By William L. Watts, MarketWatch
FRANKFURT (MarketWatch)—Euro-zone finance ministers were expected Friday to boost the region’s financial-rescue resources, but appeared certain to fall short of meeting international calls for a one-trillion euro firewall as they aim to convince markets they have the capability to contain a long-running sovereign debt crisis.
“It will not be possible to reach a volume of €1 trillion ($1.33 trillion)” because the prerequisites needed to boost the size of the permanent European Stability Mechanism funds aren’t present, Luxembourg Prime Minister Jean-Claude Juncker told reporters as ministers prepared to meet in Copenhagen, Dow Jones Newswires reported.
The meeting comes as Spain prepares Friday to unveil its 2012 budget amid mounting nervousness over Europe’s fourth-largest economy to meet tough fiscal targets while dealing with a deepening recession and an unemployment rate of more than 20%.
Spanish bond yields have pushed higher since early March when Prime Minister Mariano Rajoy announced the government wouldn’t meet an initial target of reducing its deficit to 4.4% of gross domestic product in 2012 from more than 8% last year.
The yield premium demanded by investors to hold Spanish 10-year government bonds ES:10YR_ESP -0.43% over 10-year German bunds DE:10YR_GER +0.29% has risen by around a half percentage point since early March.
The euro EURUSD +0.30% gained ground versus the dollar Friday, rising to $1.3345 from around $1.3294 in North American trade late Thursday.
The talks on the firewall have centered on a complicated proposal that would see the temporary European Financial Stability Facility, or EFSF, continue to operate alongside the permanent European Stability Mechanism, or ESM, which is set to become operational at midyear.
The ESM is meant to have a lending capacity of €500 billion. The EFSF has committed around €200 billion in loans to bailout countries, leaving around €240 billion available in the event of trouble elsewhere.
The ultimate size of any combined rescue fund remains unclear. Some news reports said finance ministers were weighing a plan that would allow the EFSF’s unused capacity to remain available until mid-2013, providing a total, temporary funding capacity of €940 billion, including existing loans.
Economists at Barclays Capital said the €940 billion option would likely be needed to convince other countries to boost resources for the International Monetary Fund.
Group of 20 officials earlier this year pressed euro-zone officials to build a trillion-euro firewall in return for increased IMF funding. Earlier this week, the Paris-based Organization for Economic Cooperation and Development said a €1 trillion firewall was necessary to restore market confidence.
Germany has resisted politically unpopular calls for boosting funding of the ESM, but gave ground in recent weeks on the idea of combining the permanent fund’s resources with the EFSF.
In the end, a €940 billion firewall may not be enough to satisfy market participants and stem pressure on Spain or Italy, strategists said.
“As seen time and again, the market may want more. After reading the fine print of the compromise, the temporary nature of the increase should fail to reassure investors who are worried about the refinancing hump in Italy and Spain in 2014/ 2015,” wrote strategists at Commerzbank, in a research note.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
