Eurozone firewall increased to €700bn

German officials believe the scale of the fund will be sufficient to ringfence Greece and allow it to go bust without spreading fears of contagion to other countries

Phillip Inman, economics correspondent, Helena Smith and Martin Farrer
guardian.co.uk, Friday 16 March 2012 18.57 GMT

http://www.guardian.co.uk/business/2012/mar/16/debt-crisis-europe-news

Eurozone leaders will inject more than €250bn (£207bn) into the single currency’s protection fund in a desperate effort to prevent contagion from Greece, it emerged on Friday.

Finance ministers will agree the package in a fortnight, although it will still leave the insurance scheme around €1.3tn short of City estimates of the firewall needed to protect Italy and Spain from a panic that would follow if Greece went bust.

Officials said the main protection fund, the temporary €440bn European Financial Stability Facility (EFSF), will be increased to around €700bn, before the introduction next year of the permanent European Stability Mechanism.

The extra funds are expected to be in place by the summer to insure against a lending freeze by private investors.

Brussels has dismissed estimates that a €2tn fund would be needed to provide sufficient confidence in the eurozone. Officials believe a compromise between Germany and France, which wanted to put in place a bigger firewall, will safeguard the euro’s future.

The German government has lobbied for the fund to be restricted to protect its taxpayers from potential liabilities, which will mostly fall on Berlin.

German officials believe the scale of the fund will be sufficient to ringfence Greece and allow it to go bust without spreading fears of contagion to other countries.

But City analysts said the scheme needed to be larger to cover Ireland, Portugal and Greece, together with Italy and Spain, to be credible with international investors.

The deal to rescue Greece agreed last week is widely believed to be insufficient to prevent its collapse in the coming months. The US investment bank Citi saidon Friday it estimated there was a 50% chance of Greece defaulting further.

It accused the troika of EU representatives, International Monetary Fund advisers and the European Central Bank of underestimating the task facing Athens as it is forced to make huge cuts in wages, pensions and welfare spending.

“While the debt sustainability analysis includes lots of sensible assumptions, we regard others, particularly the outlook for GDP growth in combination with further massive fiscal tightening in coming years and the targeted privatisation revenues, as too optimistic,” it said.

Greece struck a deal to wipe out €100bn of its private sector debts and access more EU funds to bring its total bailout to €240bn. But it must reduce its debts further and will need to access more EU and IMF funds before it can get back on its feet, the Citi report warned.

The lack of support from analysts for the deal has kept markets treading water. The FTSE index closed 24.86 points higher at 5965.58, just short of the 6000 level reached last July.

Germany’s Dax was up 0.16%, France’s Cac rose 0.36% while the Dow Jones industrial average, which has jumped in recent months on the back of stronger US economic figures was up 4 points as London closed.

Concerns that European leaders underestimate the scale of the task were fuelled by the French socialist presidential candidate Francois Hollande who reopened the debate about austerity versus growth in a television interview.

In comments which are unlikely to go down well in Berlin or Brussels, he promised to renegotiate the recently agreed EU fiscal compact if he won the presidential election which reaches a climax in May.

Although he said he would balance the budget by 2017, he said he would cancel cuts that risked undermining the country’s propects for cutting unemployment and raising living standards.

Growth had to be put back into Europe, he said, adding that Germany alone should not decide the course of the continent.

“I will make the savings that are needed, but at the same time I will not sacrifice the interests of our country.”

Hollande’s deficit targets are based on forecasts of 1.7% growth in 2013, 2% in 2014 and between 2-2.5% from 2015 to 2017, figures which economists have said are overly optimistic.

Hollande’s comments follow a deal between Brussels and the newly elected right wing Spanish government resulted in a higher deficit target for this year.

Prime minister Mariano Rajoy succeeded in raising the target from 4.4% to 5.3%, but at the cost of greater scrutiny by Brussels of Madrid’s budget plans.

In Cyprus, which uses the euro in the southern, non Turkish half of the country, finance minister Kikis Kazamias resigned today following disagreement over economic policies with the island’s president, Demetris Christofias.

Announcing the resignation, a government spokesman denied that the veteran communist 61-year-old, an expert in international economic relations, was resigning because he was at odds with Christofias.

“The finance minister had some days ago submitted his resignation to the president, exclusively because of health reasons,” the spokesman, Stefanos Stefanou, said.

But Kazamias has quit shortly after Cyprus’ sovereign rating was downgraded to junk (with a negative outlook) by Moody’s citing the island’s exposure to debt stricken Greece.

The investors service argued there was a heightened risk the Cypriot government, itself no longer able to borrow on capital markets, would have to support banks that have taken a beating because of their exposure to Athens.

The level of recapitalisation required could exceed 20% of Cyprus’s GDP, the agency estimated. Standard and Poor’s cut the republic’s credit ratings to ‘BB+’ from ‘BBB’ in January saying the downgrade was a reflection of the island’s exposure to Greece.

In more bad news on Thursday, Moody’s cut the ratings of the island state’s three main banks, again citing the losses they had incurred in the recent restructuring of Greek debt – an unprecedented agreement which saw banks, pension funds and other private investors take a massive hit in the nominal value of their Greek bond holdings. The increase in problem loans as a result of the deteriorating environment was also cited.

[additional reporting by Martin Farrer and Helena Smith]


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