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Europe split over boosting euro crisis fund

16 stycznia, 2011

Eurozone finance ministers head into a meeting on Monday divided over growing calls to ramp up the firepower of a debt rescue fund to douse market fears about the fate of vulnerable countries.

European Commission president Jose Manuel Barroso, who heads the European Union\'s executive arm, has urged EU leaders to take a decision by their next summit in February but faces resistance from eurozone paymaster Germany.

"I expect top German politicians to respect the role of the commission. We in the commission have not only the right, but also the duty, to tell Europe\'s citizens what we think is right," Barroso told Germany\'s Spiegel magazine.

Germany insists that the 750-billion-euro financial safety net is large enough and says only one-tenth has been used so far to rescue Ireland from a banking catastrophe in November.

"I do not understand Barroso\'s comments. If only a small part of the fund has been used, then there is no need to discuss making it bigger," German Foreign Minister Guido Westerwelle said in the Tagesspiegel am Sonntag weekly.

But analysts have repeatedly warned that the fund would be too small to come to the rescue of bigger economies such as Spain, amid fears that Portugal could be next to fall into the financial abyss and drag its neighbour with it.

Belgian Finance Minister Didier Reynders called this week for the safety net to be doubled to 1.5 trillion euros ($2 trillion) and said he hoped to raise the issue at the meeting of finance ministers Monday and Tuesday in Brussels.

"I think that doubling the resources would be a reasonable objective," Reynders told AFP in a telephone interview.

The fund was created last year to protect the euro from market upheaval after Greece became the first eurozone country be bailed out due to its huge public deficit and debt load.

The system combines a 440-billion-euro European Financial Stability Facility (EFSF) backed by guarantees from the 17 eurozone countries, plus 250 billion euros from the IMF and another 60 billion euros from the 27-nation EU.

But the EFSF\'s effective lending capacity is estimated at only 250 billion euros as the fund borrows money on the markets and, in order to secure a top rating and low interest rates, it must keep part of funds raised in reserve.

Although German officials oppose an expansion of the fund, German Finance Miniser Wolfgang Schaeuble indicated on Sunday that increasing the EFSF\'s effective lending capacity may be necessary.

"We must and we will solve this problem," the minister told the Frankfurter Allgemeine Sonntagszeitung weekly.

The eurozone won some breathing room this week after Portugal and Spain successfully raised funds on the sovereign bond market.

But analysts warned that it was likely a temporary reprieve as the rate of returns Portugal and Spain had to offer investors were still high and could yet rise to levels that would require bailouts.

"Even if the German government is officially still reluctant to change the \'rules of the game,\' an increase in the size and scope of the EFSF has become likely," ING banking group said in a note to clients.

If Portugal taps the EFSF, then the fund would lack enough funds to cover Spain, which would need support of around 300 billion euros, ING estimated.

French Finance Minister Christine Lagarde said Friday it was "premature" to put a new figure on the fund but admitted that increasing its size was among several options being debated.

She confirmed one idea would be to enlarge the EFSF\'s toolbox to allow it to buy the debt of troubled eurozone members on the secondary market, taking over a role that the European Central Bank has reluctantly taken.