Europe must increase the size of a debt crisis fund that was set up to rescue countries in trouble, the EU’s economic affairs chief said yesterday amid fears Portugal will need a bailout.
The eurozone created the €440 billion European Financial Stability Facility last May to provide cover for weak economies after Greece was rescued from the threat of bankruptcy.
“We must ensure that the financial support mechanisms put in place last May are fit for the purpose,” European economic and monetary affairs commissioner Olli Rehn wrote in the Financial Times.
“The effective lending capacity of the current European financial stability facility should be reinforced and the scope of its activity widened,” he wrote.
“Here 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,” Rehn wrote.
The European Union agreed last month to create a permanent crisis mechanism that will replace the EFSF when it expires in 2013.
The temporary fund totals €750 billion when contributions from the entire EU and the International Monetary Fund are added.
But the eurozone’s real contribution is under €440 billion. Its lending capacity is estimated at €250 billion because the rest of the war chest would be needed as collateral to borrow money on the markets at a low rates.
Europeans are weighing the possibility of bringing the EFSF’s real capacity to €440 billion, which would mean a significant increase in the fund and contributions from eurozone states, according to the Wall Street Journal and Germany’s Die Welt newspaper.
Another idea being invoked is to allow the fund to buy the public debt of troubled economies to ease the burden on the European Central Bank, which has been buying sovereign bonds to keep the rates of countries like Portugal low.
Talk of boosting the EFSF came as the borrowing costs of Portugal rose to dangerous heights, with fears growing that Spain could be dragged into the crisis.
Japan has said it would support bonds from the rescue fund when its initial issue takes place.
A Spanish bailout would dwarf the bailouts shelled out for Greece and Ireland. Spain’s economy is twice that of Greece, Ireland and Portugal combined.