European governments set up a full-time 500 billion-euro ($648billion) fund to aid debt-swamped countries and, not for the firsttime in the three-year crisis, expressed confidence that the extrafinancial muscle won't be needed anytime soon.

Finance ministers from the 17 euro countries declared theEuropean Stability Mechanism operational, while saying that Spain,its biggest potential near-term customer, isn't on the verge oftapping it. Decisions were also put off on Greece's next aidpayment and on an assistance program for Cyprus.

Creation of the ESM “makes the strategy of member statescredible and equips the euro area with much better tools toappropriately respond to future crises,” Luxembourg Prime MinisterJean-Claude Juncker told reporters in Luxembourg today before ameeting of euro finance chiefs that began at 5 p.m.

The fund's birth was eased by the European Central Bank's offerin August to buy bonds of fiscally struggling countries, which hasdriven down interest rates in Spain and Italy and bought Europeangovernments time to address the root causes of the crisis.

Spanish 10-year bonds yielded 5.71 percent today, down from apeak of 7.62 percent on July 24. Italian 10-year yields have fallento 5.08 percent from 6.60 percent and the euro has risen 7.6percent to $1.2971 over the same period.

The ESM will replace the temporary European Financial StabilityFacility, which has spent 192 billion euros of its 440 billioneuros on loans to Ireland, Portugal and Greece. The two funds willrun in parallel until the EFSF is phased out in mid-2013.

Controlled by euro finance ministers, the ESM can lend directlyto governments, intervene on bond markets, offer credit lines andprovide loans that can be used to recapitalize banks. It would beauthorized to pump capital into banks directly only once the eurozone sets up a central supervisor, possibly in 2013.

The ESM inherited those powers from the temporary fund. For now,it will go without two other EFSF tools that have yet to be used:debt-insurance certificates and co-investment vehicles that weredesigned to use leverage to multiply their impact.

Finance ministers touted Spain's economic overhaul, declined topress the Spanish government for more budget cuts and said abank-aid program set up in July will cost far less than the 100billion euros allocated for it. Payouts under that program will behandled by the ESM starting in November.

“Spain is also suffering under the problem of contagion, likeother countries, from speculation that's the result of theuncertainty surrounding the euro area as a whole,” German FinanceMinister Wolfgang Schaeuble said. “But Spain doesn't need anassistance program.”

Street protests against austerity and three regional electioncampaigns have played into the Spanish government's decision tohold off seeking a full aid package. While Spain is awaiting aclearer sense of what Europe would want in return, it ruled outfurther budget cuts.

Spanish Economy Minister Luis de Guindos defended the 2013budget draft against assertions by the Spanish central bank andsome European officials that it relies on optimistic economicassumptions in order to squeeze the deficit down to a Europeantarget of 4.5 percent of gross domestic product.

“The budget for next year has been put on the table, it is asignificant effort in terms of budget adjustment,” de Guindos toldreporters in Luxembourg.

Asset Sales

Ministers said the next move on Greece is in the hands of theso-called troika of officials from the European Commission, ECB andInternational Monetary Fund, now in talks with the Greek governmentover budget cuts, asset sales and economic reforms.

The holding pattern on Greece comes a day before GermanChancellor Angela Merkel, the dominant figure in European bailoutpolitics, makes her first trip to Athens since the Greek governmentuncovered hidden holes in its budget in October 2009.

Prime Minister Antonis Samaras's coalition is deliberatinginternally and wrangling with the creditors to put together 13.5billion euros in savings, the condition for tapping the next 31billion euros in loans. Greece has been promised 240 billion eurossince the crisis erupted.

Greece is undertaking “a lot of efforts, it's very difficultdown there,” Luxembourg Finance Minister Luc Frieden said. “If weneed to give them additional time, if that does not require a lotof additional money, we should support Greece. However, it's not aone-way street.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.