EU rescue fund may be increased

The European Union will be considering whether to increase its current emergency rescue fund available for eurozone member states who find themselves in difficulty raising money on the international markets.

Although officially the EU has said that the current €440 billion fund is enough to cater for all the needs of the eurozone, unofficially many member states know that this is not the case if a large economy, such as Spain, would eventually need a bailout, similar to the one given to Greece and Ireland.

Writing in the Financial Times yesterday, the European Commissioner for Economic and Monetary Affairs Olli Rehn argued that the lending capacity of the eurozone’s financial rescue fund should be reinforced and the scope of its activity widened.

“We need to review all options for the size and scope of our financial backstops – not only for the current ones but also for the permanent European stability mechanism too,” Mr Rehn wrote.

Sources close to the Commission told The Times that finance ministers meeting in Brussels next week are expected to discuss the issue and may also decide to increase the fund, meaning each member state will contribute more.

Last May, following the near collapse of the Greek economy, Malta had to lend Greece €27 million out of its own pocket as part of a bilateral €110 billion rescue package agreed by the EU, the IMF and the Greek authorities. Malta had to borrow this money in order to make its contribution, although at the end of the three-year deal, the transaction should leave a positive balance on Malta’s public coffers as the island borrows at a favourable rate next to Greece.

Following the Greek bailout, the EU, together with the International Monetary Fund and its member states agreed on a more permanent €750 billion rescue facility put in place in order to be used should other EU member states find themselves in financial difficulty.

This facility consists of guarantees by the 27 EU member states and by the Commission in the form of collateral to raise credit on the international markets. The Maltese Parliament had passed legislation last June in order to make available €398 million in guarantees as part of its commitment to this fund.

However, this may not be enough now as there is increased speculation in Brussels that Portugal, Belgium and Spain might soon have to follow Ireland’s route.

Yesterday, Portugal issued €1.25 billion in 10-year bonds. The yield on Portuguese debt has hit record levels in recent days, although the pressure eased off this week, most likely as a result of European Central Bank purchases of government debt. Should the yield at auction be too onerous, Portugal is likely to ask for a bail-out.

On Tuesday, Portuguese Prime Minister Jose Socrates continued to insist his government was not in need of any assistance.

“Portugal won’t ask for any financial help because it’s not necessary,” he said.

Spain is this week also trying to raise some €2.5 billion in five-year bonds.

Meanwhile help is coming from outside the EU as Japan announced it was to buy a fifth of the eurozone’s first bond issue. Japanese Finance Minister Yoshihiko Noda said his government was to purchase more than 20 per cent of a bond offering by the European Financial Stability Facility, to take place later this month. The move comes in the wake of an announcement last week by China to buy Spanish bonds.