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25th Sep 2022

EU considers increase of bail-out fund, as debt crisis rumbles on

  • Rehn - Greece was the first eurozone country to seek a bail-out last year (Photo: consilium.europa.eu)

Against a background of growing fears that the eurozone's rescue fund would be insufficient should Spain or Belgium knock on its doors, the European Union's economy chief has called for a hike in the effective lending capacity of the EU's bail-out mechanism.

"We need to review all options for the size and scope of our financial backstops - not only for the current ones but also for the permanent European stability mechanism too," EU economics and monetary affairs commissioner Olli Rehn wrote on Wednesday in an opinion piece in the Financial Times.

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The commissioner issued the call after member-state representatives met in the European capital to discuss proposals to boost the fund ahead of a meeting of European finance ministers next week.

Mr Rehn also issued a stark warning that for all the deficit-slashing austerity measures that European states have so far imposed, it is not enough.

"There is insufficient ambition and a lack of urgency in implementation. That needs to change," he wrote.

The commissioner called for Europe to embrace structural reforms to bring an end to the debt crisis this year.

He wants to see changes to tax and benefit systems, reform of labour markets and pension provision, a loosening of business regulation and more investment in innovation.

"This calls for a comprehensive response by the whole EU and for bold fiscal and structural measures in all member states," he said.

He issued the call ahead of the unveiling of the European Commission's first annual growth survey, essentially a template with spending recommendations for EU member states, published as part of an effort to bring European-level coherence to national budgetary plans.

On Tuesday, representatives of EU member states in Brussels also considered an increase in the effective lending capacity of European Financial Stability Facility (EFSF).

While the EFSF kitty amounts to €440 billion, as more countries become borrowers from rather than guarantors of the fund, the actual capacity of the fund currently sits at roughly €250 billion.

Some governments favour a hike in the effective lending capacity to the full €440 billion, while others are looking to a doubling of the fund. But to do so would require further credit guarantees from eurozone states in a less precarious situation, notably Germany and France.

No decision was taken ahead of a finance ministers' meeting next Monday, however.

Member states are considering expanding the role of the EFSF to permit the common purchase of government bonds, an exercise which is currently the competence of the European Central Bank.

According to EU sources, any decision on the matter hinges on the result of government bond auctions this week, particularly Portugal's trip to the market.

On Wednesday, Lisbon is to attempt to raise up to €1.25 billion in 10-year bonds from investors. The yield on Portuguese debt has hit record levels in recent days, although the pressure eased off this week, most likely as a result of ECB purchases of government debt. Should the yield at auction be too onerous, Portugal is likely to ask for a bail-out.

On Tuesday, Portuguese Prime Minister Jose Socrates continued to insist his government was not in need of any assistance. "Portugal won't ask for any financial help because it's not necessary," he said.

Spain for its part on Thursday is to try to raise some €2.5 billion in five-year bonds.

Also on Tuesday, Japan announced it was to buy a fifth of the eurozone's first bond issue.

Japanese finance minister Minister Yoshihiko Noda said his government was to purchase more than 20 percent of a bond offering by the EFSF, to take place later this month.

The move comes in the wake of an announcement last week by China to buy Spanish bonds.

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