Euro leaders delay decision on bigger bailout fund

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By GABRIELE STEINHAUSER and GEIR MOULSON, Associated Press

BRUSSELS (AP) — The leaders of the 17 countries that use the euro have delayed a decision on whether to give their bailout funds more firepower until later in March, European officials said Tuesday.

Eurozone leaders were expected to meet Friday afternoon to decide whether the currency union's bailout funds will be allowed to give more than euro500 billion ($669 billion) in loans. The decision was highly anticipated as there are concerns that the eurozone's safety nets — which have already rescued Greece, Ireland and Portugal — are too weak to support large struggling countries like Italy or Spain.

The European Commission — the EU's executive arm — the International Monetary Fund and several euro countries want the new, permanent bailout fund, called the European Stability Mechanism, to run in parallel with its predecessor, the European Financial Stability Facility.

Under current plans, the EFSF would stop operating when the ESM comes into force in July and all its commitments to Greece, Ireland and Portugal would have to be subtracted from the ESM's euro500 billion capacity. That would allow the ESM to give out only around euro320 billion ($428 billion) in loans.

Allowing the funds to run in parallel could take the overall lending capacity to around euro750 billion ($1 trillion). However, Germany, the eurozone's largest economy and the biggest contributor to both bailout funds, has so far resisted such a move.

"The decision (on the bailout funds) is not ready to be taken yet," said one official, speaking on condition of anonymity due to the confidential nature of the talks.

The delay of the decision on the bailout funds is yet another example of the slow pace of decision-making in the eurozone's two-year-old debt crisis. Ever since the EFSF was set up in May 2010 economists have noted it was too small to convince investors that bonds from vulnerable countries like Italy and Spain were a safe bet.

Since then, euro leaders have taken several decisions to boost the fund's capacity and powers, but none of them has fulfilled the demands made by the European Commission and the IMF. Last weekend, finance chiefs from the Group of 20 biggest economies made it clear they would not commit to increasing the IMF's resources — which would reinforce the eurozone's safety nets — until the currency union has done its part by boosting its own bailout funds.

Any increase in the funds' capacity would require parliamentary approval in most euro countries. Richer states in the eurozone, however, are reluctant to go back to their lawmakers for more money just after committing to a second massive rescue for Greece.

A decision on the bailout funds will be taken later in March, either at a meeting of eurozone finance ministers on March 12 or, if necessary, at an extra summit of euro leaders, the official said.

A meeting of the 27 European Union leaders on Thursday and Friday will take place as scheduled, the official said.

Separately, a decision by Germany's highest court should make it easier for the EFSF — and later the ESM — to take on a larger role in fighting the eurozone crisis.

Eurozone leaders decided last year to give the bailout funds broader powers, included buying government bond on the open market to support their prices, providing short-term loans to vulnerable countries, and helping governments with bank bailouts.

In Germany, those new powers posed difficult constitutional questions: the governing coalition in Parliament wanted a small nine-lawmaker committee to take market-sensitive decisions quickly and without information leaking out to investors and the press.

Two opposition lawmakers complained to Germany's Federal Constitutional Court, arguing that the emergency committee undermined parliament's right to be involved in important decisions on spending taxpayer money.

On Tuesday, the court ruled the special committee should be allowed to take decisions on bond purchases on the secondary market — but on other matters, a wider group of lawmakers will have to be consulted.

Chief Justice Andreas Vosskuhle said the bond purchases were a special case, because if word got out "even of plans for such an emergency measure, that would be liable to thwart its success."

That means that the EFSF could start buying the Italian of Spanish government bonds on the secondary market if either of these countries requests help and the request is approved by the rest of the eurozone. Such purchases, which have so far been conducted by the European Central Bank, can help stabilize bond prices and lower a country's funding costs.

While the German court ruling was the last major legal hurdle to the EFSF using its broader powers, it is unlikely that the fund will intervene in bond markets anytime soon, as Italian and Spanish bond prices have stabilized in recent weeks.

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Moulson reported from Berlin.

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