Euro zone divided on anti-crisis plan before meeting
Germany faced mounting pressure from its euro zone partners on Friday to boost a rescue fund for troubled member states after French Economy Minister Christine Lagarde said governments were considering expanding it.
In a sign of significant differences within the currency bloc in the runup to a meeting of its finance ministers next week, Chancellor Angela Merkel's spokesman said the fund set up in May was big enough and sources told Reuters that Berlin was determined to resist increasing it unless the crisis worsened.
Lagarde told a news conference: "The increase in the European Financial Stability Facility (EFSF) is one option which we are looking at, of course."
In response, the German government reiterated that it saw no need to commit more funds to the 440 billion euro ($590 billion) facility, which has so far been tapped only by Ireland.
"The volume is at the moment absolutely sufficient to fulfill the duties of the rescue fund," said Merkel's spokesman Steffen Seibert.
Senior European sources told Reuters that the sense of urgency in Berlin for boosting the fund had diminished after successful bond auctions this week in Spain and Portugal, the two countries seen most at risk of a bailout following rescues of Greece and Ireland last year.
Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March.
But it must overcome major differences with France to seal what German Finance Minister Wolfgang Schaeuble has promised will be a "comprehensive" new anti-crisis package.
Among the contentious issues, officials say, are France's wish to let the EFSF buy the bonds of vulnerable euro members and Germany's insistence that other members of the currency bloc be forced to introduce legislation similar to the "debt brake" rule it adopted in 2009.
Germany is also against lowering the punitive interest rate the EFSF charges states for its loans, a step other euro zone members believe is necessary to allow struggling economies in the bloc to reduce their debt mountains.
"Germany is not ready for a deal, not yet," one senior euro zone official said on Friday when asked about the prospects of an agreement next week on boosting the EFSF and allowing it to buy sovereign bonds.
Officials in Berlin were furious when European Commission President Jose Manuel Barroso urged an increase in the size of the EFSF earlier this week, a call that was echoed by European Central Bank President Jean-Claude Trichet on Thursday.
Schaeuble said in a speech in Frankfurt on Friday that speculating over an increase in the fund was not helpful. He has said, however, that he is open to a discussion about enabling the existing fund to be used in full.
Only around 250 billion euros of the 440 billion euro fund are effectively available to euro zone countries because of a complex loan guarantee system. That would probably not be enough to bail out both Portugal and Spain.
Euro zone leaders have a chance to capitalize on this week's successful bond auctions with new measures that could mark a significant shift in the crisis, analysts say.
The auctions helped push down the premium investors demand to hold Italian and Spanish government bonds over German benchmarks further on Friday.
But markets could decide to read Germany's resistance to quick measures as evidence that euro zone policymakers are unable to unite behind a new strategy for overcoming their debt crisis.
"Many fronts are still open and waiting for a decision to be taken," Citigroup economists said in a note on Friday, predicting that conflicting rhetoric and policymakers' "slow-moving" attempt to resolve the crisis would remain a source of market volatility.
That further policy measures are needed to draw a line under the debt crisis is not in dispute.
In an interview with the Bloomberg news agency, Naoyuki Shinohara, deputy managing director of the International Monetary Fund, said the premium investors demand to hold Greek and Irish bonds remained "very high" despite their bailouts.
"That means that skepticism over the sustainability of their debt in the market hasn't been cleared away," he was quoted as saying.
"At least for now it looks like the spillover from the European sovereign crisis to areas outside of the region will be limited," Shinohara said. "However, if the European sovereign debt problems were to become bigger, we need to keep in mind that that could bring about considerable downside risks."
At a two-day meeting that starts on Monday, European finance ministers are also expected to discuss a new round of "stress tests" for the bloc's banks.
But European officials said they did not expect a deal on the tests, which are expected to be published in the first quarter of 2011, because of lingering divisions over whether to include liquidity checks.
Stress tests conducted last year are now widely seen to have failed because they gave a clean bill of health to Irish banks whose liquidity problems later forced Dublin to seek an EU/IMF bailout.
[Source: By Daniel Flynn and Leigh Thomas, Reuters, Paris, 14Jan11]
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