The European plan to temporarily increase the bailout-aid ceiling above $1 trillion marks a compromise that gives German officials political cover at home and aims to attract more outside help, euro-area officials say.
While European finance ministers are nearing an agreement tomorrow to raise the limit on rescue funds to 940 billion euros ($1.3 trillion) until mid-2013, the amount they will be able to deploy immediately to protect Spain and Italy will range between 340 billion euros and 640 billion euros.
European policy makers are trying to strike a balance between meeting international demands for a more powerful war chest and opposition in donor countries led by Germany to providing additional aid for underperforming economies on Europe’s fringes.
“Given Germany’s resistance to a permanent increase in the euro zone’s firewall -- it is unwilling to put more taxpayers’ money on the line -- a quantum leap should not be expected,” said Carsten Brzeski, an economist at ING Group NV in Brussels.
An agreement taking shape for tomorrow’s meeting of finance ministers in Copenhagen involves running the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund to Greece, Ireland and Portugal, according to a draft statement prepared for the meeting.
Beyond that, the temporary fund’s unused 240 billion euros could be tapped until mid-2013 “in exceptional circumstances following a unanimous decision of euro-area heads of state or government notably in case the ESM capacity would prove insufficient,” according to the draft dated March 23 and obtained by Bloomberg News. Finance ministers may change the draft before issuing a final statement tomorrow.
The strengthening of the defenses would come after Chancellor Angela Merkel of Germany, the dominant power in two years of crisis fighting, this week warned of “fragility” in Portugal and Spain. It would also be designed to lure the rest of the world into putting more money into the International Monetary Fund’s arsenal.
The language in the draft also emphasizes the political hurdles to tapping the unused parts of the temporary fund, the European Financial Stability Facility. Merkel or any other euro-area government leader could exercise a veto.
In a sign of the political sensitivities, the draft doesn’t spell out the 940 billion-euro figure. It puts the total capacity at 700 billion euros from mid-2012 to mid-2013 and relegates the possible use of the EFSF’s remaining 240 billion euros to a footnote.
Merkel said March 26 that Germany accepted the 700 billion-euro limit in the first indication that she was ready to allow an increase in the debt-crisis firewall.
European policy makers are wrangling over amendments to rules written last year that limit total available bailout funds to 500 billion euros. The IMF has made additional aid contingent on Europe first doing more to help itself.
In a briefing in Brussels yesterday, a European official said the likeliest outcome is an anti-crisis buffer somewhere between 700 billion and 940 billion euros, without saying how long these amounts would be available.
The European Central Bank, which has battled the crisis by buying sovereign bonds and lending more than 1 trillion euros to banks, stepped up the pressure on governments to maximize their emergency aid resources.
“The ECB welcomes the commitment of Europe’s leaders to regularly review the lending capacity of the ESM and urges them to quickly agree on a significant increase of the resources of the ESM by combining the lending capacity of the ESM and the EFSF,” ECB board member Peter Praet said in an article prepared for a seminar in Copenhagen today.
The increase in the aid ceiling mooted for the Copenhagen meeting wouldn’t make the entire sum available upfront. It would require a capital call in an emergency to mobilize the ESM’s entire 500 billion euros before mid-2014.
Assuming that the temporary fund expires in mid-2013 without making further commitments, the permanent aid ceiling would revert to 700 billion euros, according to the draft. The ESM’s provisions allow the finance ministers to raise or lower its capital at any time.
Discussion of the lending cap will coincide with a possible further speedup of the capitalization of the permanent fund. The first of five planned annual payments will be made in July and the second in October, the draft statement said.
The remaining payments may also be accelerated, with two in 2013 and the final installment in the first half of 2014, two years earlier than previously planned, the statement said.
As a result, Europe would be capable of making a theoretical three-year aid pledge of 500 billion euros on July 1 and having enough money to follow through, the European official said yesterday.