Tuesday, February 15, 2011

EU to Double Rescue Fund in 2013, Takes No Fresh Portugal Steps

By James G. Neuger and Stephanie Bodoni - Feb 15, 2011 8:01 AM GMT+0800

Jean-Claude Juncker, Luxembourg's prime minister and president of the Eurogroup. Photographer: Hannelore Foerster/Bloomberg

European governments agreed to double the lending capacity of the rescue fund for debt-laden countries in 2013, while seeing no need for immediate steps to shield Portugal from the fiscal crisis.

Finance ministers decided that the future emergency aid mechanism will be able to lend 500 billion euros ($675 billion), twice the size of the fund set up in the wake of Greece’s near- default last year.

“The situation on the sovereign-debt markets remains worrying,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing a meeting of European finance ministers in Brussels yesterday. “The Portuguese authorities did take effective actions. If this action would reveal itself as not having been sufficient, other measures will have to be taken, but I have no indications that this has to be done in the short term.”

Bonds in Greece, Italy and Portugal fell as Germany opposed stepping up the rescue effort until European governments take fresh measures to bolster the competitiveness of the 17-nation economy. The maneuverings over longer-term economic policies pushed the near-term crisis management into the background.

“They only want to talk about the future, and not the present,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “EU leaders seem to be trying to ring-fence the current crisis and not address its pressing issues.”

Portugal’s 10-year yield increased 11 basis points to 7.42 percent yesterday. The extra yield over benchmark German bonds, a measure of investors’ doubts about Portugal’s fiscal health, widened to 413 basis points, the highest since Jan. 7.
Deficit Overruns

German Finance Minister Wolfgang Schaeuble said the “stable” situation in the markets enables the European Union to play for time, sticking to a late-March timetable for measures to bolster the current rescue fund and prevent future deficit overruns.

“The markets are so stable right now that it’s better not to unsettle them with superfluous discussions,” Schaeuble told reporters before the meeting.

Germany, the biggest contributor to last year’s 110 billion-euro rescue of Greece and 67.5 billion-euro aid for Ireland, is under domestic pressure to hitch the rest of Europe to Germany’s low-inflation, low-deficit orthodoxy.

With her party facing elections in seven of Germany’s 16 states this year, Chancellor Angela Merkel is seeking to reassure voters that Europe’s largest economy is getting something in return for handouts to debt-strapped governments.
Distressed Countries

Merkel’s coalition allies, the Free Democrats, are trying to counter a slump in the polls by opposing more generous bailout terms or using the fund to enable distressed countries to retire debt at a discount.

Backed by French President Nicolas Sarkozy, Merkel struck a blow for German-style economic management with a Feb. 4 proposal for a “competitiveness pact” including caps on wages and spending as well as a lengthening of the retirement age. The proposal, one of Germany’s conditions for expanding the euro- support operations, was criticized for overlapping with policies already pursued at the European level.

“Almost everybody is in favor to improve competitiveness, but what’s the way to do it? I’m not sure the Franco-German proposal is the best way,” Finnish Finance Minister Jyrki Katainen said.

The pact will be aired at a special March 11 summit called at Merkel’s bidding. Finance ministers may hold an extra meeting on March 21 to prep for a March 24-25 summit designed to unveil a “global response” to the debt crisis, Juncker said.
Collateral Rules

Germany has put the focus on getting the full potential out of the temporary fund, known as the European Financial Stability Facility. While nominally worth 440 billion euros, collateral rules that underpin its AAA credit rating limit the fund’s lending capacity to about 250 billion euros.

The permanent fund will take effect in mid-2013, with its size adjustable at two-year intervals. As with the current mechanism, the International Monetary Fund will kick in 50 cents for every euro from European governments, under what EU Economic and Monetary Commissioner Olli Rehn called an “unwritten understanding.”

German politics will complicate the permanent rescue facility as well, after legal experts in the lower house of parliament concluded yesterday that it will require a two-thirds majority to win Germany’s endorsement. Merkel would have to fall back on opposition support.
Upgraded Toolkit

While European officials have said direct purchases of struggling countries’ bonds in the primary market are likely to be part of the current fund’s upgraded toolkit, other pieces -- such as Ireland’s plea for lower interest rates on aid -- have yet to fall into place.

“The interest-rate facility is higher, is designed to give a profit to other member states, and there is an issue about whether the interest rate should be reduced to reflect the need to have sustainability,” Irish Finance Minister Brian Lenihan said in Brussels.

The opposition in Ireland’s Feb. 25 election has made the average 5.8 percent rate a campaign issue, promising to cut it in case of victory. The EU might approve lower rates starting next year, not for 2011, Rehn said.

It is “essential to respect” the arrangements for this year, Rehn said. “Concerning outer years, there is more room for maneuver.”

The European Central Bank, which has propped up markets by buying 76.5 billion euros of weaker countries’ bonds, is looking to hand over that job to governments as it pivots to its main mission of combating inflation.
‘Their Responsibility’

“Governments have to take on their responsibility,” ECB President Jean-Claude Trichet said in an interview with Les Echos. “I’ve asked for an improvement in the interventions of the EFSF, qualitatively and quantitatively. The possibility of the EFSF buying sovereign bonds forms part of this logic.”

Separately, the ministers picked Belgium’s Peter Praet to fill the next opening on the central bank’s Executive Board. Praet, 62, will take the seat set to be vacated on May 31 by Gertrude Tumpel-Gugerell of Austria, currently the only woman on the board.

The selection collides with intensified speculation over who will succeed Trichet when his term ends in October. A top candidate for that post, German Bundesbank President Axel Weber, took himself out of the running by announcing last week that he will step down and return to academia.

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