EU urges austerity as rescue fund won't be boosted

[December 07, 2010]  BRUSSELS (AP) -- European finance ministers pressured the eurozone's weaker members Tuesday to get a grip on their finances, a day after they refused to increase the euro750 billion ($1 trillion) bailout fund.

Much of the focus over the rest of the day will be on Dublin, where parliament is due to vote on the budget for next year -- the measures proposed by the Irish government are the harshest in the country's history but are required in return for a euro67.5 billion rescue package.

With Ireland joining Greece in getting bailed out, the markets have fretted about which country will be next -- Portugal and Spain are viewed by many as the weakest links in the 16-country currency union and the EU's finance ministers are continuing to press them to get their financial houses in order.

For many of the bloc's ministers, that's far more important than increasing the size of Europe's bailout funds.

"If we are not addressing the long-term and midterm solutions as well, the markets will never be able to completely restore the confidence they have into the eurozone," Dutch Finance Minister Jan Kees de Jager said ahead of the meeting of the EU's 27 finance chiefs.

Both Portugal and Spain are enacting further spending cuts and tax rises over the months ahead as they try to get their borrowing levels down and appease worried investors that their financial positions are unsustainable in the medium-term.

Following their meeting Monday, leading officials from the eurozone insisted they had enough financial firepower right now to deal with Europe's government debt crisis, but did not rule out increasing the bailout fund in the future.

One of the main worries in the markets in recent weeks is that Europe might not have enough bailout money available to cope with the rescue of an economy the size of Spain's.

A proposed increase of the fund -- championed by Belgian Finance Minister Didier Reynders over the weekend -- as well as the idea of issuing pan-European bonds to shore up confidence in the euro were quickly rejected by Germany, Europe's biggest economy.

German Finance Minister Wolfgang Schaeuble said Tuesday that it was now important to implement the decisions taken in recent months -- such as the creation of a permanent tool to deal with financial crises in the eurozone -- rather than bringing up new issues every day.

"The scope of the debate has to be somewhat reduced," Schaeuble said.

The pressure on the EU's finance ministers has abated somewhat as the euro has recovered much of its lost ground and the cost of servicing debt in countries like Portugal has come down from record euro-era highs.

This easing in tensions in part came after the European Central Bank decided to play a more active role in the markets. Figures Monday confirmed widespread speculation that the bank has stepped up its purchases of government bonds. In the week to Nov 30, it bought euro1.965 of government bonds -- a 22-week high -- as it tried to boost confidence in the single currency bloc following the Irish bailout and renewed contagion fears.

Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting.

Market participants suspect the stabilization in European bond markets since the meeting has been largely thanks to greater bond purchases by the central bank, under pressure from policymakers to do more to prevent the debt crisis from spreading -- buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.

The ECB is widely expected to continue playing this more active role in the secondary markets over the weeks ahead.

"There is little reason to assume they are about to disappear anytime soon," said Daragh Maher, an analyst at Credit Agricole.

[Associated Press; By GABRIELE STEINHAUSER and PAN PYLAS]

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