OECD calls for €1 trillion debt fund for eurozone

The eurozone came under new pressure to boost the firepower of its debt emergency fund yesterday, with the 34-nation OECD pressing for a safety net of at least €1 trillion.

“The European firewalls should be expanded further and made more credible to restore confidence,” the Organisation for Economic Cooperation and Development said in a report on the eurozone economy.

“To ease market tensions, the funds should be available on a scale sufficient to withstand possible future requests for financial assistance,” said the Paris-based economic forum.

Eurozone finance ministers are meeting on Friday and Saturday in Copenhagen to decide whether to increase the size of its debt rescue mechanism amid resurgent concerns about the financial health of Spain.

The OECD said the refinancing needs of vulnerable eurozone nations could top €1 trillion over the coming two years and in addition contributions may be necessary to recapitalise banks.

“Although it is unclear that funds on this scale would ever need to be drawn down, the availability of credible firewalls may enhance confidence,” the report said.

“Ultimately, the scale and form of funds needed will depend on how confidence returns, as well as economic and financial developments.”

OECD secretary general Angel Gurria, warning that the current commitments to the fund were not enough to restore market confidence, said a “credible” firewall would give governments “breathing space” to focus on reviving growth.

“Make it large, make it prominent,” she told a news conference alongside European Economic Affairs Commissioner Olli Rhen.

“We are not out of the woods,” Ms Gurria said, referring to the debt crisis that has festered for more than two years.

The OECD’s call has little chance of being heard, however, with Germany backing a smaller increase after months of international pressure to back a bigger fund.

Eurozone governments have debated whether to combine the lending capacity of the temporary European Financial Stability Facility, used to rescue Portugal, Ireland and Greece, with the permanent European Stability Mechanism.

German Chancellor Angela Merkel said on Monday that Berlin was now open to combining €500 billion from the ESM with some €200 million already promised to debt-ridden countries within the EFSF.

This option would give the eurozone around €700 billion on paper, but in reality it would have a lending capacity of €500 billion since the rest is already committed to Greece, Ireland and Portugal.