Euro ministers add final stitch to debt safety net

LUXEMBOURG (Reuters) - Finance ministers from the debt-stricken euro zone sought to restore financial markets’ confidence on Monday by agreeing how to deploy a vast anti-contagion program if needed by struggling members.

Luxembourg's Prime Minister and Eurogroup chairman Jean-Claude Juncker (1stRow L), Treasury Minister Luc Frieden (1st Row 2ndL) and Euro zone finance ministers gather around the European Financial Stability Facility (EFSF) in Luxembourg June 7, 2010. Ministers sign the European Financial Stability Facility, a company that may borrow up to 440 billion euros ($525 billion) on the market for euro zone members in trouble. (1st Row L-R) Luxembourg's Jean-Claude Juncker, Luc Frieden, Germany's Wolfgang Schaeuble, Italy's Giulio Tremonti. (2nd Row L-R) Finland's Jyrki Katainen, Dutch Jan Kees De Jager, French Christine Lagarde, Portugal's Fernando Teixeira dos Santos, Spain's Elena Salgado, Irish Brian Lenihan, Belgium's Didier Reynders, Austria Josef Proll, Slovenia's Franc Krizanic and Cyprus Charilaos Stavrakis. REUTERS/Eric Vidal

Germany’s coalition government agreed in parallel to budget cuts and taxes worth 11.2 billion euros next year -- and more than 80 billion euros by the end of 2014 -- in the latest of a series of austerity plans being hatched across the euro zone.

Ministers from the 16 countries that use the euro finalized arrangements for a Special Purpose Vehicle (SPV) to raise up to 440 billion euros ($525.4 billion) to lend to euro zone countries that run into Greek-style payments problems.

“There is no uncertainty left about the euro zone’s capacity to provide conditional aid to countries in fiscal trouble,” European Economic and Monetary Affairs Commissioner Olli Rehn told a news conference after talks in Luxembourg.

Jean-Claude Juncker, who chaired the meeting, said the SPV would be operational this month.

A statement issued by the ministers said governments would make bigger commitments than first planned to ensure smooth operation and to justify a top credit rating.

The SPV is essentially a company that will be able to raise money on markets by issuing bonds thanks to loan guarantees provided by governments of the euro zone. Member states hope it will never be mobilized but that its existence will convince markets that default fears are unfounded.

Juncker and Rehn also welcomed additional austerity measures announced in mid-May by Spain and Portugal, which markets see as potential trouble spots after Greece, the first country in the euro zone’s 11-year history to require a financial rescue.

International Monetary Fund chief Dominique Strauss-Kahn, who joined the ministers, said the anti-contagion plan -- a safety net worth up to 750 billion euros once an IMF commitment of 250 billion euros is included -- was a “good step forward.”

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British Prime Minister David Cameron said the scale of his country’s budget problems was worse than he had anticipated and cited Greece as an example of what happens when countries lose credibility or pretend difficult decisions can be avoided.

Hungary’s new center-right rulers, who alarmed markets last week by suggesting the country could face a Greek-style crisis, tried to reassure investors on Monday by pledging to stick to deficit-cutting targets their predecessors agreed with the IMF.

Britain and Hungary are not in the euro zone, but the risk of financial turmoil in wider EU countries is a factor weighing on confidence in the euro and in euro zone banks which have substantial exposure to central and eastern Europe.

Juncker said he saw “no problem at all” with Hungary, adding: “I only see the problem that politicians from Hungary talk too much.”

The finance ministers also discussed ways of tightening surveillance of national budgets and applying earlier and tougher sanctions against countries that breach EU deficit limits or misrepresent their statistics, as Greece did.

EU President Herman Van Rompuy said they agreed in principle on the need to subject national budget strategy to greater peer scrutiny and to find more effective penalties for countries with wayward or potentially wayward public finances.

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Investors fled peripheral euro zone government stocks and bonds last week because of doubts about how the euro rescue mechanism would work and worries about the solvency of European banks exposed to the sovereign debt crisis.

World share prices dipped further on Monday. U.S. stocks closed lower in thin volume, and the euro fell below $1.20 for the first time in more than four years.

Concern about political stability in Spain, one of the troubled euro zone economies, fed market anxiety.

Juncker and Rehn said they were more concerned by the pace of the euro’s decline than by the lower exchange rate, and the IMF said a currency long seen by many as too strong was now closer to what economic fundamentals justified.

“But rigidities, especially in labor and financial markets in some countries, are limiting the necessary restructuring in the aftermath of the global crisis,” it said in a report.

Germany needs less than others to slow spending but, keen to set an example, will pursue savings of 30 billion euros over four years in welfare, mainly from unemployment benefits, and will cut thousands of federal government jobs.

The new savings are unlikely to please some of Germany’s partners, including the United States, which pressured Berlin at a G20 meeting in South Korea to stimulate domestic demand.

Despite the efforts in Luxembourg to reassure markets, German Chancellor Angela Merkel postponed talks with French President Nicolas Sarkozy on reforming governance of the euro zone. Officials cited diary problems.

The two had been due to patch up their differences over the euro zone and financial regulation, 10 days before an EU summit. The meeting will take place next Monday, German officials said.

Additional reporting by Marcin Grajewski, Sudip Kar-gupta and Brian Rohan in Luxembourg, Krisztina Than in Budapest, Matthias Sobolewski and Dave Graham in Berlin, George Matlock in London; writing by Brian Love and Paul Taylor; Editing by Noah Barkin and Timothy Heritage