Eurozone needs 'mother of all firewalls' says OECD

  • @Benchu_

European leaders must erect "the mother of all firewalls" to protect the eurozone from the flames of financial contagion, the secretary of the OECD urged yesterday.

Angel Gurria, the head of the economic organisation, urged finance ministers, who are due to meet in Copenhagen on Friday, to come up with a plan to boost the capacity of the eurozone's bailout funds that will be sufficiently large to impress investors.

"When dealing with markets, you must overshoot expectations," said Mr Gurria in Brussels. "The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough, just big."

The European Commission has been pushing for the existing €400bn temporary EU bailout fund, the European Financial Stability Facility, to be merged with the new €500bn permanent fund, the European Stability Mechanism, which will be introduced in June, to create a €940bn firewall.

But the German government is pushing for a less ambitious plan that would see the funds run in tandem for a year. This would result in the size of the firewall falling to back to €500bn by mid- 2013. Mr Gurria warned European leaders against complacency in response to the easing of market tensions since last year as a result of the successful Greek debt swap and the €1 trillion liquidity operation by the European Central Bank.

"The pressure has come down, but we can't draw too much comfort from signs of healing," he said. "Risk spreads remain at unsustainable levels for some countries and have shown signs of creeping up in the last few days." Investors have been looking at Spain with growing alarm in recent days.

Yesterday, the Bank of Spain confirmed that the economy has returned to recession, after shrinking 0.3 per cent in the first quarter of 2012. Last year Spain's deficit came in at 8.5 per cent, well above the 6 percent target. Earlier this month, European finance ministers set the administration of Mariano Rajoy a deficit target for 2012 of 5.3 per cent.