Landmark deal reached as Spain underlines need for firm defences

  • Business
  • Saturday, 31 Mar 2012

COPENHAGEN: Eurozone finance ministers reached a landmark deal to raise their debt firewall to more than US$1 trillion, as a budget crisis in Spain underlined the need for firm defences.

Austrian Finance Minister Maria Fekter left a key meeting in Copenhagen to brief reporters on an agreement raising the eurozone firewall to “in total, over 800 billion euros” (US$1.07 trillion).

Fekter said the 800 billion euros comprised 500 billion euros from the permanent European Stability Mechanism (ESM) bailout fund that would come into effect in July, plus 200 billion in loans already pledged, plus a further 100 billion in bilateral loans and European Union (EU) funds.

The eurozone's two rescue funds ESM and European Financial Stability Facility or EFSF would run in parallel until mid-2013, Fekter said. Two cash tranches would be paid into the ESM this year and a further two next year, she added.

The figure matched a pledge made on Thursday by Wolfgang Schaeuble, the finance minister of Germany, Europe's top economy and paymaster.

“It's convincing, it's sufficient,” said Schaeuble at the time.

Irish Finance Minister Michael Noonan told reporters on the way into the meeting: “The market reaction to these is to the dollar amounts.

“So anything that gets you to a trillion dollars looks like a serious firewall and if you're talking 800 (billion euros), it's over a trillion dollars and that is a very serious firewall.”

Eurozone ministers have come under huge international pressure to build a convincing firewall.

The EU's partners from Washington to Tokyo and including groups such as the International Monetary Fund (IMF) want to see the eurozone ring-fenced as effectively as possible against a new crisis which would affect the whole world.

The Organisation for Economic Cooperation and Development (OECD) pressed this week for a one-trillion-euro pot, which OECD head Angel Gurria calls “the mother of all firewalls.”

And leading and emerging nations of the Group of 20 (G-20) have said they would only consider lending more to the IMF to combat the eurozone crisis if the bloc first stumps up enough cash to tackle its own problems.

Highlighting the main reason to bolster the firewall fears that the sovereign debt crisis that started in Greece could spread to larger economies such as Italy and Spain were fresh concerns about Spanish fiscal strains.

Hours after a general strike, which burst into violence in places, Spain's right-leaning government was poised to unveil huge cuts yesterday to meet European rules.

“Spain is in a very difficult situation,” said EU Economic Affairs Commissioner Olli Rehn, adding that Madrid had the strength to fix its fiscal position.

Spanish borrowing costs have risen in recent weeks after Madrid admitted it had missed its 2011 deficit target of 6% of gross domestic product, reporting 8.5% instead.

“We had a very severe budgetary slippage in 2012 but Spain will cease to be a problem,” Finance Minister Luis de Guindos said in Copenhagen. - AFP

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