ESM Plus EFSF Plus IMF: Europe May Be Planning 1.5 Trillion Euro Backstop Fund

The permanent euro backstop fund ESM is due to replace the European Financial Stability Facility this year. But both 500 billion-euro funds could be merged and added to a third from the International Monetary Fund to create a super debt firewall, according to media reports from Davos.

Europe may be planning to dramatically enlarge its backstop fund. Zoom
DPA

Europe may be planning to dramatically enlarge its backstop fund.

Europe could have a 'super' €1,500 billion ($1,969 billion) debt firewall by the summer under plans to combine three funds of €500 billion each. The Financial Times Deutschland reported on Tuesday that the plan was discussed at a meeting on the sidelines of the recent World Economic Forum in Davos attended by US Treasury Secretary Timothy Geithner, International Monetary Fund (IMF) chief Christine Lagarde, German Finance Minister Wolfgang Schäuble and his French counterpart Francois Baroin.

The proposal would see the current temporary bailout fund, the European Financial Stability Facility (EFSF), combined with, rather than replaced by, the permanent European Stability Mechanism (ESM). The third €500 billion chunk would be provided by the IMF. In return, euro-zone countries have already agreed to €150 billion in bilateral credit for the fund. The other €350 billion would come from across the world from countries such as Brazil and the UK. The US, however, would not participate -- even though Geithner himself said in Davos that only an extremely large firewall would ensure financial security.

The massive fund will only become reality if Berlin agrees to it, and the IMF and the European Commission are hoping to secure Germany's approval at the next EU summit at the beginning of March.

Pressure on the Euro Zone

According to the newspaper, the timetable for putting into place what Lagarde called a "clear, simple firewall" is a short one. The second aid package for Greece and the debt rescheduling agreement with private creditors should be agreed in the next week or two, and G20 finance ministers can then discuss the fund issue at their summit in Mexico at the end of February to once again put pressure on the euro zone to put up more money.

Senior figures in the European Commission believe that Chancellor Merkel will agree to a larger EU rescue fund, something which she has been under increasing pressure from other governments to do. With the ability to deposit €750 billion, a joint ESM-EFSF fund would be able to meet the previously-approved commitments for Ireland, Portugal and Greece, totalling more than €200 billion. Germany will need to make a €32 billion contribution to the ESM in the summer.

But Lagarde is hoping that the super-fund will never need to be used once it is in place, especially as the European Central Bank should be waiting in the wings to provide more liquidity into the financial sector.

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