Brussels, 27/03/2012 (Agence Europe) - Germany is coming under constant pressure from its European and international partners to agree to an increase in the financial backstop put in place to prevent the sovereign debt crisis spreading. The Eurogroup is expected to make the final decision in Copenhagen on Friday 30 March. The most recent attempts to alter Germany's position are from EU Euro Commissioner Olli Rehn and the OECD secretary general, Angel Gurría - the latter calling on Tuesday 27 March for the mother of all firewalls to be put in place in order, in part, to get IMF countries to increase their contributions to the IMF.
“We have already taken significant decisive steps towards a stronger and permanent firewall to contain contagion and calm down market instability if it arises…. Further reinforcement will be decided on Friday, which will help us remove any remaining doubts. I am confident we can reach a confidence-building compromise”, said Rehn. In a memorandum on the various options for increasing the financial backstop in Europe, the European Commission says that the European Financial Stability Facility (EFSF), which has lending capacity of €440 billion and is currently bailing out Ireland, Portugal and Greece, should be merged with the €500bn European Stability Mechanism (ESM), due to come on stream in July.
Gurría said “the mother of all firewalls should be in place” with a lending capacity of around a trillion euros. He said the idea was to send a clear message to the financial markets to prevent them from being tempted to put the eurozone's credibility to the test. Gurría said that a trillion euros would cover the various rollovers of debt due to arrive in the near future among eurozone nations thereby preventing any spread of the crisis to countries like Spain and Italy through an unaffordable increase in their bond yields. He said the amount should echo the trillion euros pumped into the European banking system by the ECB recently.
German €700bn idea. Aware of the rising tension on the money markets as a result of Spain's budget woes, the German chancellor, Angela Merkel, spoke on Monday for the first time (see EUROPE 10582) of the idea of the EFSF working alongside the ESM. Germany's official, minimalist, negotiating position is a combination of the €200bn from the EFSF already earmarked with the €500bn planned for the ESM, in other words a total lending capacity of €700bn. Merkel says the EFSF could continue to operate until the three countries that have received cash have paid back their loans from it, at which point the ESM would be the only bailout fund in operation. The Financial Times says that the German government is prepared to agree to a combination of the remaining lending capacity in the EFSF (€240bn) and the €500bn in the ESM. (MB/transl.fl)