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Euro Zone in deal for $933bn rescue package

Copenhagen, March 31, 2012

Euro zone finance ministers have agreed to increase their financial firewall to 700 billion euros ($933.7 billion) to ward off a new flare-up of Europe's sovereign debt crisis, drawing a positive initial reaction from markets and G20 partners.

The 17-nation currency area agreed to combine two rescue funds to make 500 billion euros of new funds available in case of emergency until mid-2013, on top of 200 billion euros already committed to bailouts for Greece, Ireland and Portugal.

The executive European Commission had proposed raising the total to 940 billion euros, with 740 billion in new money, but EU paymaster Germany resisted a bigger increase.

International Monetary Fund chief Christine Lagarde welcomed the decision, saying it would help the global lender raise more resources to fight contagion from the European crisis if needed.

The euro rose and Spanish bond yields fell as investors weighed the firewall move and a draconian Spanish austerity budget.

Spain unveiled savings worth 27 billion euros this year, roughly half from spending cuts and half from revenue increases, in a bid to convince European partners and investors it can rein in its budget deficit.

"Today's decision is a classic European compromise. It was as far as the German government was willing to go and it was the minimum most other euro zone countries were expecting," said Carsten Brzeski, economist at ING bank in Brussels.

"Obviously, a bigger increase along the lines of earlier discussed options could have sent a stronger signal and would have been more convincing," he said.

"With today's increase, the role of the European Central Bank as euro zone fire brigade is likely to continue."

The ECB averted a looming credit crunch in December by flooding euro zone banks with cheap three-year loans, calming bond markets and buying time for euro zone economic reforms.

An official statement said the ministers had lifted the combined lending capacity of the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) to 700 billion euros from 500 billion.

"The current overall ceiling for ESM/EFSF lending ... will be raised to 700 billion euros," it said. "All together, the euro area is mobilising an overall firewall of approximately 800 billion euros, more than $1 trillion."

The higher number was arrived at by adding in bilateral loans that euro zone countries granted to Greece under a first bailout, money disbursed by the EFSF and from a smaller third fund controlled by the European Commission.

The ESM will have only 200 billion euros in its first year from July since capital is due to be paid in over three years. Yesterday's decision means 240 billion of uncommitted EFSF funds could be tapped if necessary until the ESM becomes bigger.

French Finance Minister Francois Baroin said the decision put the euro zone in a strong position to persuade other major economies next month to increase IMF resources. The US, China, Brazil and Britain had all said the euro zone should first do more to help itself.

Mexico, chairing the G20 major economies, said the European agreement was an important step towards boosting IMF funding.

"It's a major effort on the part of Europe, in line with what was discussed during the last meeting of G20 ministers," Mexican Deputy Finance Minister Gerardo Rodriguez said.

"Now we have to work within the G20 for additional resources for the IMF. That was the agreement," he added.-Reuters




Tags: funds | Euro zone | capacity | G20 | Debt crisis |

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