RESCUE FUND:EU OFFICIALS are racing to iron out technical issues surrounding a €750 billion rescue fund for euro countries after a late-night deal to lance rising pressure on the currency and its members.
There was considerable relief in Brussels as markets responded positively to a deal reached in the early hours yesterday at the end of an 11-hour negotiation between EU finance ministers.
The deal includes €440 billion in loan guarantees from the 16 euro countries, €250 billion from the International Monetary Fund and €60 billion from the budget of the European Commission.
A senior European Commission official involved in the talks suggested the scale of the €500 billion European contribution was somewhat arbitrary, a view shared in diplomatic circles.
“Probably if you have €440 billion and €60 billion it’s something nice,” the official said.
Diplomatic sources said ministers and other participants in the talks wanted to send a strong signal to markets by pledging a very large tangible figure to avert the threat of any sovereign default in the euro zone.
Any country that draws down emergency aid would have to take radical measures to correct their budget deficits, German chancellor Angela Merkel indicated.
“The access to the guarantees . . . will be linked to countries presenting budget consolidation programmes to the IMF and the EU, which will then be regularly inspected,” said Dr Merkel. “We must attack the problem at its roots . . . In this process, budget consolidation in all member states becomes extraordinarily important.”
The talks came after a deal providing emergency loans to Greece was swiftly followed by escalating pressure on Spain and Portugal over their large budget deficits and downward pressure on the euro. The finance ministers told both countries to deliver tougher austerity measures this year. New proposals from Madrid are expected tomorrow, with plans from Lisbon expected next week.
The talks on Sunday took place after dire warnings to euro leaders that there was mounting evidence of severe strain in sovereign debt markets.
“Nobody is thinking that this is a silver bullet but we’re hopeful there’ll be a bit of calmness in the market now,” another commission official said.
Finance ministers were under huge pressure to strike an agreement before markets opened yesterday after the leaders of the 16 euro states moved early on Saturday morning rapidly to advance plans for a massive rescue fund.
Having worked to complete the pact in time for the reopening of the Australian markets at 11pm Dublin time, it was agreed two hours later, minutes after the Japanese markets opened.
Diplomatic sources said the proposal to establish a dedicated “special purpose vehicle” to disburse loans to distressed countries – with the backing of member-state guarantees – emerged only late in the talks.
Numerous technical questions on the precise operation of the fund – which would be owned by member states – were still outstanding when the deal was done.
The ministers’ agreement was swiftly followed by a significant change of policy by the European Central Bank, which decided to start buying up government debt from euro countries.
“This morning’s agreement will ensure that any attempt to weaken the stability of the euro will fail,” said commission president José Manuel Barroso in a speech.
“It shows the determination of the whole EU to stand behind any of its member states when they are threatened with severe difficulties caused by exceptional circumstances beyond their control.”
This was a reference to an article in the EU treaty on which the European authorities will lean, as the commission makes €60 billion available to include euro zone countries in an existing fund which helps non-euro-zone countries balance their books.