Europe agrees on financing for future bailout fund

AP News
Posted: Mar 21, 2011 3:31 PM
Europe agrees on financing for future bailout fund

The eurozone's 17 finance ministers agreed Monday on how to finance the region's future bailout fund, slightly lowering the contributions that poorer states have to pay into it.

Nations that use the common euro currency will give the new European Stability Mechanism a capital base of euro80 billion ($114 billion) and provide euro620 billion ($880 billion) in callable capital and guarantees, said Olli Rehn, the European Union monetary affairs commissioner.

The ESM will start in mid-2013, succeeding the eurozone's existing bailout fund, the European Financial Stability Facility. European policymakers hope the existence of a rescue mechanism for countries that run into financial trouble after 2013 will help counter any doubts over the credibility of the euro.

Investors were keen to know the details of the future fund amid doubts that Europe will have solved its debt crisis _ which has already pushed Greece and Ireland into multibillion-euro (dollar) bailouts _ by 2013.

The euro80 billion capital base allows the fund to act more like a bank, giving additional security to its creditors. The callable capital and guarantees would only have to be paid if a bailed-out country fails to repay its loans.

The euro700 billion ($994 billion) in overall contributions will give the ESM an effective lending capacity of euro500 billion ($710 billion). The overcapitalization is necessary to get a good credit rating for any bonds the fund issues, providing extra security in case countries that are currently contributing run out of money.

Ministers also decided to tweak the formula to calculate each state's contributions, giving economic output more weight than population and thus slightly lowering the burden on poorer countries. That follows demands by 10 poorer eurozone states, including Slovakia and Malta, which felt they were carrying an unfair burden compared to their economic strength.

German Finance Minister Wolfgang Schaeuble, who until earlier in the day had opposed changes to the formula, said the tweaks were so minimal _ changing his country's contribution by less than 0.1 percentage point _ that all finance ministers were able to agree.

On top of that, countries that receive aid from the new fund will pay interest rates that are, on average, 1 percentage point lower than rates in the current bailout fund.

Ministers did not make any final decision on how to increase the lending capacity of the current fund, which plans to increase from about euro250 billion ($355 billion) currently to euro440 billion ($625 billion). Schaeuble said the increased capacity would most likely come from countries raising their guarantees, based on the old contribution formula.

The ministers also left Ireland waiting for a decision on the interest rate it has to pay for the euro67.5 billion ($96 billion) rescue loan it received last November. Schaeuble said Ireland was not discussed and he was still waiting to hear what the country had to offer in return for a better interest deal.

The final decisions on the new fund will come at a summit of EU leaders Thursday and Friday.