Battle over EU financial firewall threatens to derail Greek bailout

Tuesday, February 21, 2012
By Paul Martin

A battle over an increased eurozone bail-out fund and International Monetary Fund support for the European Union’s single currency threatens to derail the latest Greek bailout.

By Bruno Waterfield
21 Feb 2012

At a G20 summit in Mexico in two days the EU will plead for increased IMF contributions by non-euro countries to help shore up a eurozone “financial firewall” seen as vital to protecting Spain and Italy from Greek debt contagion.

The IMF will refuse to make extra cash available to the EU and will threaten to pull the plug on its contribution to Tuesday’s €130bn bailout of Greece unless the eurozone creates a €750bn fund, a move opposed by Germany.

In the wake of this week’s deal to prevent a Greek default, Olli Rehn, the EU’s economic and monetary affairs commissioner, insisted that a plan to merge two eurozone bailout funds was vital over the next 10 days. Mr Rehn is seeking to fuse the existing European Financial Stability Facility (EFSF) fund, worth €250bn, with a new European Stability Mechanism (ESM), to be created this summer and worth €500bn.

“This is very important to show that we have credible instruments to ensure we have financial stability in Europe,” he said. “It is also very important to encourage our international partners in the G20 and IMF to move in order to increase the resources of the IMF, which form a global financial firewall but also contribute significantly to the European financial firewall.”

The issue will dominate an EU summit in Brussels on March 1 and is expected to spark a major political battle when Germany’s parliament debates the Greek bailout in Berlin in next week.

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