March 26 (Bloomberg) -- Chancellor Angela Merkel gave her first indication that she is prepared to allow an increase in the debt-crisis firewall, saying that Germany could let the temporary and permanent rescue funds run in parallel.
Merkel cited “fragility” in Spain and Portugal as she revealed Germany’s position on addressing the future financial backstop. Agreement among euro-area governments this week “could be the basis” for the International Monetary Fund to channel more resources to help fight the turmoil, she said.
Germany holds to its stance that the permanent rescue fund should be capped at 500 billion euros ($663 billion), she told reporters in Berlin today. “But in order for us to have the full 500 billion at our disposal, we could imagine that we let the programs that have already been disbursed run in parallel.”
Merkel’s comments prepare the ground for Germany to drop its opposition to proposals to expand the 17-nation region’s financial backstop at a meeting of euro-area finance ministers in Copenhagen on March 30. Merkel said that senior members of her Christian Democratic Union agreed on the position today.
The euro and stocks rose on Merkel’s comments. The single currency rose 0.4 percent to $1.3323 as of 2:46 p.m. in Berlin, while the Stoxx Europe 600 Index added 0.8 percent.
Merkel’s reference to Iberian economic troubles adds weight to warnings by Italy’s Prime Minister Mario Monti that Spain could reignite the debt crisis.
“It doesn’t take much to recreate risks of contagion,” Monti said during the weekend at a conference in Cernobbio, Italy. Days after his Cabinet approved a bill to overhaul Italy’s labor laws, Monti praised Spain’s efforts to loosen work regulations while advising it to focus on cutting the national budget. Spain “hasn’t paid enough attention to its public accounts,” he said.
The euro crisis has eased after the European Central Bank last month boosted liquidity through three-year loans to banks, while European Union leaders this month sealed a second Greek bailout package. Italian and German confidence indexes rose today as Spanish and Italian bonds gained.
Even so, Merkel responded to a question about the firewall today by citing bond yields in Spain and Portugal that have in recent weeks shown “great sensitivity and fragility.” That means “the situation is not yet normal,” she said.
European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday that he was confident ministers will resolve their differences on providing more bailout funding for the euro. Officials “will take a convincing decision on the reinforcement of the firewalls,” Rehn told reporters in Saariselkae, Finland.
Euro-area leaders have established the permanent 500 billion-euro European Stability Mechanism, which is scheduled to take over from the European Financial Stability Facility and begin operations in July. Under current rules, unused EFSF funds would be passed on to the ESM, though disbursement could not exceed the half-trillion limit.
Policy makers are discussing how to add to the funds, for example by allowing the EFSF and ESM to work concurrently to make more money available. Maintaining the used sums from the temporary fund while allowing the ESM to operate at capacity would bring a total crisis backstop to 692 billion euros.
Under existing plans, the temporary fund “will run out in the middle of next year, just as planned,” Merkel said. “But 200 billion have already been handed out there, and we could imagine that these 200 billion run in parallel to the ESM until the program countries have paid it back. That will take a few years and then the ESM will stand alone again.”
The focus by policy makers and investors has shifted over recent weeks from Greece to Spain, where Prime Minister Mariano Rajoy is struggling to reduce the country’s budget deficit in the face of a looming recession.
Rajoy faces his first general strike on March 29 as unions protest against changes to employment laws making it cheaper to fire workers and cut wages. Three months after coming to power, he is due to present the 2012 budget on March 30, which is designed to cut the deficit.
Rajoy meanwhile failed to win an outright majority in elections yesterday in Spain’s most populous region, Andalusia. While his People’s Party took more seats in the legislature than any other, it fell short of the 55 needed. The region has been controlled by the Socialists since Spain’s return to democracy in 1978.
The conundrum for European leaders was underscored on March 22, when a report showed that euro-area services and manufacturing output contracted more than economists forecast. The drop in March on declining domestic demand added to signs that the region’s economy is sliding into recession.
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