FT: Merkel set to allow firewall to rise

25 March 2012

Germany is poised to bow to international pressure and allow a temporary increase in the eurozone's financial "firewall" this week, to prevent the crisis in the region's periphery spreading to other Member States.

Officials in Berlin signalled on Sunday that the government would allow funds to be boosted as a way of calming financial market pressures.

Olli Rehn, EU commissioner for monetary affairs, expected eurozone finance ministers to reach a decision at a meeting in Copenhagen this Friday. Senior European officials said a consensus appeared to be building behind Mr Rehn’s “mid-range” option, which would allow the €440 billion European Financial Stability Facility, the current temporary rescue fund, to keep running when a new permanent €500 billion fund, called the European Stability Mechanism, starts up in the middle of this year. That would boost the rescue system’s overall firepower to €940 billion, although with about €200 billion committed to Greek, Irish and Portuguese bailouts, the total available would be €740 billion.

According to an options paper circulated before Friday’s meeting, Mr Rehn’s preferred option would be to make the €940 billion combined total permanent but the mid-range option – likely to be Berlin’s favourite – would allow the system to fall back to €500 billion once the EFSF expires in mid-2013.

Even though the firewall increase would only be temporary, Mr Rehn’s staff wrote that it was likely to be enough to convince the International Monetary Fund to increase its own resources to $1 trillion. Christine Lagarde, the IMF chief, has said she will not advocate increasing IMF resources to help reinforce the eurozone firewall unless EU countries act convincingly first.

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