Euro-area finance ministers pledged to strengthen the safety net for debt-strapped countries and indicated they don’t face pressure for immediate moves to tame the fiscal crisis.
“We shall improve our current existing financial backstops so that the so-called market forces cannot have even the slightest doubt about our capacity to act even in the most stressed scenarios,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters after euro ministers met in Brussels late yesterday.
Finance ministers from six countries with AAA credit ratings met earlier in the day to discuss ways of getting the 750 billion-euro ($1 trillion) rescue fund to its full potential instead of setting aside some of the money as collateral. Boosting the fund’s size was ruled out for now.
A strengthening euro, signs of economic buoyancy and successful bond auctions in Portugal, Spain and Italy bought time for European governments to weigh how to stiffen the firewall against the year-old debt crisis that threatens to undermine the euro.
“Currently the rescue fund isn’t under stress,” German Finance Minister Wolfgang Schaeuble said. “There’s a lot to discuss, but little to announce and even less to speculate about. It’s good that market developments in the last week, thank God, also took any dramatic edge out of this discussion.”
Portugal Respite
Investors offered Portugal a respite by cutting its borrowing costs in the sale of 599 million euros in 10-year bonds on Jan. 12. The extra yield on Portuguese 10-year debt over German levels has fallen 46 basis points since Jan. 7 to 378 basis points.
Germany, the leading power in the 17-nation euro region, has eased its opposition to augmenting the anti-crisis toolkit by reinforcing the rescue fund, mapping out the permanent aid mechanism to be set up in 2013 and rewriting the bloc’s budget- deficit rules.
The ministers set no strict deadline to outline a package of measures amid concern that Greece and Ireland, recipients of 178 billion euros in European and International Monetary Fund loans last year, will struggle to revive their economies.
Tonight’s meetings started with a hastily scheduled get- together of ministers from Germany, France and four other countries with AAA credit ratings to consider how to boost the financial firepower of the rescue fund without pushing up their own borrowing costs.
Lending Capacity
Experts are examining whether an increase in guarantees would put the top credit rating at risk, a European official told reporters. The need for a capital buffer to cinch a AAA rating cuts the main rescue fund’s lending capacity to about 250 billion euros from a theoretical maximum of 440 billion euros.
“If it’s needed to be made ready, it’ll be there,” Dutch Finance Minister Jan Kees de Jager told reporters. “But for the Netherlands it will only go through if there is a comprehensive package.”
The other components in the emergency aid program are 60 billion euros in a fund managed by the European Commission and 250 billion euros from the IMF.
The goal is to shore up the euro’s defenses “without putting too much of a burden on the partners,” Austrian Finance Minister Josef Proell said.
Ireland is pushing for the new package to give it a break on interest rates that average 5.8 percent. The rate is around 300 basis points higher than the EU’s cost of borrowing, a mark- up that was designed under German pressure to make EU aid a last-ditch option. EU policy makers view 50 to 100 basis points as a more suitable margin, a person familiar with the discussions said.
Irish Intention
“We’re beginning a discussion this evening about how those interest rates can be improved,” Irish Finance Minister Brian Lenihan said before the talks. “My intention is to ensure that Ireland can get a better deal.”
The euro, which strengthened 3.7 percent against the dollar last week, the biggest weekly gain since May 2009, slipped 0.7 percent to $1.3288 at 11 p.m. Brussels time. It remains 15 percent overvalued, according to a Bloomberg index of relative purchasing power.
“We’re in a tricky position in that if we don’t succeed in a reasonable amount of time to find answers, financial markets could start to get nervous again,” Luxembourg Prime Minister Jean-Claude Juncker, the meeting’s chairman, told reporters.
Fund Options
Options under discussion include using the fund to buy ailing countries’ bonds in the secondary market, easing strains on the European Central Bank. The central bank bought 2.31 billion euros in distressed countries’ bonds last week, the most in five weeks, taking its total purchases to 76.5 billion euros.
Use of the government-run aid program to buy bonds “might render some of the ECB’s non-standard measures no longer necessary,” ECB council member Athanasios Orphanides said in a Jan. 14 interview in Frankfurt.
Bond buying is controversial within the ECB, lacking the support of Axel Weber, Germany’s representative on the ECB council and a potential successor to Trichet when his term ends in October.
German Chancellor Angela Merkel is starting to campaign for Weber, Bild newspaper said on Jan. 16, citing unidentified government officials. A Merkel spokesman didn’t deny the report.
Separately, the race began to succeed ECB council member Gertrude Tumpel-Gugerell, an Austrian who steps down on May 31. The two nominees for her post are Elena Kohutikova, a former Slovakian central bank deputy governor, and Peter Praet, a Belgian central bank official, Juncker said.
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net
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