Future EU bailout fund details agreed on

With clouds gathering above a fiscally distraught Portugal, finance ministers of the 17 countries that share the euro as a currency have firmed the details of a new permanent bailout mechanism for member-states in need.

The move comes only days ahead of a self-imposed deadline for the European Union (EU) to sound a clear response to market concerns about the sovereign debt crises that have been plagueing many of the region’s economies since last year.

Following the latest in a series of meetings, euro zone ministers announced late on Monday that the new European Stability Mechanism (ESM) due to come into force in January 2013, will be a ¤700-billion fund, with an effective capacity to lend ¤500 billion to aid any members in danger of defaulting.

Euro zone nations will provide ¤80 billion in hard currency and ¤620 billion in either "on-call capital" or state guarantees. These reserve funds would only be liquidated when required. The fund would also be able to buy the bonds of euro members in the primary market but only in exceptional circumstances, such as those countries having negotiated an adjustment programme in exchange for a bailout.

The ESM is set to replace an existing, temporary rescue fund, cobbled in haste after Greece called for financial assistance last year. Later, Ireland followed and made use of the fund, called the European Financial Stability Facility (EFSF).

Yesterday’s meeting did not go into the tricky question of expanding the EFSF’s effective lending capacity. The three-year EFSF is notionally worth ¤440 billion. In practice, it can only provide half that amount if it is to maintain the requisite capital buffers to retain its triple-A ratings.

Nor was there any decision on Ireland’s demand for a renegotiation of its bailout terms, essentially because Dublin refuses to make any change on its low corporate tax rate, something France and Germany are demanding in return for lowering loan interest rates.

Both these issues are to be passed on for discussion at a summit of leaders of all the EU’s 27 members, to be held in Brussels on Thursday and Friday. This is the summit that investors will be focusing on for definitive answers to their worries about the economic future of the region.

The euro zone debt crisis was to have been the primary subject of discussion at this meeting. However, recent events in Libya, where several European countries are currently involved in a military capacity, as well as Japan, might well overshadow the euro issue. Such a development could again lead markets, reasonably stable in the lead up to the summit, to wobbly territory.