EU Finance Ministers Agree to Increase Firewall to 940billion Euro

EMU  finance ministers will raise the combined firepower of the region’s two bailout funds to a potential €940bn from 500bn today, a draft statement showed.

Together they will increase the EFSF/ESM safety net to at least €700bn and pledge an extra 240bn if required that could be used until mid-2013, according to the statements published

The 17 ministers today will make issue the formal release after their meeting Copenhagen, the option is a  compromise between Germany’s reluctance to pledge more money for euro area bailouts and the need to reassure markets that money invested in eurozone bonds is safe.

Increasing the eurozone’s financial safety net is a pre-condition for most countries from the G20 group of the biggest developed and developing economies to contribute more money to the International Monetary Fund, to further calm markets.

Germany, the eurozone’s dominant economy, has been against increasing the bailout capability in advance, saying it was ready to give more money when needed and noting markets have calmed down from the peak of the debt crisis.

Investors concerns about Spain, which badly missed its budget deficit target in 2011 and negotiated a softer target for 2012 with eurozone ministers, have sent the country’s bond yields higher and put the bailout capability discussion back on the table. Today, Spain is scheduled to release their new draft budget.

Together, the ESM and the existing EFSF program would therefore create a firewall of €700bn.

But if the €700bn were to prove insufficient to finance bailouts in the period between July 2012 and July 2013, eurozone leaders can agree to raise that amount by the yet uncommitted lending capability of the EFSF — €240bn.

The ESM’s capacity will be based on €80bn of paid-in capital and €620bn of callable capital. The first agreement was the paid-in capital would be supplied over 5 years. To help the ESM reach maximum capacity earlier, eurozone leaders agreed to pay in the cash over 4 years, with the 1st 2 tranches delivered already in 2012. This would give the ESM a preliminary lending capacity of €200bn in 2012, €400bn in 2013 and the full five hundred in 2014.

Eurozone officers note nevertheless that should the ESM need its full lending capacity earlier, the capital can be raised swiftly.

The ministers are also to assert that they’re going to continue to check the adequacy of the ESM capital “as appropriate” and “in particular when used EFSF guarantees are liberated once the financial aid is repaid”.