Euro Leaders Delay Decision On Bigger Bailout Fund

Euro Leaders Delay Decision On Bigger Bailout Fund
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The leaders of the 17 countries that use the euro have delayed a decision on whether to give their bailout funds more firepower until later in March, European officials said Tuesday. Eurozone leaders were expected to meet Friday afternoon to decide whether the currency union’s bailout funds would be allowed to give more than euro500 billion ($669 billion) in loans.

The decision was highly anticipated as there are concerns that the eurozone’s safety nets – which have already bailed out Greece, Ireland and Portugal – are too weak to support large struggling countries like Italy or Spain.

The European Commission – the EU’s executive arm – the International Monetary Fund and several euro countries want the new, permanent bailout fund, called the European Stability Mechanism, to run in parallel with its predecessor, the European Financial Stability Facility.

Under current plans, the EFSF would stop operating when the ESM comes into force in July and all its commitments to Greece, Ireland and Portugal would have to be subtracted from the ESM’s euro500 billion capacity. That would allow the ESM to give out only around euro320 billion ($428.42 billion) in loans.

Allowing the funds to run in parallel could take the overall lending capacity to around euro750 billion ($1 trillion). However, Germany, the eurozone’s largest economy and the biggest contributor to both bailout funds, has so far resisted such a move.

“The decision (on the bailout funds) is not ready to be taken yet,” said one official. The official was speaking on condition of anonymity to discuss the eurozone’s internal planning.

The delay of the decision on the bailout funds is yet another reminder of the slow pace of decision-making in the eurozone’s two-year-old debt crisis. Ever since the EFSF was set up in May 2010 economists have noted it was too small to convince investors that bonds from vulnerable countries like Italy and Spain were a safe bet.

Since then, euro leaders have taken several decisions to boost the fund’s capacity, but none of them has fulfilled the demands made by the European Commission and the IMF. Last weekend, finance chiefs from the Group of 20 biggest economies made it clear that they would not commit to increasing the IMF’s resources – which would reinforce the eurozone’s safety nets – until the currency union has done its part by boosting its own bailout funds.

Any increase in the funds’ capacity would require parliamentary approval in most euro countries. Richer states in the eurozone, however, are reluctant to go back to their lawmakers for yet more money just after committing to a second massive rescue for Greece.

Because of that, European Council President Herman Van Rompuy decided not to call a special summit of eurozone leaders that had been planned for Friday afternoon, a second official said.

A decision on the bailout funds will be taken later in March, either at a meeting of eurozone finance ministers on March 12 or, if necessary, at an extra summit of euro leaders, the first official said.

A separate meeting of the 27 European Union leaders on Thursday and Friday will take place as scheduled.

At the EU meeting, leaders will sign a new treaty setting out tighter spending rules for the eurozone and are expected to elect Van Rompuy for a second term as president of the European Council. He is also expected to be elected as president of the eurozone, making him the chairman of the summits of euro leaders.

Associated Press

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