Eurozone unlocks bailout war chest

The eurozone has unlocked its 500-billion-euro ($NZ791 billion) European Stability Mechanism (ESM), amid worries over Greece and as Spain agonises over whether to call for a full bailout.

The launch of the war chest - immediately given an AAA rating by credit giant Fitch - "marks a historic milestone in shaping the future of monetary union," Luxembourg Prime Minister and fund chairman Jean-Claude Juncker said.

Juncker spoke after the inaugural meeting of the ESM's board, made up of the finance ministers from the 17 countries that share the currency. The ministers then went into talks on Greece and Spain.

The permanent rescue fund, initially due to enter service on July 1 but delayed by a challenge at the German Constitutional Court, is not yet operational however.

In a first stage it will contain 200 billion euros of working monies once the first instalments of government capital are paid in by the end of October.

Juncker said the currency union, troubled for the last three years by massive sovereign and banking debts, had now "closed the gap in euro area institutions" with another element in "a comprehensive plan to reshape economic governance".

The ESM monies will build on top of resources left in a temporary fund, the European Financial Stability Facility (EFSF), taking combined lending capacity during the latter's wind-down to 700 billion euros, the ESM said in Luxembourg.

European Commission President Jose Manuel Barroso said this was "comparable only with the IMF", and Fitch said the fund's outlook was "stable".

ESM managing director Klaus Regling said it was his "expectation" that the chest, like the temporary EFSF, would in time leverage up the fund's lending reach using complicated financing techniques.

The EFSF raised about 40 per cent of its assets from Asian investors on the back of eurozone government guarantees.

Long anticipated, the ESM makes its formal debut 10 days before the European Union's 27 leaders meet in Brussels for talks expected to focus once again on bailing out Greece and on tensions in Spain.

EU officials last week said Greece was unlikely to get a green light in Luxembourg to resume talks following differences with the European Commission, European Central Bank and International Monetary Fund creditors.

Greek Prime Minister Antonis Samaras said on Friday his country could not take more bitter medicine. If its next aid instalment of 31.5 billion euros did not arrive soon, by November state coffers would be empty, he said.

German Chancellor Angela Merkel is due in Greece later today, to what could be a hostile reception from many Greeks who see her as responsible for their problems.

The issue of funnelling new aid to Madrid has become more complex since eurozone hardliners Germany, the Netherlands and Finland questioned commitments made at a June eurozone summit.

Leaders had notably agreed the ESM would be able to recapitalise banks directly once a single banking supervisor was in place, which initially was targeted for the end of the year.

That timetable has now slipped, and the three nations said the ESM should not be used to help banks bailed out before it became operational.

Ireland, like Spain, wants to be able to capitalise banks directly from the ESM.

AFP

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