The EU commission, which is warning that euro-zone governments shouldn’t get complacent, also favours a much bigger firewall. It argues one is needed to signal to the market in advance that other euro-zone governments stand ready to backstop our bigger member states under pressure, and calm contagion.
By implication, if the firewall isn’t big enough, the market will doubt the commitment is there. This was supported by reports from the OECD saying that the eurozone needs a firewall of close to 1 trillion euros to instil confidence and to make sure they can cover the necessary funding to help ailing EU nations.
Germany has taken the almost opposite position. They argue that beefing up the bailout funds now will signal that governments are anticipating more trouble ahead, and therefore risks creating a self-fulfilling prophecy. The rescue fund should be smaller and grow only if needed.
Sounds like the ostrich still have their heads buried in the sand.
Most G20 nations are pushing, almost demanding that the EU build a more credible and robust firewall would be the best way to keep ahead of the crisis. Word has recently leaked the EU nations have proposed 3 options to be reviewed in their meeting on Friday.
And it doesn’t take much reading between the lines to understand which of the three options the commission staffs believe the most convincing: Option 3, which would be to transform the unused EFSF guarantees into ESM capital. That would boost bailout funds to €940 billion and, importantly, maintain the resources at that level.
The one most governments favour, including Germany, is Option 1. This, the commission paper said, would “most likely be insufficient to unlock resources” from other Group of 20 governments.
“The €940 billion ceiling was never going to fly,” a euro-zone government official said.
But the commission had to put it out there anyway.
A German-backed proposal to expand the size of the euro-zone bailout funds is gaining ground, official word has it. Under the favoured option, the region’s bailout funds would rise temporarily to roughly €650 billion ($799 billion) by July. The arrangement would see the transitional European Financial Stability Facility continue running until June 2013 in parallel with the new, permanent bailout fund, the European Stability Mechanism.
The EFSF will maintain its €200 billion of commitments to the Greek, Irish and Portuguese bailouts, but its spare lending capacity of €240 billion is expected to be wiped out after mid-2013.
Finance ministers are also moving towards a deal to pay cash more quickly into the ESM, which will eventually have a €500 billion lending capacity to help troubled euro-zone countries. Under the preferred option, officials say, the ESM would start with a €200 billion lending capacity on July 1 but increase to its full capacity by 2014.
The ESM has to hold about 15% of capital against its lending capacity in order to maintain its triple-A credit rating. When the ESM was first conceived, the idea was to inject the €80 billion of paid-in capital in five equal annual instalments of €16 billion. Since then, the start-up date for the ESM has been brought forward one year to July 2012, and agreement reached to pay in two instalments of capital, amounting to €32 billion, when it becomes operational.
Officials tell us that a consensus will likely be reached in Copenhagen to pay in two extra tranches in 2013 and one in 2014.