Eurozone finance ministers called on Monday for an increase in the effective lending capacity of the currency bloc's rescue fund, but EU paymaster Germany said there was no urgency and it would be March before a firm plan was in place. Growing realisation that a deal to widen the bailout fund was not imminent caused the euro to retreat on Monday from a one-month high reached after successful debt auctions by Portugal and Spain last week.
Dutch Finance Minister Jan Kees de Jager said it was vital that eurozone governments under pressure forge ahead with structural economic reforms and deficit-cutting to make debt levels sustainable. It was also important that the full amount earmarked for states shut out of credit markets be available if required, not the smaller amount that can actually be tapped now because of the need to put cash aside, he said.
"We have an emergency fund in place. We will look if it needs an increase... so as to have 700 billion euros ($931.8 billion) available, instead of a lower amount," De Jager said on arrival for the monthly meeting of the 17-nation Eurogroup. A Reuters poll of bank analysts across Europe found most expect eurozone policymakers eventually to increase the firepower of the European Financial Stability Facility by 260 billion euros to 700 billion.
But German Finance Minister Wolfgang Schaeuble said that with bond markets calmer, there was no rush to take action now and work was being prepared for a late March EU summit. "There will not be results today, the market developments in the last week have, thank God, taken any urgency out of these discussions," he told reporters.
The European Commission and the European Central Bank called last week for the region to boost the effective capacity of the rescue fund - the European Financial Stability Facility - as well as expanding its scope of operations. ECB President Jean-Claude Trichet reiterated the central bank's call for improvement of the fund "qualitatively and quantitatively".
By qualitative enhancement the ECB most likely means taking over the purchases of government bonds on the secondary market, now done by the central bank, ECB Governing Council member Athanasios Orphanides indicated. If the EFSF "were to buy government bonds, and that improved the functioning of the monetary policy transmission mechanism, that might render some of the ECB's non-standard measures no longer necessary," Orphanides told Bloomberg in an interview. Germany has so far opposed several proposals for widening the EFSF's role raised by the European Commission and other countries such as bond-buying in the secondary market, providing standby credit or lending to banks.
The ECB disclosed that it bought 2.3 billion euros in eurozone government bonds last week, its biggest weekly purchase for more than a month. The buying helped calm markets, enabling Spain and Portugal to stage successful auctions.
Madrid cancelled another planned bond auction on Monday and decided to place long-term debt through a syndicated issue instead, drawing a hefty 9 billion euros in orders. Risks premiums on Spanish and Portuguese debt widened and one analyst said Spain's announcement could add a new layer of uncertainty to an already tense debt market. It may also, however, help Spain sell more debt while the going is relatively good.