlikely to end financial-market skepticism about the euro zone's commitment to finance its weaker governments, particularly if the region's economic health continues to deteriorate, said Credit Suisse interest-rate strategist Helen Haworth.

"If the data is bad on the economic side, then you've got an environment where are people are saying, 'We've got this firewall. Is it big enough?' Maybe, maybe not," Ms. Haworth said.

The euro zone's bailout capacity is determined by the interplay between the European Financial Stability Facility, the bloc's €440 billion temporary bailout fund, and its permanent successor, the €500 billion European Stability Mechanism, due to come into operation in July.

The EFSF has already pledged to lend about €200 billion to Greece, Ireland and Portugal. Until Friday's decision is ratified, those loans would be subtracted from the ESM's €500 billion loan capacity, giving the bloc just over €300 billion for future bailouts, far short of what would be required to finance Italy and Spain, should they need it.

The ministers' decision will raise the cap of the two funds to €700 billion beginning in July 2012, the launch date of the ESM, ensuring that €500 billion is available for future bailouts.

They also decided to accelerate capital payments into the ESM—€32 billion will be paid this year, the same amount next year and a final €16 billion in 2014—to ensure the fund has enough capacity to start lending significant amounts soon after it launches. Because all the ESM capital won't be paid in upfront, an EU official said the governments could further accelerate the capital payments if needed to make more loans.

Until July 2013, when the EFSF will cease new lending, the EFSF and the ESM could in theory be making loans side-by-side, but ministers said the preferred option would be to make loans from the ESM.

The EFSF will thus for a year serve as an emergency backstop. That is because the ESM's status as an international financial institution, with its own capital, means the loans it makes lead to relatively small increases in the debt levels of euro-zone nations backing the fund. Each euro lent by the EFSF, by contrast, leads to a euro increase in the collective debt of the euro-zone governments guaranteeing the fund.

The commission had pushed an option that would have folded the EFSF's unused lending guarantees into the ESM, raising the bailout capacity to €940 billion and increasing the amount of lending available for future bailouts to €740 billion. German officials publicly opposed that option.

Source: WSJ Cartoons added by ET