Europe goes slow on rescue fund, stress tests

BRUSSELS Tue Jan 18, 2011 7:23am EST

German Interior Minister Thomas de Maiziere (C), Finance Minister Wolfgang Schaeuble (R) and Economics Minister Rainer Bruederle talk before a cabinet meeting at the Chancellery in Berlin, December 8, 2010. REUTERS/Thomas Peter

German Interior Minister Thomas de Maiziere (C), Finance Minister Wolfgang Schaeuble (R) and Economics Minister Rainer Bruederle talk before a cabinet meeting at the Chancellery in Berlin, December 8, 2010.

Credit: Reuters/Thomas Peter

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BRUSSELS (Reuters) - European finance ministers agreed on Tuesday to take their time over beefing up the euro zone's rescue fund and to publish new stress tests on the region's shaky banks in the second half of the year.

The go-slow approach could test the patience of investors, spooked by the euro zone debt crisis, who sold off peripheral countries' bonds this month until the European Central Bank intervened to steady markets.

Going beyond last July's flawed exercise, which failed to expose Irish banks' frailty, EU ministers agreed to include targets on liquidity in new, tougher tests of banks' ability to withstand financial shocks to be conducted by the end of May, with results in the third quarter, EU presidency sources said.

"The message is that the tests have to be much more stringent and credible," one source said.

The tests will encompass the same 91 banks with a tougher methodology, covering not only bank trading books but also banking books and searching tests of core tier 1 capital. Germany had previously resisted testing for liquidity.

New European watchdogs said last week they planned coordinated tests of banks and insurers in the first half of the year, with conclusions published in mid-2011.

Euro zone finance ministers explored ways to strengthen the 17-nation currency zone's financial backstops at their monthly session on Monday evening, but as expected came to no agreement.

Eurogroup chairman Jean-Claude Juncker said they discussed many options, but favored none.

German Finance Minister Wolfgang Schaeuble said that with markets calmer there was no rush to boost the European Financial Stability Facility, and it should be part of a comprehensive package of reforms adopted by EU leaders in late March.

"We want to bring about a comprehensive package and this naturally means, beyond short-term measures, an improvement of the Stability and Growth pact and economic coordination," Schaeuble told reporters.

GREECE QUASHES RESCHEDULING TALK

Greece, the first country to receive an EU-IMF bailout last May, moved swiftly to quash a senior minister's suggestion that it may seek to reschedule its entire outstanding debt to enable it to overcome its debt crisis.

"I do not believe in haircuts but in extending the repayment period on debt," Deputy Prime Minister Theodore Pangalos, a maverick whose comments do not always reflect government policy, told Skai TV late on Monday.

"Debt payment extension may refer not only to the 110 billion euros (of emergency funding) but the entire debt," he said.

Many economists believe Greece will eventually have to restructure its debt, but a finance ministry official who requested anonymity said Athens was not discussing stretching out repayment of its entire outstanding debt.

"The government has a very specific agenda ... there is preliminary agreement to extend repayment of Greece's EU/IMF bailout loans and that's it," the official said.

Juncker said the euro zone ministers discussed in general terms the possibility of reducing the interest rates charged on rescue loans to Greece and Ireland, and lengthening the maturity on Greece's 110 billion euro emergency package.

"As concerns the lengthening of the Greek maturity, we are not discussing this in detail as this is part of the comprehensive package we are supposed to deliver," he said.

The euro rebounded in European trading, jumping above $1.3400, after sliding in Asia as hopes were dashed for an immediate agreement to increase the size of the bailout fund.

Analysts expressed concern that the euro zone was veering away from early action now that bond markets are temporarily calmer following successful debt auctions by Portugal and Spain.

"What indications we have heard from European officials over the past several days is that they just don't feel the same sense of urgency that the market does," said Todd Elmer, currency strategist at Citi in Singapore.

GREATER LENDING POWER

The EFSF was set up last May after the Greek bailout to help any other euro zone countries that got shut out of credit markets. Ireland had to tap the fund in December after its public debt ballooned following a bank crash due to the bursting of a real estate bubble.

The EFSF borrows money on markets with euro zone government guarantees of up to 440 billion euros. But to obtain the top credit rating of triple A, the lenders have to set aside cash reserves effectively reducing the amount the fund can lend to countries in need to about 250 billion euros.

Markets want to see more money available for the fund because they estimate the current amount would not be sufficient if both Portugal and Spain applied for emergency financing.

Ministers of the six euro zone countries with a triple A rating -- Germany, France, the Netherlands, Finland, Austria and Luxembourg -- held a preliminary meeting on Monday to discuss how that aim could be achieved.

"Obviously it is clear that we have an interest in securing the (fund's) triple A status and the triple-A states are therefore positioning themselves such that their voice is heard in the future," Austrian Finance Minister Josef Proell told reporters.

Euro zone policymakers are expected eventually to increase the firepower of the rescue fund by 260 billion euros to reach 700 billion, a Reuters poll shows.

Last week, the European Commission and the European Central Bank called not only for the EFSF to have more money but also to use it in a different way -- for example to buy government bonds on the secondary market, like the ECB does now.

(Reporting by euro zone bureau; writing by Paul Taylor, Editing by Mike Peacock)

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