Tags: EU | Europe | Financial | Crisis

Euro Zone Nations Set Up $1 Trillion 'Shock and Awe' Bailout Fund

Monday, 07 Jun 2010 03:25 PM

Euro zone nations on Monday started setting up a massive bailout fund that could rescue any member of Europe's currency union from default, aiming to soothe market jitters that have sent the euro to a new four-month low against the dollar.

The "shock and awe" financial rescue package from the European Union and the International Monetary Fund will total 750 billion euros ($1 trillion) — money that can be lent to any indebted euro zone nation risking default, and intended to counter investor fears that Spain, Portugal or others could follow Greece in requiring a bailout to meet debt repayments.

The special purpose vehicle to borrow up to 440 billion euros ($526 billion) will be ready this month, when countries formalize debt guarantees for some 90 percent of the package, said Luxembourg Prime Minister Jean-Claude Juncker, who led Monday's talks between euro zone finance ministers.

Another 60 billion euros managed by the EU's executive commission "is available to cover urgent financial needs were it to arise" in the mean time, he said, while the International Monetary Fund will provide another 250 billion euros.

Germany, which will provide the largest chunk of the EU fund, has pressed other euro zone countries to make big budget cuts to reduce the chances of them needing a bailout.

Markets "want to see not only actions but deeds" to shore up the currency, German Finance Minister Wolfgang Schaeuble told reporters.

German Chancellor Angela Merkel vowed to "set an example" Monday by laying out plans to save 80 billion euros through 2014 by reducing handouts to parents, cutting 15,000 government jobs and delaying projects such as construction of a replica of a Prussian palace in Berlin.

Juncker said euro zone finance ministers wanted Spain and Portugal to build on current "significant and courageous" spending cuts with further efforts "needed beyond 2011 together with further progress" on structural reforms, such as changes to pensions, welfare or labor systems.

EU Economy Commissioner Olli Rehn said "more needs to be done ... with all determination that is needed in this very sensitive situation" and that other countries may also need to ready action — without mentioning their names.

The International Monetary Fund called for euro zone countries facing market pressure to shun "delayed or half-hearted" budget cuts and draft more in case they can't make current targets to reduce budget deficits — the gap between government spending and income.

Juncker dismissed market volatility in recent days triggered by concern that Hungary — which does not use the euro — could be the next European government to follow Greece by risking a default.

Hungarian officials last week warned that the country's deficit is growing and the country is close to default, two years after it received a bailout from the EU and the IMF.

Hungary's government has downplayed those comments, which nevertheless kept the euro trading near the four-year lows it hit Friday, when it went below $1.19 for the first time since March 2006.

There is intense pressure on all euro zone countries to make cuts.

However, trade unions warn that budget cuts could be going too far and could choke a fragile recovery that so far relies more on exports than domestic demand in European countries where people are still slow to spend and companies are reluctant to hire new workers.

Unemployment in the euro zone reached a 10-year high of 10.1 percent in April — adding extra welfare costs to governments struggling with higher outgoings, lower tax revenue and debt that has soared since they paid out hundreds of billions to shore up the region's banking system.

Monday's talks between euro zone finance ministers will be followed by a meeting of most EU finance ministers and EU officials who will thrash out plans for long-term ways to avoid a new economic crisis, including a proposal for more EU oversight of national budgets.

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