European Union leaders are unlikely to take a decision on how to strengthen their eurozone bailout fund until June, undermining market confidence and possibly prolonging the region's debt crisis. For months, EU leaders have talked about using a summit in Brussels this Thursday and Friday to reach a final agreement on a "comprehensive package" of measures that they hope will prevent the debt crisis spreading further.
Portugal government nears collapse, may spur bailout The expectation was that a stronger European Financial Stability Facility would be in the final package - EU leaders have agreed it will be, but they have not agreed on how they will strengthen it, raising its effective capacity from 250 billion euros to the full size of 440 billion euros.
Draft conclusions prepared for the two-day meeting, seen by Reuters on Wednesday, make clear that a definitive decision on how to bolster the fund will only be taken when leaders also formalise the structure of the European Stability Mechanism, a permanent fund that will replace the EFSF in 2013.
"The preparation of the ESM treaty and the amendments of the EFSF agreement, to ensure its 440 billion euro effective lending capacity, will be finalised so as to allow national procedures to be completed in good time for signature of both agreements at the same time before the end of June 2011," the documents say. Word of the delay, coupled with concern that Portugal may soon follow Greece and Ireland in requiring emergency aid from the EU, drove down the euro and pushed up government bond yields for weaker eurozone states on Wednesday.
The Portuguese government faces the threat of collapse, with the opposition expected on Wednesday to reject new austerity steps that Prime Minister Jose Socrates had hoped would convince markets Lisbon was getting to grips with its budget deficit. Socrates has said he will resign if his plans are defeated. Portuguese radio reported he would make a statement at 2000 GMT. If he resigns, it increases the likelihood that Portugal will have to seek a bailout from the EFSF.
A eurozone source estimated in January that were Portugal to ask for aid, it might need between 60 and 80 billion euros. Those amounts would be comfortably within the scope of the EFSF even before its planned expansion, but it might be difficult for a caretaker government in Lisbon to negotiate bailout terms.
The EU's delay in reaching a deal to bolster the EFSF is partly due to politics and partly the result of a need to co-ordinate the legal and structural changes that being introduced and avoid national parliaments rejecting them. Finland has dissolved its parliament ahead of an election on April 17 and cannot take any formal decisions until it has a new government in place, something that is only likely by May at the earliest. There are also doubts in Germany about what capital commitments it needs to make to finance the ESM, which will have an effective capacity of 500 billion euros.
EU finance ministers agreed on Monday that the ESM would have paid-in capital of 80 billion euros and 620 billion euros of either callable capital or guarantees, a total that would ensure a triple-A credit rating. But German government sources said on Tuesday Chancellor Angela Merkel now had concerns about the timing of when Germany would have to make capital injections, and indicated that Monday's deal might need re-negotiating.
Greece, already receiving aid to the tune of 110 billion euros of bilateral loans from the EU and IMF, is also not out of the woods. The former chief economist of the European Central Bank said it was only a matter of time before Greece's sovereign debts - nearly 150 percent of GDP - needed restructuring.
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