COPENHAGEN (MNI) – Eurozone finance ministers agreed to bolster
their rescue funds to a total of E800 billion on Friday in a bid to keep
market tensions under control and to encourage an increase in resources
for the International Monetary Fund.

But ministers capped fresh lending at E500 billion, a victory for
Germany and a rebuff to the European Commission and to European leaders
like Italian Prime Minister Mario Monti who argued for a much more
substantial increase in new firepower to contain the crisis.

The ministers, after a meeting here, said they had agreed to allow
the temporary and permanent bailout funds, the European Financial
Stability Facility and the European Stability Mechanism, to operate side
by side until mid-2013. About E200 billion of EFSF funds already set
aside for the Greek, Irish and Portuguese bailouts has been included in
the total, plus another E102 billion in already-paid-out EU aid
facilities.

“All together the euro area is mobilizing an overall firewall of
approximately E800 billion, more than USD 1 trillion,” the Eurogroup
statement said. “Robust firewalls have been established.”

Countries including the United States and Mexico have said that an
increase in IMF resources would depend on how aggressively European
countries would bolster their own financial firewall.

It remains to be seen whether they will be convinced by the deal
announced Friday, since the funds available to battle new crises will be
far less than the E1 trillion many countries had called for.

“Today’s decision is a classical European compromise. It was as far
as the German government was willing to go and it was the minimum most
other Eurozone countries were expecting,” said Carsten Brzeski, European
economist at ING.

In an “almost desperate attempt to at least come up with the
magical 1 trillion number,” ministers added already-paid money to the
ESM’s new E500 billion to come up with E800, and then they converted
that to U.S. dollars in their public statement, Brzeski observed.

“Maybe this is new European arithmetics but the 1 trillion US
dollar only equals new and fresh lending for future bailouts of 500
billion euro,” he stated. “With today’s increase, the role of the ECB as
Eurozone fire brigade is likely to continue. More LTRO firepower could
be needed to strengthen the firewall.”

Although the size of the permanent ESM will remain at E500 billion,
Eurozone countries will pay in their contributions to it more quickly.
The fund will have paid-in capital of E80 billion and member states will
pay in two tranches of that capital this year, another two in 2013 and a
final tranche in 2014.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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