Eurozone Clinches Trillion-Dollar Firewall Deal
Eurozone finance ministers reached a landmark deal on Friday to raise their debt firewall to more than one trillion dollars, as a budget crisis in Spain underlined the need for firm defenses.
Austrian Finance Minister Maria Fekter left a key meeting in Copenhagen to brief reporters on an agreement raising the eurozone firewall to "in total, over 800 billion euros" ($1.067 trillion).
"This 800 billion is a trillion US dollars and that is roughly the defined firewall," Fekter said.
Fekter said the 800 billion euros comprised 500 billion euros from the permanent ESM bailout fund that comes into effect in July, plus 200 billion in loans already pledged, plus another 100 billion in bilateral loans and EU funds.
The Eurozone’s two rescue funds -- ESM and EFSF -- will run in parallel until mid-2013, Fekter said. Two cash tranches would be paid into the ESM this year and a further two next year, she added.
The figure matched a pledge made on Thursday by the finance minister of Germany, Europe's top economy and paymaster, Wolfgang Schaeuble.
"It's convincing, it's sufficient," said Schaeuble at the time.
Irish Finance Minister Michael Noonan told reporters on the way into the meeting: "The market reaction to these is to the dollar amounts."
"So anything that gets you to a trillion dollars looks like a serious firewall and if you're talking 800 (billion euros), its over a trillion dollars and that is a very serious firewall."
Eurozone ministers have come under huge international pressure to build a convincing firewall.
The European Union's partners from Washington to Tokyo and including groups such as the International Monetary Fund want to see the Eurozone ring-fenced as effectively as possible against a new crisis which would affect the whole world.
The Organization for Economic Cooperation and Development (OECD) pressed this week for a one-trillion-euro pot, which OECD head Angel Gurria calls "the mother of all firewalls."
And leading and emerging nations of the Group of 20 (G20) have said they will only consider lending more to the IMF to combat the Eurozone crisis if the bloc first stumps up enough cash to tackle their own problems.
Highlighting the main reason to bolster the firewall -- fears that the sovereign debt crisis that started in Greece could spread to larger economies such as Italy and Spain -- were fresh concerns about Spanish fiscal strains.
Hours after a general strike, which burst into violence in places, Spain's right-leaning government was poised to unveil huge cuts on Friday to meet European rules.
Unions said nearly a million people took part in Madrid alone to denounce labor reforms, spending cuts and soaring unemployment in a country mired in recession. The interior ministry put turnout in Madrid at just 85,000.
"Spain is in a very difficult situation," said EU Economic Affairs Commissioner Olli Rehn, adding that Madrid had the strength to fix its fiscal position.
Spanish borrowing costs have risen in recent weeks after Madrid admitted it had missed its 2011 deficit target of 6.0 percent of gross domestic product, reporting 8.5 percent instead.
"We had a very severe budgetary slippage in 2012 but Spain will cease to be a problem," said Finance Minister Luis de Guindos in Copenhagen.
The final firewall figure agreed on was however short of what some -- including the European Commission and France -- had demanded.
Many called for combining the zone's two rescue funds to create a total firewall of 940 billion euros.
But Germany, facing domestic public opposition to paying in more to what some Germans see as a "bottomless pit" in the eurozone, rejected this solution.
And some 300 billion euros of the headline figure are made up of loans already pledged.
Ministers will now tackle other thorny issues, including appointing a new member of the six-member Executive Board of the European Central Bank.
The head of Luxembourg's central bank, Yves Mersch, is favorite to get the nod, but the decision may yet be delayed until the French election on May 6.