BLBG:Europe Caps Fresh Crisis Aid at 500 Billion Euros
European governments called for a bigger global financial emergency fund after engineering a firewall to fight the region’s debt crisis that tops the symbolic $1 trillion mark.
Euro-area finance ministers decided yesterday in Copenhagen that 500 billion euros ($666 billion) in fresh money would go along with 300 billion euros already committed to create an 800 billion-euro defense against the two-year-old turmoil.
Europe is counting on those sums, plus the European Central Bank’s extra lending and bond-buying programs, to demonstrate that it is on the road back to stability and encourage Group of 20 economies to bulk up the International Monetary Fund’s anti- crisis coffers at a meeting next month.
“The side effects from a European crisis would be severe in Latin America or emerging Europe, so it’s in everybody’s interest to find a solution,” Finance Minister Anders Borg of Sweden, one of 10 European Union countries outside the euro, told reporters. “But obviously there has to be continuous negotiations. As always, I think we will have the negotiation the last night before we have the solution.”
While welcomed by the ECB, the firewall decision stopped short of a bolder step mooted before the meeting as a Germany- led coalition of creditor countries rebelled against imposing further burdens on bailout-weary taxpayers.
Permanent Fund
As flagged by German Chancellor Angela Merkel, the rich countries dropped plans to deduct sums pledged and disbursed by the temporary rescue fund from the 500 billion euros to be wielded by the permanent fund, the European Stability Mechanism.
Those countries refused to go further, tossing out a proposal to make the money left in the temporary fund fully available. Instead, that 240 billion-euro sum will be used only to get the ESM up to its full 500 billion euros during its two- year buildup starting in July.
The total would be too little to cope with an emergency in Italy or Spain, which have combined gross borrowing needs of 800 billion euros in the next three years, or to deal with additional bank recapitalizations, said Malcolm Barr, an economist at JPMorgan Chase & Co. in London.
Europe’s move “is likely to be a disappointment not only to some within the euro area, but also to those outside who wanted to see ‘the color of European money’ before being prepared to commit more resources to the IMF,” Barr said in an e-mailed note.
Rebutting Criticism
European officials wheeled out a variety of numbers -- including bilateral loans to Greece in 2010, loans from a now- defunct centrally managed fund and the ECB’s 1 trillion-euro cash infusion to banks -- to rebut international criticism of Europe’s response to the crisis.
“Robust firewalls have been established,” the ministers’ statement said. “This comprehensive strategy has paid off and led to a significant improvement in market conditions.”
Finance ministers also agreed to get the ESM up to full capacity by mid-2014, two years earlier than planned. Governments will pay in two installments of capital this year, two more in 2013 and the final tranche in the first half of 2014.
Some countries might be stretched to meet that timetable. German Finance Minister Wolfgang Schaeuble told reporters that “some member states said this morning they have difficulties paying these two tranches already this year.”
Dollar Conversion
In his own twist on the mathematics, Irish Finance Minister Michael Noonan said a conversion into dollars makes them more impressive. “The market reaction to these is to the dollar amounts so anything that gets you $1 trillion looks like a serious firewall,” he told reporters.
To underscore the point, the dollar figure was featured in the statement, in an effort to show emerging countries such as China and Brazil that Europe is on top of the crisis and unlock more IMF support.
Europe now has an “excellent basis” to make that case, Italian Deputy Finance Minister Vittorio Grilli said. In a statement in Washington, IMF Managing Director Christine Lagarde said Europe’s upgraded strategy will “support the IMF’s efforts to increase its available resources for the benefit of all our members.”
Market Tensions
Euro-region national central banks plan to steer 150 billion euros to the IMF as a downpayment toward other countries chipping in. That sum was left out of Europe’s firewall calculation because it would be managed by the global powers that run the Washington-based IMF.
Much of the credit for the lessening of market tensions goes to the more than 1 trillion euros pumped into the financial system by the ECB since December. Ten-year bond yields in Spain, for example, have fallen to 5.35 percent from 6.70 percent on Nov. 25.
Spain’s battle against its deficit was another focal point. Spanish Prime Minister Mariano Rajoy’s three-month-old government presented its budget yesterday, after first tearing up the 2012 deficit target, and then bowing to European demands for further cuts. Spain announced spending reductions and corporate tax increases to cut the deficit to 5.3 percent of gross domestic product in 2012 from 8.5 percent last year.
To contact the reporters on this story: James G. Neuger in Copenhagen at jneuger@bloomberg.net; Jonathan Stearns in Copenhagen at jstearns2@bloomberg.net
To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net
