Germany Changes Tune on Increasing Size of Eurozone Bailout Funds
January 23, 2012
Citing German and Eurozone officials, the FT is reporting that German Chancellor Merkel may be open to the idea of boosting the firepower of the Eurozone’s rescue funds by letting the EFSF run in parallel with its permanent successor, the ESM.
If approved, the plan would provide a total of €750 billion in bailout firepower made up of the €250B in unused funds from the EFSF and the €500B that has been committed to funding the ESM.
Germany appears to be softening its longtime opposition to increasing the size of the bailout funds. The move was possibly motivated by the IMF’s warning Monday that the Eurozone needed to “build a larger firewall” in order to avoid a “1930’s moment.”
According to the FT, in return for effectively increasing the size of the bailout funds Merkel wants Eurozone governments to agree to more stringent rules relating to budget deficits and public sector debt levels.
The German offer emerged after a weekend meeting between IMF Chief Christine Lagarde and Ms Merkel. Reports indicate that Lagarde had asked Merkel for “a clear and credible timetable” under which the existing EFSF and the ESM could be merged in order to increase the size of the bailout funds.
Today’s shift by the Germans also comes on the heels of the weekend Der Spiegel report which noted that Italian Prime Minister is calling for a doubling of the ESM to €1 trillion. The article also pointed out that PM Monti has the support of the likes of Spain, Portugal and France, as well as ECB President Mario Draghi.
However, it should be noted that Draghi is said to be in favor of combining the EFSF and the ESM in order to reach the €750 billion figure.
Word that Merkel may be open to allowing the EFSF and ESM to run parallel put a bid under the stock market that had sold off on reports that Greece had not yet come to an agreement with its private bond holders.
Recall that the IMF’s Christine Lagarde told CNBC on Monday that she is confident a deal on the Greek debt restructure will get done. Lagarde believes that much of the current back-and-forth is simply negotiations between the two sides.
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