Euro zone governments have hammered out a deal on a permanent €500-billion ($696-billion) bailout fund for debt-crippled members after resolving a key dispute with poorer states.
The new European Stability Mechanism, which will come into force in mid-2013, will have a capital base of €80-billion and access to another €620-billion in callable capital and guarantees that would only kick in if a bailout recipient was unable to meet its loan commitments. The fund's lending capacity would be capped at €500-billion.
The permanent fund is regarded as essential to ensure the future of the euro as a viable regional single currency and give the markets confidence that there will not be a mad scramble to mount ad hoc rescues if another Greece or Ireland debt crisis should surface.
Because proposed tough fiscal, labour market and other reforms have been watered down, the new funding mechanism may not be enough to assuage investors' concerns about growing imbalances in the euro zone and repeated debt crises.
"It's not going to really reassure the markets," said Marko Papic, senior European analyst with Stratfor, a global intelligence firm based in Austin, Tex.
Still, the euro has been climbing against the U.S. dollar and other major currencies in reaction to rising instability in the Middle East and elsewhere, the Libyan fighting and the disasters in Japan.
"Even though the crisis in Libya and certainly in the [Persian]Gulf would have serious adverse effects on many European economies, on the flip side, investors have realized that there are greater problems in the world than the Portuguese budget crisis," Mr. Papic said.
Under a compromise, contributions to the new fund by poorer members of the 17-country single-currency club will be reduced slightly, after a change in the formula. Slovakia, Estonia, Malta and seven other countries had objected to a plan that would have seen them pay more per capita than such powerful members as Germany. Finance ministers agreed to attach more weight to economic output than size of population in calculating the tabs for individual countries.
German Finance Minister Wolfgang Schaeuble had adamantly opposed any alterations, but finally capitulated, making an agreement possible. Germany's share will rise marginally to 27.1 per cent of the total financing cost.
"The common European currency is mainly in Germany's interest," Mr. Schaeuble told reporters in Brussels. "The failure of the European currency - and the exit of one member would be such a failure - would have incalculable consequences for Germany."
The new fund will do nothing to resolve financial crises arising before mid-2013. Any bailout would have to come from the existing temporary fund, the European Financial Stability Facility (EFSF), set up last May in the wake of the Greek rescue. Ireland is the only country so far to tap it, to the tune of €7.5-billion. The EFSF has access to €220-billion of European capital, plus additional funding from the International Monetary Fund of up to €250-billion and €60-billion directly from the European Commission.
So a widely forecast bailout of Portugal this year would not prove a problem, analysts said. But finance ministers have failed to resolve differences over how to expand the facility, which would prove necessary if a larger economy such as Spain runs into a fiscal crisis, as financing costs rise and economic conditions worsen in the face of climbing energy costs and weaker consumption.