Copenhagen, 29/03/2012 (Agence Europe) - The French economy minister, François Baroin, argued on Thursday 29 March ahead of the Eurogroup meeting (which will be deciding on the scale of the eurozone nations' bailout fund) for the biggest lending capacity possible to head off any danger of the sovereign debt crisis spreading to other countries (see EUROPE 10584). On the BFM radio station, Baroin said the bailout was like nuclear weapons in the military arsenal - there as a deterrent. He said he wanted the biggest firewall possible, because the higher it is, the less likely it is that vulnerable countries will come under attack from speculators on the money markets. After a period of calm following the ECB's injections of cash into the banking system and the agreement on the second Greek bailout, concern is rising in the eurozone again due to the budget problems of Spain.
The maximum possible size of the eurozone's firewall is €940 billion if one adds the full capacity of the current European Financial Stability Facility (EFSF) to the €500bn capacity of the European Stability Mechanism (ESM) that comes into force on 1 July 2012, but Germany - backed by Finland and Estonia - wants the smallest possible firewall by letting the EFSF continue in operation - it had already pledged to lend out some €200bn - alongside the gradually increasing size of the ESM. This amounts to a cap of €700bn.
A compromise solution might be to freeze the €240bn of the EFSF, but make it possible to use it in the event of emergency if heads of state so agree. This would mean that the EFSF's remaining lending capacity could provide preventative loans to countries whose banks are in trouble - such a decision would not need the prior agreement of eurozone heads of state. Another option is to let the EFSF continue beyond its June 2013 expiry date.
The speed at which countries pay in their contributions to the ESM - totalling €80bn - might be a negotiable variable. The treaty establishing the ESM stipulates that the initial capital be paid in five annual instalments of €16bn and this must be done at such a speed that the combined EFSF/ESM lending capacity is never less than €500bn. Earlier this month, eurozone leaders agreed to speed up payment of the first two instalments and this could be provided, possibly, even more quickly. The idea of payment of the full amount in three instalments has been mooted - €32bn in 2012 and 2013 and €16bn in 2014.
Head of the Eurogroup. Baroin said that agreement has not been reached by Europe's bankers on who should replace Jean-Claude Juncker at the helm of the Eurogroup, so the negotiations were continuing. The financial press suggests that German Finance Minister Wolfgang Schäuble is the frontrunner, but an official decision is not expected until June 2012. There is plenty of horse-trading going on behind the scenes, because the appointment is connected with other big jobs in the financial world. The Eurogroup is expected to recommend that the governor of the Bank of Luxembourg, Yves Mersch, should be appointed to the ECB Executive Council, and the heads of the EBRD and the ESM also need to be appointed.
The German Bundestag has started examining the budget pact and the intergovernmental treaty establishing the ESM. Chancellor Angela Merkel needs the opposition's support for ratification of the budget pact, but the German Left says it will only vote in favour if the German government does more to get a financial transaction tax introduced - another big issue on the ECOFIN agenda. (MB/transl.fl)