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Eurozone boosts financial buffers to $1.1 trillion but falls short of international demands
COPENHAGEN, Denmark (AP) ' The 17 countries that use the euro have boosted their emergency funding for debt-troubled countries to '800 billion ($1.1 trillion) ' an amount that falls short of what the currency union's international partners had said is needed to calm financial markets.
Of the '800 billion, which eurozone finance ministers agreed Friday at a meeting in Copenhagen, only some '500 billion ($670 billion) is actually still available. About '300 billion ($400 billion) in loans have already been used to bail out Greece, Ireland and Portugal.
The International Monetary Fund and others have been calling for a financial "firewall" of more than '1 trillion ($1.3 trillion) ' just in case the vulnerable economies of Spain and Italy needed assistance. On Friday, IMF managing director Christine Lagarde congratulated European leaders on their agreement, but didn't say whether it went far enough to guarantee additional help from the IMF.
"I welcome the decision of Euro Area Ministers to strengthen the European firewall. The IMF has long emphasized that enhanced European and global firewalls, together with the implementation of strong policy frameworks, are critical for ending the crisis and securing international financial stability," Ms Lagarde said in a statement.
Many economists, as well as non-European countries like the U.S and China, fear that further trouble in Europe could smother a burgeoning economic recovery in other parts of the world. Together, Italy and Spain hold more than '2.5 trillion in debt and a default ' or even the serious threat of a default ' could pummel banks across Europe and spread panic on global markets.
But putting up large amounts to save some of its members is not an easy task for the eurozone. Rich countries like Germany and Finland face rising opposition against bailouts among their voters, while the finances of many other states are already overstretched.
Even reaching the overall '800 billion capacity required a complicated patchwork of several old and new funds and loan programs. Ministers struggled to add up old commitments to reach a large figure to impress markets ' only to quickly explain its components to calm down voters worried about their tax money.
Of the new total, only '500 billion is fresh money and will have to be built up and cobbled together over time, as the eurozone moves from its interim bailout fund, the European Financial Stability Facility, to its new rescue vehicle, the European Stability Mechanism.
The ESM, which will come into force in July, will initially only be able to give out some '200 billion of its future '500 billion loan capacity. By middle of next year, that figure will rise to '400 billion.
Until then, some '240 billion remaining from the EFSF will act as a buffer, in case a large amount of financial aid is required.
Analysts said the agreement didn't come as much as a surprise, as it was closely modeled on a proposal made earlier this week by Europe's largest economy. "Today's decision is a classical European compromise. It was as far as the German government was willing to go and it was the minimum most other eurozone countries were expecting," said Carsten Brzeski, senior economist at ING.
The big question is now whether the new firewall will convince not only investors to keep lending money to vulnerable euro countries, but also get other large non-European economies to send new resources to the IMF. The IMF says it needs an extra $500 billion to support governments around the world in case the crisis intensifies again. The eurozone has already promised to provide '150 billion ($200 billion) of that amount and other IMF members are expected to make a decision at a meeting in Washington in April.
The head of the EU's economic affairs unit, Olli Rehn, and Joerg Asmussen, a member of the executive board of the European Central Bank, were confident that Friday's decision would be enough to get other countries to participate ' even though both institutions had pushed for a much bigger boost.
"I trust that today's decision will pave the way for an increase of the lending resources by the IMF's spring meeting next month," Rehn told journalists.
Earlier, Rehn, together with French Finance Minister Francois Baroin, had mounted a last-minute initiative to go beyond the '800 billion, but that attempt was quickly smothered by Germany's finance chief Wolfgang Schaeuble.
After the meeting, Schaeuble couldn't resist a slight sting against those who had pushed for a bigger increase.
"My irritation over some stupid chitchat in recent days come from the pretense that the only thing that mattered was the firewall," he told reporters during a short break between talks.