Eurozone ducks crucial issues on rescue fund

Little in the way of consensus as ministers postpone agreement on sovereign debt
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The Independent Online

European finance ministers remain split on the way the eurozone and the wider EU should deal with sovereign debt crises.

At a routine meeting in Brussels, all the signs are that, in the absence of a renewed attack on one of the peripheral economies' sovereign debt, ministers will postpone agreement on the next moves forward and will leave the crucial decisions to the heads of government summit in late March.

However, a further market crisis might well force European governments' hands, as happened during the Greek and Irish crisis last year. The key player in the talks, the German finance minister Wolfgang Schäuble, said: "There will not be results today, the market developments in the last week have, thank God, taken any urgency out of these discussions. Currently the bailout plan is not under stress, it works and is on a good path. I will not feed speculation."

The president of the eurozone group of finance ministers, Jean-Claude Junker, from Luxembourg, added: "We won't make any decisions today."

The issues facing the eurozone are well canvassed: more funds for the current European Financial Stability Facility (EFSF); a wider remit for the EFSF, to allow it to buy sovereign debt and bond issued by banks and other private sector entities; and the interest rate.

Longer-term, there remain vital questions about the new European Stability Mechanism proposed for 2013, which will require government bond holders to share the losses arising from any default of sovereign debt, in an analogous way to corporate bond holders, when a majority decision can bind all debtors and force them to take a "haircut".

Against original nominal total funding of €770bn (£643bn) in rescue funding available to the eurozone, almost half has evaporated due to calls on the fund from Ireland and the erosion in the health of some members, even with some €250bn pledged directly from the IMF.

This means that the effective current funding available for bailouts is only about €440bn – that is the sum that can be confidently issued as AAA rated bonds by the EFSF – a figure judged too modest to deal with the looming possibility of a fresh crisis in Spain, with or without rescues of Portugal and Belgium along the way.

There seems a growing consensus that the EFSF may need to have more funding, and German figures have appeared supportive – and Berlin will have to find the bulk of the money.

However, the German government has resisted allowing the EFSF to buy sovereign debt, as that would threaten the fiscal discipline they are urging on the weaker members of the single currency. Even so, it may emerge as a more palatable alternative to the current back-door funding of budget deficits by the European Central Bank.

Analysts said yesterday that the ECB settled €2.3 bn of bond purchases last week – when the Portuguese, Spanish and Italian governments were desperately trying to get their bond auctions away successfully – compared with only buying €113m two weeks ago.

The cumulative value bonds purchased by the ECB now represents €76.5 bn, almost 16 per cent of the Greek, Irish and Portuguese national debts. Oscar Bernalm, an economist at ING said: "Last week, markets were comforted somewhat by the success of debt issuance in Portugal, Spain and – to a lesser extent – Italy. But the appeasement is likely to be only temporary.

"Uncertainty about the sovereign crisis in Europe is far from over and concerns regarding the long term sustainability of public debt in the peripherals remain vivid."