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Germany Proposes Combining European Bailout Funds

Euro Leaders Seek Long-Term Crisis Fix as Greek Talks Drag
Left to right, Wolfgang Schaeuble, Germany's finance minister, Evangelos Venizelos, Greece's finance minister, Elena Salgado, Spain's finance minister, Jan Kees De Jager, the Netherlands' finance minister, and Giulio Tremonti, Italy's finance minister, chat during a meeting of the European Union finance ministers at the European Council headquarters in Brussels, Belgium. Photographer: Jock Fistick/Bloomberg

Germany floated the idea of combining Europe’s two rescue funds, in a concession to bolster the fight against the fiscal crisis as Greece bargained with bondholders over debt relief.

Germany may be open to boosting the combined aid limit from 500 billion euros ($651 billion) when a permanent fund runs alongside the temporary fund starting in July, government officials in Berlin said. The need for a beefed-up fund was dramatized by haggling between Greece, the trigger of the two-year-old crisis, and its creditors over debt reduction to stave off default.

“It’s essential that we will be able to reinforce our financial firewalls,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters before a meeting of finance ministers in Brussels today.

Finance chiefs will tackle the rescue funds, Greece’s latest offer to bondholders, a German-inspired deficit-control treaty and nominees to the European Central Bank’s board in meetings that started at 2:30 p.m. and will run until late evening.

Italy led a rally in bonds of fiscally struggling states, the euro rose above $1.30 and European stock markets advanced amid confidence that a formula for quenching the crisis is coming together.

Economic Power

Germany, Europe’s dominant economic power, gave the strongest signal yet that it would allow the roughly 250 billion euros left in the temporary rescue fund to be tapped once the permanent fund is set up.

Running the two funds in parallel “is being discussed,” Norbert Barthle, parliamentary budget spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview in Berlin. The issue may come up at a summit of European leaders on Jan. 30, government spokesman Steffen Seibert said.

Such a step would boost Europe’s unspent crisis-fighting capacity to around 750 billion euros. On top of that would come 150 billion euros pledged by euro-area central banks to the International Monetary Fund.

“We need a larger firewall,” IMF Managing Director Christine Lagarde said in Berlin. “Without it, countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs.”

‘Optimistic Side’

Backed by the euro region’s downpayment, Lagarde is seeking $500 billion for the IMF -- a number that looks “on the optimistic side,” she said today. Debate over the IMF’s coffers will peak at a Group of 20 meeting in February.

Greece’s struggle was set to intrude on today’s Brussels meeting after bondholders made what Charles Dallara, managing director of the Washington-based Institute of International Finance, termed a “maximum” debt-relief offer.

“The elements now are in place,” Dallara, the bondholders’ chief negotiator, told Athens-based Antenna TV yesterday. “It’s a question now, really, of the broader reaction of the European official sector and, of course, of the IMF.”

An accord is key to a second financing package for the cash-strapped country, which faces a 14.5 billion-euro bond payment on March 20. A deal is likely in time, German Chancellor Angela Merkel said.

“I expect that the negotiations with the private creditors and the new Greece program can be completed simultaneously and soon enough that no new bridge loan whatsoever will be needed,” Merkel told reporters in Berlin today.

Greece’s Failure

Greece’s failure to wrap up the debt-reduction accord over the weekend helped drive two-year yields to an all-time high of 206 percent at 2:47 p.m. in Athens. In contrast to earlier points in the crisis, investors were optimistic that Greece’s travails won’t spill over to the rest of Europe.

Italian bonds rose, pushing the extra yield over 10-year German bonds down to 418 basis points. The spread, a gauge of the perceived risk of lending to Italy’s government, is now the narrowest since Dec. 7.

Successful short-term debt sales in the past two weeks in Italy, Portugal, Spain, France and Belgium were smoothed by 489 billion euros disbursed by the ECB in unlimited three-year loans to euro-region banks.

The central bank has drawn encouragement from pledges by political leaders to turn Europe into a low-debt economy, enforced by a fiscal treaty to be discussed by the finance ministers today and completed at next week’s summit.

Latest Draft

The latest draft of the treaty bows to some objections raised by the ECB. It will create an EU-supervised automatic “correction mechanism” that would force governments to fix “significant” deviations from a target structural deficit of 0.5 percent of GDP, according to the Jan. 19 draft obtained by Bloomberg News.

Under German pressure, countries that don’t enact the fiscal treaty will be denied aid from the permanent rescue fund, the European Stability Mechanism. Finance ministers will pore over the draft ESM treaty tonight, with Finland’s objections to the lack of a veto over aid payouts the main sticking point.

“There are still outstanding questions but I think we can take a big leap forward on it,” Danish Economy Minister Margrethe Vestager said in a Bloomberg Television interview. Denmark is among the nine non-euro states that may sign the pact.

Also on the agenda is who will take the seat on the ECB’s Executive Board that will open up when Spain’s Jose Manuel Gonzalez-Paramo comes to the end of his eight-year term in May.

Central Banker

In a battle that pits the richer north against the debt-encumbered south, Luxembourg is seeking to wrest the seat away from Spain by nominating its central banker, Yves Mersch.

Spain proposed Antonio Sainz de Vicuna, head of the ECB’s legal department, to hold onto a seat that has been in Spanish hands throughout the euro. A third contender, Mitja Gaspari, was put forward by Slovenia.

Nominees will be discussed tonight, with no decision likely until the next meeting on Feb. 20.

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