German Chancellor Angela Merkel left the door open to boosting the euro-area financial backstop, saying that a decision on reinforcing the firewall will be made in time for International Monetary Fund meetings next month.
Merkel said that European finance ministers have discussed “combination possibilities” for the permanent and the temporary rescue funds ahead of a March 30 meeting in Copenhagen. Ministers may decide to increase the region’s crisis fund to a total capacity of 692 billion euros ($904 billion) when they meet, a euro-area official said separately.
“What’s clear is that we need to settle on a position with a view to the IMF’s spring meeting because the topic will surely come up and because there have been offers by the international community” to boost the IMF’s anti-crisis resources, Merkel told reporters in Munich today. “You can count on us setting the course by the end of March.”
Finance ministers are weighing what to do with the temporary European Financial Stability Facility, which manages rescue programs for Ireland, Portugal and Greece, and its permanent successor, the European Stability Mechanism. Their decision, a signal of how much aid euro nations are willing to provide in a crisis flare-up, affects how much other countries will contribute to a global crisis backstop.
That figure of 692 billion euros represents the least ambitious, and therefore most attainable, proposal for expanding the 17-nation euro zone’s firewall, the official said. Other options are still on the table, with potential total capacity ranging from 500 billion euros, if ministers do nothing, to a maximum of 940 billion euros.
Merkel, speaking after talks with trade and industry representatives, reiterated her opposition to lifting the 500 billion-euro ceiling on the ESM, saying there is “no question” of expanding it. Business leaders she talked to said they don’t want an “unlimited permanent rescue fund” and she agrees, she said. That means it’s “extremely important” the limit stands.
If the ministers do nothing, the ESM’s 500 billion-euro limit will be the firewall’s binding constraint. Available funds would be less because the EFSF has already committed 192 billion to the three bailouts under way.
Under the least-ambitious option, the ESM would be allowed to start fresh with its entire half-trillion euro capacity available for future use. The EFSF would continue to administer the programs in progress while its unused capacity would no longer be available.
Under other options, ministers might allow the EFSF’s 248 billion euros in unused capacity to remain available until at least June 2013, when the EFSF is slated to phase out. The money could be kept available until then, or it could be set aside through a political decision that ministers could revisit if needed, the official said.
Led by the U.S., major world powers have held back on increasing the IMF’s crisis-fighting resources until the euro area does more to help itself. German Finance Minister Wolfgang Schaeuble said this week that there is a “certain link” between the firewall decision and a bigger role for the IMF.
Europe has some breathing room as it considers the firewall because the crisis has abated for now, the euro area official said. For the moment, there are no further requests for bailout programs; Greece has just this week won approval for its 130 billion-euro second rescue program.
Before Greece could seek a third program, it would need to show efforts to comply with the conditions of its most recent bailout. If Greece still needed more rescue money after meeting all of the program’s conditions, the euro area would probably be willing to provide it, the official said.
New budget rules have strengthened the euro area by requiring member countries to act more collectively in their financial planning, the official said, hailing Spain’s decision to accept EU-mandated fiscal cuts as it revises its fiscal targets. Even if a country needs to change its budget numbers, it should not act alone if it wants to remain in the currency union, the official said.
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