Eurozone finance ministers are moving closer to approving a plan to allow the European Financial Stability Facility (EFSF) to increase its firepower by borrowing money. At a meeting in Luxembourg last night, ministers from those governments that have previously poured cold water over proposals to leverage the €440bn (£377bn) EFSF, admitted that the plan is now under serious discussion.
Meanwhile, Christian Noyer, a member of the European Central Bank, indicated that he would back the scheme to beef up the bailout fund in a speech delivered in Tokyo yesterday. Mr Noyer, who is also the Governor of the French central bank, said: "It would be unrealistic to expect an increase in the EFSF itself but I am personally open to any scheme that would allow existing commitments to be leveraged."
The EFSF, which has been used to bailout Greece, Ireland and Portugal, is considered too small to support the governments of Spain and Italy should those two countries lose access to the capital markets. The purpose of leveraging the fund would be to convince investors that the eurozone is serious about standing behind all the weaker members of the single currency.
The indications of movement in Luxembourg came too late to calm the financial markets, which endured another torrid session. The German Dax shed 2.3 per cent and the French CAC fell by 1.9 per cent. The FTSE 100 closed down 53 points to finish at 5,075.5. Investor pessimism was driven by an admission from the Greek government that it would fail to meet its agreed deficit reduction targets this year or next. Athens had agreed with the European Union and the International Monetary Fund to bring down its borrowing to 7.6 per cent of GDP in 2011 and 6.5 per cent in 2012. But the Greek government now says that borrowing will come in at 8.5 per cent in 2011 and 6.8 per cent in 2012.
Athens claims the discrepancy is the result of a severe recession in Greece, rather than insufficient efforts on its part to cut spending. But the "troika" of officials from the European Central Bank, the European Commission and the IMF will decide on 13 October whether Athens is doing enough to merit the release of the next €8bn bailout instalment that Greece needs to avoid national bankruptcy.
There was further bad economic news yesterday in the latest eurozone manufacturers' purchasing managers index, which showed that manufacturing in the single currency area continued to contract in September. The measure of activity dropped to 48.5 last month, from 49 in August. A reading below 50 indicates contraction.
Reports from Luxembourg also indicated that eurozone finance ministers are ready to approve the appointment of the deputy German finance minister Jorg Asmussen to the board of the ECB. Mr Asmussen would replace Jürgen Stark, who stepped down last month in apparent protest at the ECB's emergency purchases of Spanish and Italian bonds.
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