Faced with an unrelenting debt crisis that has reached the heart of Europe, eurozone finance ministers unveiled a larger, revamped version of the bailout fund they hope will buy them enough time to salvage their battered currency union.
The Europeans also signalled they will seek more help from the International Monetary Fund in an effort to thwart bond-market attacks that have driven the cost of government financing to unmanageable levels across much of the region. Italy’s borrowing costs soared to nearly 8 per cent on Tuesday, well above the 7 per cent considered sustainable and a record for its dozen years in the euro.
The bailout fund would be boosted through new investment structures involving public and private money. The ministers also agreed to guarantee up to 30 per cent of new debt issued by troubled governments.
But European officials could not say how much more firepower the bailout fund, known as the European Financial Stability Facility, would be able to deploy. The IMF has warned that more resources to tackle the debt crisis would have to come from Europe. And skeptical analysts doubt the changes will be enough to stem the speculative attacks in the market that have driven the most fiscally troubled governments to the brink of collapse.
“It’s impossible to give one number, it’s a process,” EFSF chief executive Klaus Regling said, refusing to be pinned down to an earlier stated goal of €1-trillion. “We will need money if countries make a request, and market conditions change over time.”
Luxembourg Prime Minister Jean-Claude Juncker, who heads the eurozone ministers’ group, said: “We haven’t lowered our ambitions, but the conditions have changed, so it will probably not be €1-trillion but less.”
Early reaction in the markets was muted. The euro was largely unchanged, reflecting a view that the Europeans repeatedly talk a better game than they have delivered throughout the course of the two-year-old crisis.
“Juncker came out and stated what analysts have known for a long time, which is that if you start with nothing, and you multiply it by a gazillion, you still come up with nothing,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.
The worry is that even the new larger, leveraged version of the bailout fund and an accompanying bond-insurance scheme simply will not be big enough to stop the speculative attacks in the bond market that have raised the spectre of debt restructurings or defaults that could spell the death knell for the common currency.
“We’re no further forward because we don’t know who is going to invest [in the bailout fund]and how much the IMF will be involved,” said Michael Hewson, a market analyst in London at CMC Markets. Officials “were deliberately short on detail on this point. As such, the credibility gap remains and wasn’t helped by German Finance Minister Wolfgang Schauble admitting that it [the EFSF]wouldn’t be able to contain the debt crisis.”
Economists have repeatedly argued that the solution lies in turning the European Central Bank into a lender of last resort with unlimited capacity to buy euro-zone sovereign debt and in replacing the unloved debt of various governments with eurobonds guaranteed by the strongest countries in the union. Germany flatly rejects both avenues.