Eurozone moves to prop up rescue fund

Eurozone governments are accelerating efforts to bolster their €440bn rescue fund amid further signs that the debt crisis that has threatened the single currency is migrating from Greece to impose fresh pressure on Spain and Italy.

In an about-face, the leaders of the 17 eurozone governments decided at a summit meeting last month to grant sweeping new powers to the fund, known as the European financial stability facility, in order to prevent the crisis from spreading beyond Greece and other peripheral economies.

Among other powers, they agreed to equip the EFSF with the ability to repurchase the bonds of stricken governments on open markets, provide them with short-term lines of credit and cash to help recapitalise ailing banks.

The need for such enhancements was highlighted on Tuesday, as the risk premium on Spanish and Italian bonds hit new highs, raising fresh alarm that the crisis had not been contained in spite of a €109bn Greek bail-out package unveiled last month.

The ability to repurchase Spanish or Italian bonds at distressed prices, say analysts, would be one way to help stabilise the markets, and prevent further tremors from spreading across the eurozone.

Yet European diplomats and officials acknowledged that it would be weeks – and possibly months – before the EFSF’s new powers could be put to use. The delays are another example of a mismatch on display throughout the crisis between the slow pace of making and implementing European Union policy and the urgency of financial markets.

Before the EFSF can use its new tools, eurozone officials and executives at the EFSF’s Luxembourg headquarters must first draft a legal text spelling out the practical details behind the broad aims that heads of government agreed. That text must be signed by the 17 eurozone governments, and then endure a ratification process that includes parliamentary approval in most of those countries.

“People are working around the clock, night and day,” one European official said, estimating that it was a matter of weeks – and not months – before the text was ready. But he acknowledged that was an ambitious timetable and could not say how long it would be before all 17 countries completed the ratification process, particularly given the summer holiday.

In an effort to accelerate the process, members of the eurogroup met by conference call last week. A technical group is expected to convene today, and again early next week.

Olli Rehn, Europe’s economics commissioner, appealed for calm on Tuesday, noting the budget cuts and other belt-tightening measures that governments were undertaking.

“Italy and Spain are taking very determined action to ensure the sustainability of their public finances and to boost economic growth through reforms,” Mr Rehn said, adding that no emergency aid plans were under preparation. “Everyone is now working really hard and speedily to put flesh on the bones to the agreement of 21 July.”

In addition to Spain and Italy, EU officials are also concerned about tiny Cyprus, where the country’s biggest bank warned on Monday that an EFSF bail-out would be needed if politicians did not soon break a stalemate and agree to a new austerity package. Many analysts believe Cypriot banks may also require a recapitalisation due to their heavy exposure to Greece.

The EFSF was already awaiting ratification of a previously agreed plan to boost its lending capacity from about €255bn to €440bn – a sum that some analysts believe is still insufficient to deal with the magnitude of the crisis.

Germany and the Netherlands long resisted calls to retool the EFSF for fear that it would expose their taxpayers to greater risk. Their shift at last month’s summit was triggered in part by the intensity of the crisis.

Still, they left plenty of technical details to iron out, including what sort of conditions should be imposed on governments that accept short-term loans, and what maturities those loans should carry.

In terms of bond buy-backs, eurozone governments spelt out limited conditions for their use, suggesting that Spain or Italy could not readily resort to them even if the revamped EFSF were already in force.