–Adds on banking sector, Irish aid package to story sent at 14:05 GMT
–EU’s Rehn Praises Portugal, Spain Budget Consolidation Moves

FRANKFURT (MNI) – The European Financial Stability Facility should
be enhanced and reinforced to show markets that political leaders are
serious about maintaining confidence in the single currency, European
Commission President Jose Manuel Barroso declared Wednesday.

Both Portugal and Spain are moving in the right direction in fiscal
consolidation, the European Commissioner for Economic and Monetary
Affairs Olli Rehn also told reporters at the same press conference, in
Brussels.

For Portugal to reach its deficit target for last year “is already
a major achievement,” Rehn said. But for the country to surpass that
target, as the Portuguese Prime Minister Jose Socrates announced
yesterday, “is even better news,” Rehn pronounced.

Indeed the country’s new fiscal law, which will set up quarterly
monitoring of public expenditure, “should provide a major contribution
to fiscal consolidation,” Rehn said.

He added that, “Spain has adopted many important and appropriate
measures over the last months to consolidate public finances”, increase
flexibility in the labor market, and reform its banking sector.

“The [pension] reform is indeed essential” in Spain, both because
of the country’s ageing population and the need to bolster confidence on
the financial markets, Rehn added.

“In terms of fiscal consolidation, Spain is on track,” Rehn
asserted. “The data so far have been encouraging,” showing that the
economy is stabilizing, he said.

“Therefore we are encouraging the Spanish authorities to continue
along this track with the same boldness and determination,” Rehn added.

Addressing reforms to the financial stability mechanism, Barroso
said, “We are preparing the design of the permanent mechanism…so it
makes sense…also to prepare and to reinforce the existing one,” given
that the market is still suffering from instability.

But Barroso denied that plans to reinforce the lending capacity of
the EFSF necessarily meant they were expecting Portugal to follow Greece
and Ireland in requesting aid.

“We believe it is important to have this instrument to give
reassurances to the market that Eurozone stability is not in question.
It is important for the markets to know that the EU and Eurozone leaders
are committed to do whatever is necessary to preserve that financial
stability,” Barroso said.

“That is the reason why we are doing it..it is a precautionary
measure that makes sense…we are not with this implying that we will
use it for country A or country B” or any particular country, he added.

Rehn seconded this notion.

“To my mind it is very clear — we have learned in this crisis that
prevention is always better than correction, not to speak of crisis
resolution,” he said. “And that is why we have proposed a profound
reform of economic governance in Europe that’s now in progress and that
will be completed by the summer of this year. That is the first and
foremost task.”

But he reminded that “it is better to be safe than sorry” and to
make sure that resources are available even for the worst case scenario.
“It has been very important that we have been able to create these
financial backstops.”

The comments by Rehn and Barroso lend some credence to recent
reports saying that Eurozone officials are working on strong new
measures to end the debt crisis for once and for all by restoring
confidence in the single-currency area.

Things mentioned in reports as under stronger consideration than
before include: a Eurobond; enhancing lending capacity of EFSF and its
successor mechanism; an aid package to Portugal; and even the possible
purchase of peripheral bonds by the EFSF.

Rehn called Eurobonds “an intellectually attractive idea that has
been part of the discussion [in] the European Union for quite some
time.” However, he added, “I find that the realistic way forward is the
one that President Barroso outlined, which is to reinforce the effective
lending capacity” and widen the scope of the EFSF.

Rehn said it was important to ensure that the banking sector was
repaired in order to “safeguard” against contagion and “ensure the
provision of credit to the real economy.”

“To that effect, bank restructuring needs to proceed, especially
for those banks which have received significant amounts of state aid,”
he underscored.

“Also, banks will be required progressively to strengthen their
capital base so as to improve their capacity to withstand adverse
stocks,” he added.

“One part of this will be the next round of bank stress tests in
the coming months, which will be made with a common method and with even
more rigor than the previous round,” Rehn noted. He argued that the
previous round, completed last July, “was much better than its
reputation.”

“The results of this [new] round of stress tests will guide the
necessary restructuring and possible recapitalization of the banking
sector in Europe,” he said.

Rehn dodged a question on whether the interest rate charged to
Ireland in its rescue package might be too high. “The interest rate as
defined in the Irish loan package is in line with the previous decision
of the council concerning the Greek loan package and this level was
decided following quite lengthy and intensive discussions among the
member states,” he said.

–Frankfurt newsroom; +49-69-720142, tbuell@marketnews.com

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