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Eurozone boosts anti-crisis firewall to one trillion dollars

PublishDate:2012-06-11 Source: Author:

Eurozone ministers hailed a deal Friday to boost their firewall against the debt crisis to more than a trillion dollars but analysts were quick to pounce on "window dressing" to pad out the figures.

Under intense international pressure to combat the two-year crisis and with fresh Spanish budget woes underscoring the need not to let down their guard, finance ministers sealed an agreement aimed at reassuring financial markets.

"All together, the euro area is mobilising an overall firewall of approximately 800 billion euros, more than $1 trillion," said a joint statement from the 17 finance ministers of the eurozone bloc.

However, on close inspection, it turned out that some 300 billion euros of the headline figure was composed of loans already pledged to debt-wracked countries, giving only 500 billion euros in untapped funds.

And ministers agreed that the maximum lending capacity of the new combined bailout pot would be 700 billion euros, with the extra 100 billion euros cited coming from already pledged bilateral loans and a special EU fund.

Nonetheless, the head of the International Monetary Fund, Christine Lagarde, welcomed the deal and said it would "support the IMF's efforts to increase its available resources for the benefit of all our members."

The United States also commented positively.

"Today's announcement by the Eurogroup reinforces a trajectory of positive efforts to strengthen confidence in the euro area," US Treasury spokeswoman Natalie Wyeth said in a statement.

"Over the last several months, European leaders have made significant progress in addressing the crisis, and we welcome their unequivocal commitment to reinforcing their currency union," Wyeth said.

"We also look forward to continuing discussions in the G20 about how best to restore the global economy to strong, sustainable and balanced growth," she added.

Joerg Asmussen, a top European Central Bank official, hailed the deal as "significant" and said: "I think now we Europeans can travel to the Spring meeting (of the IMF) having done our homework on European firewalls."

But he warned that "a firewall is no substitute for reform".

Ministers were under huge international pressure to clinch a deal that top and emerging G20 economies have said is the precondition for boosting their own contributions to the IMF to aid the eurozone.

But many analysts were sceptical.

"It is a load of window dressing," Carsten Brzeski, senior economist at ING bank in Belgium, told AFP.

The deal is a "classic European compromise" with extra elements added on "to present the one trillion number to financial markets", he said.

"This so-called firewall is about as much use as a chocolate fireguard," said Michael Hewson at CMC Markets.

"The bottom line, is unless EU leaders mobilise a firewall in excess of 1.0 trillion euros, doubts will remain about their ability to prevent a contagion," he added.

Nevertheless, European and US stock markets were firmer Friday after news of the deal.

Ministers seemed to insist on the psychological figure of one trillion dollars, with Ireland's Michael Noonan calling it a "very serious firewall".

Highlighting the need to strengthen the euro's defences against a possible spreading of the crisis to economies such as Italy and Spain, the government in Madrid agreed a new budget with sweeping cuts to reduce its deficit.

Spain unveiled some 27 billion euros worth of spending cuts and tax hikes as it sought to reassure markets it will get its finances under control, with the top EU economic official Olli Rehn acknowledging Spain was in "a very difficult situation".

The new budget in Spain came after a general strike Thursday which turned violent at times amid protests against austerity measures and labour market reforms.

And in a reminder that the crisis has not disappeared from where it started, Greece's leader unnerved ministers by raising the spectre of a third bailout package for his debt-mired country.

Even the 800 billion euros package fell short of what was demanded by the Organisation for Economic Cooperation and Development, which called for one trillion euros -- what head Angel Gurria called the "mother of all firewalls".

It also fell well short of demands by the European Commission and France, who wanted something closer to 940 billion euros but came up against German resistance.

German Finance Minister Wolfgang Schaeuble said the size of the firewall was less important than reforms. "You can put 10 trillion in (but) if you don't solve the problems, there's no benefit," he told reporters.

Even the communication of the deal resulted in somewhat of a farce.

To reporters' surprise, Austrian Finance Minister Maria Fekter left the closed-door meeting, marched into the media centre and revealed the 800-billion-euro agreement.

This infuriated the head of the Eurogroup, Luxembourg Prime Minister Jean-Claude Juncker, who was due to announce the deal at a news conference minutes later.

Juncker, said by one EU diplomat to be "furious" at the leak, promptly scrapped the news conference.

Fekter later apologised, sources said.

But it was not clear whether Juncker, a veteran of hundreds of EU meetings, was mollified.

"If you reveal decisions when they have not yet been taken, then I don't need to do a press conference," he told French daily Le Monde.

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