Europe set to speed up building of new bailout

Activists of the Occupy Frankfurt movement have set up a fireplace near the Euro sculpture in front of the European Central Bank in Frankfurt, Germany Nov.3, 2011. The ECB announced to lower their key interest rate to 1.25 percent.
AP Photo/Michael Probst

(AP) BRUSSELS - The 17 countries that use the euro are debating building up their new rescue fund to its full 500 billion euro ($670 billion) capacity faster than originally planned as part of a broader plan to beef up the currency union's financial firewalls.

The European Stability Mechanism will have a capital base of 80 billion euro, paid in by eurozone governments. This 80 billion euro - together with 620 billion euro in a form of payment guarantees from the member governments - can then be used to raise up to 500 billion euro on financial markets and with banks.

Under current plans, the countries' capital payments into the fund would be spread out until 2015. Two installments worth a total of 32 billion euro would be paid in this year, while the remaining 48 billion euro would come in three annual 16 billion euro slices.

That would mean that, when it comes into force in July, the ESM would only be capable of lending out some 200 billion euro in new rescue loans.

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But two European Union officials said Wednesday that the eurozone is now debating to also make two payments next year, with the final one coming in 2014, instead of 2015. Under that scenario, the ESM could hand out around 400 billion euro in loans by next year and the full 500 billion euro loan capacity would be reached by 2014.

The officials were speaking on condition of anonymity to discuss confidential talks ahead of a meeting of eurozone finance ministers on Friday in Copenhagen, when are final decision is expected.

Europe's currency union is under pressure from other large countries like the United States and China to beef up their defenses against a debt crisis that has been brooding for more than two years.

Although financial markets have calmed down in recent weeks, the U.S. and others are worried that renewed turmoil may sweep across other parts of the world and put an end to a burgeoning economic recovery.

At the center of their concerns are Italy and Spain, the eurozone's number three and two economies, whose funding costs - although lower than just two months ago - are widely seen as unsustainable in the long run.

The pressure to build up bigger financial firewalls comes as the eurozone is trying to figure out how to move from its interim bailout fund, the 440 billion euro European Financial Stability Facility that was set up hastily in May 2010, to the permanent, 500 billion euro ESM.

The EFSF has already committed almost 200 billion euro to the bailouts of Greece, Ireland and Portugal. The question now is how the eurozone plans to deal with both the loans that have already been given out and the money that is left in the EFSF.

Last year, eurozone leaders decided that total lending of the EFSF and the ESM together could never exceed 500 billion euro. That means that even once the full ESM capital has been built up, only some 300 billion euro would remain - way too little to effectively help large countries like Italy and Spain, which together have debts of more than 2.5 trillion euro.

International institutions like the International Monetary Fund, the Organization for Economic Cooperation and Development want to the eurozone to have financial buffers of at least 1 trillion euro ($1.3 trillion) - a position that is also backed by the U.S.

"The Americans are calling someone up almost every day," one of the EU officials said, referring to different European capitals.

But rich eurozone countries like Germany are reluctant to commit too much money to saving weaker neighbors, fearing that such a move would not only hurt its own finances but also discourage those countries from cutting spending and reforming their economies.

German Chancellor Angela Merkel said earlier this week that she would be open to letting the 200 billion euro in old bailout loans run separately from the 500 billion euro, which would effectively lift overall lending to some 700 billion euro.

The big remaining question - apart from the ESM capital payments - is how to deal with the 240 billion euro left in the EFSF. Merkel indicated that the EFSF could run until July 2013, as had been planned when it was set up, but did not say what should happen to the remaining money.

The European Commission and several euro countries want the remaining money to be included in the ESM, but the two officials aid that option had almost no chance of passing at the finance ministers' meeting.

A compromise would see the remaining 240 billion euro run on until July next year, providing a sort of buffer until the ESM's capital has been built up further.

But that would still fall far short off the 1 trillion euro favored by much of the rest of the world and raises questions of whether big non-eurozone economies will agree next month to send more money to the IMF. The Washington-based fund has asked for $500 billion in new resources so it can effectively help struggling economies over the coming years. The eurozone has already promised $200 billion.