Eurozone bailout fund 'needs boost'

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The Independent Online

The eurozone needs to make further changes to its bailout fund - including boosting its size - to ensure it can stop the debt crisis from drawing in big economies like Italy and Spain, a top European Union official said.







The appeal from European Commission President Jose Manuel Barroso comes just two weeks after eurozone leaders reached what they called a "historic" deal on the currency union's crisis strategy, including a second massive bailout for Greece and far-reaching new powers for their bailout fund.



However, the accord failed to stem rising panic on financial markets over the ability of Italy and Spain - the eurozone's third and fourth largest economies - to repay their debts.



Although the yields, or interest rates, on Italian and Spanish bonds were below records reached earlier in the week, the two countries' stock markets were once again firmly in the red and the euro lost 0.9% against the dollar.



The main reason for that selloff was "the undisciplined communication and the complexity and incompleteness of the July 21 package," Barroso said in a letter to eurozone leaders dated August 3 but made public today.



That has led to "a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis," he wrote.



The commission president urged "a rapid reassessment of all elements related to" the eurozone's bailout fund, known as the European Financial Stability Facility, so it can effectively use its new powers. A spokeswoman for Barroso confirmed that those elements included the fund's size.



On July 21, eurozone leaders decided to equip the EFSF with new pre-emptive powers, such as the ability to buy up distressed government bonds to support their prices or extending short-term credit lines to countries before they are in full-blown crisis mode.



That was a recognition that rescue packages like the ones given to Greece, Ireland and Portugal, which keep those countries out of the market for several years, would be far too expensive for Italy and Spain.



However, analysts have said the EFSF will not be able to properly use these new powers at its current size of 440 billion euro (£383 billion).



Barroso also urged leaders to speed up the implementation of the previously agreed changes to the fund, which have to be ratified by national governments and in many cases parliaments, which are currently on summer breaks.



The most recent anxiety over Italy and Spain comes after banks and other private investors on Greek bonds were asked to take some losses as part of the country's second bailout - a move that the eurozone had ruled out for most of the crisis and which analysts warn may well be in the cards for other weak European states.



It also coincides with a broader fear that the US economy, in particular, may be weakening, dealing a further blow to Europe's recovery. That fear has gripped stock markets for the past couple of weeks and today was proving no exception - Milan's main index plunged a further 2.1 % while shares on Spain's Ibex were down 0.2 %.

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