EU ministers begin talks on rescue fund overhaul

European finance chiefs start work today on a revamped debt-crisis-fighting strategy with Germany easing its opposition to an expanded arsenal and Portugal insisting it will get by without an aid package.

Germany, the leading power in the 17-nation euro region, is eyeing a March deadline for bolstering the ¤440-billion ($585 billion) rescue fund, drawing up a permanent aid facility and rewriting the bloc’s budget-deficit rules.

A rising euro and successful bond auctions in Portugal, Spain and Italy offered a respite last week from market pressure for steps that go beyond the emergency aid program and the European Central Bank’s (ECB’s) unprecedented bond purchases.

“European leaders need their backs to the wall in order to complete their monetary union,” Barry Eichengreen, an economics professor at the University of California at Berkeley, said on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “I’m still convinced that’s what they’re about to do.”

Germany endorsed the need for a “comprehensive” approach to stemming the debt contagion amid concern that Greece and Ireland, recipients of ¤178 billion in European and International Monetary Fund loans last year, will struggle to nurse their economies back to health.

Still, German Finance Minister Wolfgang Schaeuble resisted an appeal by the European Commission, the bloc’s central regulator, for an upgraded anti-crisis toolbox to be unveiled as soon as a February 4 summit of national leaders.

‘No immediate need’
Germany is ready to discuss “in the medium-term” how to change the way the fund operates to allow countries to tap the full ¤440 billion, Schaeuble said in an interview on German radio station Deutschlandfunk today. “There is no immediate need to take action,” he said, adding that the fund is big enough to handle “whatever is under discussion in the short term.”

Euro-area finance ministers meet at 5 pm today in Brussels. Luxembourg Prime Minister Jean-Claude Juncker, the chairman, and European Union Economic and Monetary Commissioner Olli Rehn will brief the press in late evening.

Europe’s political sands are shifting even as Portuguese Prime Minister Jose Socrates says the country is beating deficit-cutting targets and doesn’t need a rescue. The ECB indicated that its focus may move from maintaining interest rates at a record-low 1 per cent to combating inflation, which reached a two-year high of 2.2 per cent in December.

Breathing space
Portugal gained breathing space with the sale of ¤599 million in 10-year bonds on January 12, with borrowing costs dropping to 6.72 per cent from 6.81 per cent. The extra yield on Portuguese 10-year debt over German levels has fallen 45 basis points to 379 basis points since January 7. The euro, which rose 3.7 per cent against the dollar to $1.3388 last week, the biggest weekly gain since May 2009, was down 0.8 per cent at $1.3279 at 10.45 am in London today.

“Portugal will eventually be put under the umbrella of an EU-IMF bailout,” London-based Citigroup economists Juergen Michels and Giada Giani said in a research note. “Until the Portuguese saga around the access into a rescue package finds a resolution, market tensions are unlikely to abate.”

In response to ECB President Jean-Claude Trichet’s call for “quantitative and qualitative” improvements to the aid programme, governments are considering putting more money on the table and using it more flexibly. “It’s up to governments to assume their responsibilities,” Trichet said on France’s LCI television yesterday.