Bigger rescue call, bond auctions raise investor hopes

By Alvise Armellini, Sinikka Tarvainen and Andrew McCathie Jan 12, 2011, 21:36 GMT

The pressures on Europe's most cash-strapped states eased Wednesday amid renewed political efforts to beef up the eurozone's rescue fund along with the successful launch of new bond issues by Portugal.

   Referring to the European Financial Stability Fund (EFSF), European Commission President Jose Manuel Barroso said the 'financing capacity must be reinforced, the scope of activities ... should be widened.'

Barroso's comments coincided with Portugal successfully selling bonds totalling 1.25 billion euros (1.62 billion dollars).

The bond auctions combined with signs that Europe's political leadership was considering stepping up efforts to tackle the 17- member eurozone's debt crisis helped to bolster investor confidence in currency bloc's financial markets.

While the euro gained ground, the eurozone's blue-chip Eurostoxx 50 surged to close 3 per cent higher. The euro traded up 0.7 per cent at 1.3064 dollars.

Portugal's bond auctions were the first of the year for Europe's most heavily indebted states and set the stage for two other key bond issues on Thursday from Spain and Italy.

Both Madrid and Rome have been also been battling to reduce high debt-and-deficit levels. Despite the remarks from Barroso, the eurozone's two biggest economies - Germany and France - appeared less enthusiastic about extending the currency bloc's rescue mechanism.

   'We consider that this fund (...) is big enough to meet the demands of one country or another,' said French government spokesman Francois Baroin, who is also France's budget minister.

   Meanwhile, German Chancellor Angela Merkel told reporters in Berlin: 'Germany will do whatever is necessary (to ensure a stable euro).' But she declined to be drawn on suggestions for bolstering the bailout mechanism.  

   Merkel was speaking ahead of a meeting in Berlin with German Finance Minister Wolfgang Schaeuble as they met International Monetary Fund chief Dominique Strauss-Kahn.

   The 440-billion-euro (571-billion-dollar) EFSF is the main plank of a 750-billion-euro financial backstop set up by the European Union and the IMF in May last year.

   The 440-billion-euro figure is the total amount of guarantees offered by eurozone governments to back the EFSF, rather than the actual amount of money the fund can raise on the capital markets to help governments in trouble.

   With Portugal having passed a major market test Wednesday, the nation's prime minister, Jose Socrates, again rejected suggestions that Lisbon would be forced to follow Greece along with Ireland and apply for an EU bailout.

   Speaking in Frankfurt, Socrates said: 'We don't need help. All we need is confidence.'

Barroso told a news conference in Brussels that reinforcing the eurozone's rescue fund represented a precautionary step, but ruled out suggestions that it was aimed at any assisting any specific country.

   'It's a precautionary measure that makes sense ... but we are not in any way implying we will use it for country A or B,' Barroso said, answering a question about the possibility of moves to throw Portugal or Spain financial lifelines.

   Barroso was also echoing comments made in Wednesday's Financial Times by EU economy commissioner Olli Rehn on the need to review the size and scope of the eurozone's bailout fund.

Rehn told the newspaper that it was 'better to be safe than sorry and make sure we have sufficient instruments of reassurance, even with a view to the worst case scenarios.'

   Eurozone finance ministers are expected to discuss the issue at their next regular meeting in Brussels, scheduled for Monday.