Eurozone may raise bailout fund capacity to near 700 billion euros

The eurozone may raise the combined lending power of its bailout funds to close to 700 billion euros from 500 billion, in a trade-off between German opposition to committing more money and the need to calm markets, eurozone officials said. Eurozone finance ministers and central bankers will discuss the size of their bailout capacity - the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) - in Copenhagen on March 30-31.
The 440 billion euro ($575 billion) EFSF and the 500 billion ESM now have a combined lending ceiling of 500 billion euros, which means that in the 12 months from July 2012 when they co-exist, they cannot lend more than that between them. The size of the eurozone''s bailout fund is of keen interest to ministers of the Group of 20 economies, who are due to meet again in April. They want to stop the euro debt crisis dragging on the world economy but are reluctant to boost the bailout resources of the International Monetary Fund unless the eurozone does more to increase its own firewall.
Markets have long been pushing for a higher lending capacity to make sure there is enough money to bail out even large eurozone economies like Italy or Spain, should that be necessary. But Germany has been adamantly opposed to such an increase. "Given that the situation is difficult in several countries, it seems to me the easiest option is the least ambitious one," one senior eurozone official said.
Out of its 440 billion euros of lending power, the EFSF has already committed 192 billion euros to bailouts for Greece, Ireland and Portugal. "One possibility would be to say the EFSF has made commitments of 192 billion euros, but the ESM should start afresh with 500 billion," the senior eurozone official said.
"The combined lending capacity would go from 500 billion to 692 billion - roughly 700 billion. That is one of the options under discussion and that is probably the least ambitious and therefore politically the easiest," the official said. A second eurozone official confirmed this was a likely solution, although both officials noted several options were being examined and the final decision was still uncertain.
EU Economic and Monetary Affairs Commissioner Olli Rehn has called for a joint lending capacity of around 750 billion euros, calculated as the full 500 billion of the ESM when it comes on line in July and the 248 billion of yet uncommitted EFSF funds.
But this would require all eurozone countries to pay in all their capital contributions to the ESM, now meant to be spread over four years, in one go, as well as keeping their guarantees for the EFSF''s remaining 248 billion lending. "That will not happen, unless there is a clear need," the first senior official said.
"That would be totally out of line with the market at the moment. At the moment one does not see any need for more money. The markets are calming down," the official said. "You can only talk about potential needs. Six months ago people were talking about Italy and Spain, but all that has disappeared. They can refinance themselves at rates that are sustainable, so it is hard to build a case today that it (the bailout capacity) must go up," he said.
GRADUALLY BUILDING UP CAPACITY Eurozone countries have agreed to pay two tranches of ESM capital by July, giving the ESM an initial lending capacity of only 200 billion euros. Together with the 192 billion of committed EFSF funds, that would still be well below the existing joint ceiling. If further capital tranches are paid on an annual basis, the ESM would reach 500 billion only in four years. But officials stressed the full amount could be reached quickly if needed. "The effective capacity is determined by paid in capital and the current thinking is to have two tranches this year," a third eurozone official said.