EU FINANCE ministers were early today locked in high-stakes talks on a €600 billion rescue fund for distressed euro governments after a dire warning of mounting distress in the global market for sovereign debt.
The ministers hoped to strike a deal before the overnight reopening of Asian markets following the weekend break, setting the stage for a key test in European and American markets later today.
Sources briefed on the talks said the 16 leaders of the euro countries moved at their summit on Friday to advance emergency talks on a general rescue mechanism after hearing of severe concern that sovereign credit markets could freeze if decisive action was not taken.
“In the night, when the markets are opening, we cannot afford a disappointment,” said Swedish finance minister Anders Borg. “We now see herd behaviour in the markets that are really wolf pack behaviour.”
After a week of market turmoil – fanned by fear of “contagion” in the market for Spanish and Portuguese debt – the ministers hope to ease the pressure with a general rescue fund more than five times the size of the loan package for Greece.
On the table early today was the creation of a highly-conditional loan scheme similar to the Greek plan. The fund would be financed by the 16 euro countries, the International Monetary Fund (IMF) and the European Commission.
While many technical details remained to be resolved, the euro countries would agree in principle to extend bilateral loans worth as much as €440 billion if required to help a distressed country. The stance of Minister for Finance Brian Lenihan on this aspect of the proposal was unclear as the talk continued.
If such loans were raised according to each state’s shareholding in the European Central Bank – the division adopted in the Greek rescue plan – Ireland’s 1.6 per cent stake would see the Government providing €7.04 billion.
The IMF’s contribution would be €100 billion, although diplomatic sources said the Washington-based organisation did not want an explicit reference to the size of its commitment in any communiqué.
The European Commission would contribute €60 billion, which would extend an existing €50 billion scheme which helps non-euro countries to balance their books.
An earlier plan from the Commission fell after Germany, the Netherlands, Sweden and Britain blocked its proposal to release loans to distressed governments using funds it borrowed on private credit markets with the aid of guarantees from member states.
The meeting yesterday was delayed when the German minister Wolfgang Schauble was taken to hospital after an adverse response to new medication. The country’s interior minister Thomas de Maiziere dashed from Berlin to replace him.
Under discussion in separate talks involving the European Central Bank’s governing council is the prospect of the bank becoming a buyer of debt from euro area governments. The bank is said to favour such a move, although Germany resists it.
Sources briefed on the political engagements that took place before the summit of euro leaders on Friday attached great significance to a phone call to German chancellor Angela Merkel from US president Barack Obama. Until that time, they said, there was no indication that Dr Merkel was willing to lend her support for the immediate creation of a permanent rescue scheme.
Voters dealt a blow to Dr Merkel in a key German regional election yesterday amid anger over the Greek rescue, depriving her of a majority in the upper house of parliament.