Race against time to establish euro rescue fund

FINANCE Ministers were working against a tight deadline last night to set up a European rescue fund before the markets opened this morning.

They needed to have full agreement on what they are referring to as a European Stabilisation Mechanism to reduce the influence of the speculators that have threatened the existence of the euro in the past few weeks.

The main task was to set up a fund drawing on the European Commission and the member states that could be used to help countries that can no longer go to the markets.

Vice president of the European Central Bank Lucas Papademos attended the Brussels meeting while the bank’s executive committee met in Frankfurt.

The bank is independent of the member states, but it has been under pressure to take certain steps. Many expect that they will now agree to take on debt from distressed governments, in a move known as quantitative easing, which is tantamount to printing money.

As the German cabinet was reported to be holding a special meeting to discuss the new fund, diplomats insisted that there was no one step to resolve the crisis, no silver bullet.

Instead it would be a series of steps in an attempt to get ahead of the markets and insist countries deal with their debt and deficit problems.

Following the emergency meeting of EU leaders on Friday night, the European Commission put forward two proposals on setting up stand-by funds.

The first was that the existing balance of payments fund worth €50 billion operated by the commission to help countries having problems would be extended and opened up to all countries who required it.

Whatever extra money the commission has in their budget – estimated at about €10 billion – would be added to this and there was a debate on whether they could use the total to borrow additional funds from the market.

The current fund has been used to help Hungary, Romania and Latvia, all non-euro countries, when their governments ran into trouble over the past two years with their deficits.

They were also discussing setting up a second mechanism consisting of inter-governmental bi-lateral loan guarantees that the commission could use to raise much more money, some believe around €1 trillion.

This proposal was creating much more division between the member states, with Britain insisting it would not be part of it.

“We will not agree to a mechanism that leaves us liable,” British treasury sources said.

The Germans also had issues which were not helped when the governing coalition looked to have lost yesterday’s North Rhine-Westphalia regional elections and with it control of the upper houses.

“There are significant legal issues involved here. We are in unchartered territory and it will need careful choreography,” one official said.

The Finance Ministers agreed that countries need to rein back their budget deficits quicker than they had agreed to so far. But Irish sources said this does not apply to Ireland as the Government has already announced specific measures for next year.

“Credibility is not an issue for Ireland,” he added.

The ECB has been reluctant to use quantitative easing to date, believing it will lead to inflation, forcing the ECB to raise interest rates, adding to private sector debt. However, it would help reduce government debt.

Portugal needs to raise between €300 million and €1bn on the open market on Wednesday, which will be seen as a test of the success or otherwise of the ministers’ decisions.