EU ministers agree funding for new euro bailout scheme

Mar 21, 2011, 17:47 GMT

Brussels - European Union finance ministers agreed at a meeting on Monday on funding for a new eurozone bailout scheme - a key component of the EU's strategy to overcome the single currency's debt crisis.

States participating in the permanent European Stability Mechanism (ESM) will provide 80 billion euros (114 billion dollars) in real cash - paid-in capital' in euro speak - to back up the ESM's planned lending capacity of 500 billion euros, Luxembourg Prime Minister Jean-Claude Juncker said.

Juncker is the head of the so-called Eurogroup panel of the 17 eurozone finance ministers, whose meeting on Monday was enlarged to include ministers from the 10 countries that do not use the euro.

Individual contributions will be weighed according to each euro country's contribution to the European Central Bank's capital. Germany - the biggest euro economy - is expected to come up with 27.1 per cent of the total, its finance minister Wolfgang Schaeuble said.

However, countries whose per capita income is below 75 per cent of the EU average - a provision that applies to most Central and Eastern European members of the bloc - will benefit from a discount, EU economy commissioner Olli Rehn said.

This was seen as a concession to Slovakia, whose conservative government last year balked at having to loan money to bankrupt Greece - a country whose per capita income was higher than its own.

Overall capital for the ESM is expected to total 700 billion euros. The remaining 620 billion euros are to be provided by 'on call capital' or by state guarantees, Juncker said.

The ESM would use the capital to raise money in the markets with which to finance bailout payments to euro countries in need. Capital backing needs to be higher than its 500-billion-euro lending capacity so that ESM loans can enjoy the top triple-A credit rating.

The ESM is due to be introduced in mid-2013. Under the current, temporary bailout scheme - the European Financial Stability Facility (EFSF) - governments do not have to put forward any capital at all, as it is backed only by state guarantees.

But EU ministers still have to decide how to make good on a parallel pledge to double the EFSF's effective lending capacity to 440 billion euros. This can be achieved either by raising guarantees or by providing capital, as was decided in the case of the ESM.

'My personal guess is that this will be done by guarantees,' Juncker said, indicating that there was time until June to finalize work on the EFSF.

Monday's decision is expected to be endorsed by an EU summit on March 24-25 - along with last week's EU finance ministers' deal on toughened budget discipline rules, which still need to be green lighted by the European Parliament.

'We now have a comprehensive strategy to strengthen the foundations of the euro area,' Rehn said.

But ECB President Jean-Claude Trichet again argued Monday that the measures to not go far enough.

In particular, he told a European Parliament committee that the EFSF and ESM should be made 'more flexible,' with provisions to allow them to intervene in the markets to buy sovereign bonds of eurozone countries in financial difficulty - relieving the ECB from the task.

Eurozone leaders agreed on March 11 that bond-buying may only take place 'as an exception' and only directly from governments issuing them, not from traders exchanging them subsequently.

Monday's talks took place as speculation continued to linger on whether Portugal could become the third eurozone country to need a bailout after Greece and Ireland last year.

Portuguese Finance Minister Fernando Teixeira dos Santos said failure by the conservative opposition to approve austerity measures proposed by a minority Socialist government would give 'a big push to the country to fall into the arms of outside aid,'

The austerity package won praise from euro leaders last week, and Juncker said he saw 'no reason to change it.'

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