Eurozone Countries to Boost Their Bailout Fund?

on Sep 25, 2012

While the European leaders are still trying to overcome their differences over a possible banking union, they now have yet another topic of discussion, namely the size or the Eurozone bailout fund, which might reach huge proportions. On 24 September 2012, The Times reported that there were ambitions to boost the firepower of the European Stability Mechanism (ESM) to more than €2 trillion (£1.6 trillion).

After the German Constitutional Court approved the permanent ESM, the plan to massively increase its amount is back on the agenda with a meeting on September 21, at which the Eurozone finance ministers discussed possibility to significantly increase the bailout fund amount. ESM’s chief executive Klaus Regling noted that leverage would allow the Eurozone to fund more than €1 trillion in resources, whereas Der Spiegel magazine reported that there were ambitions to increase the sum to more than €2 trillion.

The stability mechanism’s present balance, which has been approved by all 17 Eurozone countries, is €500 million, meaning that a significant increase would be required. Two methods of leverage could be adopted from the temporary bailout fund which provided rescue loans for Greece, Portugal and the Republic of Ireland. The first method would allow the ESM to provide partial support against losses to buyers who purchase the fund’s bonds, covering the holder for between 20 and 30 percent of the bond’s principal value. The other option is the creation of a specific vehicle to attract private funding by promising investors that the Eurozone would pick up the first portion of any losses.

!m[](/uploads/story/452/thumbs/pic1_inline.png)It is still unclear however where the money to increase the bailout fund is going to come from. While Mr Regling has indicated that he already has €60 billion pledged from private sources, he failed to get any big government-backed commitments in China and Japan last year.
Wolfgang Schaeuble, the German finance minister, is reported to be in favour of the scheme since it would not require an increase in Germany’s €190 billion liability for loans made under the stability mechanism. The plan, however, has its opponents, with Bloomberg reporting that according to Der Spiegel, Finland has already objected.

Bloomberg also reports that the bailout fund amount is not the only recent point of contention among European leaders, with Germany’s chancellor Angela Merkel and France’s president Francois Hollande clashing over the EU banking union timetable at their meeting in the Ludwigsburg castle on September 22. More precisely, Ms Merkel rebuffed Mr Hollande’s appeal to activate the joint oversight of the region’s banking sector “the earlier, the better”. Financial markets which “are watching Europe want to see results,” noted the German chancellor, as quoted by Bloomberg. “It has to be thorough, the quality has to be good and then we’ll see how long it takes.” Failure to reach an agreement over the supervision, however, could further delay the creation of the banking union which is now seen as a key element for resolving the Eurozone debt crisis.


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