Euro zone finance ministers have agreed on an amount for the firewall designed to rescue ailing nations, but the figure they settled on may be too small to reassure markets that the crisis is contained.
Reuters reported Friday that, while Finance Minister Maria Fekter of Austria put the amount at 800 billion euros ($1.06 trillion), that figure seems to have included money already spent so that it would appear more imposing to investors.
The temporary European Financial Stability Facility (EFSF) and permanent European Stability Mechanism (ESM) will be combined for a year, for a total of 940 billion euros. However, the total, which includes 440 billion euros from the EFSF and 500 billion euros from the ESM, includes approximately 192 billion euros already paid out or promised to Greece, Ireland and Portugal, as well as funds that would only be available if countries in the euro zone paid into the ESM faster than expected.
There are 240 billion euros in reserve in the EFSF, and Fekter said that money would form a reserve buffer as the two funds run together and while money is built up in the ESM. However, that money would only be available if the ESM runs out of money while the two funds are operating together.
Germany had spoken out against substantial increases in the firewall. Finance Minister Steve Vanackere of Belgium was quoted saying, "Obviously markets will only have confidence in us if we agree on a strong rescue fund. We can't consider that the crisis is over. We must find a good middle way between those who seek a [maximum] firewall and those who want it kept to a minimum."
It remains to be seen whether they were successful in doing that. Steve Barrow, head of G10 strategy at Standard Bank in London, was quoted saying, "At the end of the day the key question is whether this new firepower is enough. Clearly if things turn down again, and especially if more bailouts are needed, the tricky issue of underfunding the ESM/EFSF relative to the potential bailout need is bound to resurface."
While Commerzbank analyst Christoph Weil said that the increase proposed by finance ministers, when put together with funding from the International Monetary Fund (IMF), would likely suffice to "offer shelter to Spain and Italy if necessary," he said in a note, "Nonetheless, there is reason to fear that investors will remain skeptical and continue to demand high risk premiums for peripheral bonds."