Eurozone ministers hailed a deal on Friday to boost their firewall against the debt crisis to more than US$1 trillion, but analysts were quick to pounce on “window dressing” to pad out the figures.
Under intense international pressure to combat the two-year crisis and with fresh Spanish budget woes underscoring the need not to let down their guard, finance ministers sealed an agreement aimed at reassuring financial markets.
“All together, the euro area is mobilizing an overall firewall of approximately 800 billion euros, more than [US]$1 trillion,” a joint statement from the 17 finance ministers of the eurozone bloc said.
However, on close inspection, it turned out that 300 billion euros of the headline figure was composed of loans already pledged to debt-wracked countries, giving only 500 billion euros in untapped funds.
And ministers agreed that the maximum lending capacity of the new combined bailout pot would be 700 billion euros, with the extra 100 billion euros cited coming from already pledged bilateral loans and a special EU fund.
Nonetheless, IMF Managing Director Christine Lagarde welcomed the deal and said it would “support the IMF’s efforts to increase its available resources for the benefit of all our members.”
The US also commented positively.
“Today’s announcement by the Eurogroup reinforces a trajectory of positive efforts to strengthen confidence in the euro area,” US Treasury spokeswoman Natalie Wyeth said in a statement. “Over the last several months, European leaders have made significant progress in addressing the crisis, and we welcome their unequivocal commitment to reinforcing their currency union.”
“We also look forward to continuing discussions in the G20 about how best to restore the global economy to strong, sustainable and balanced growth,” she said.
Joerg Asmussen, a top European Central Bank official, hailed the deal as “significant” and said: “I think now we Europeans can travel to the spring meeting [of the IMF] having done our homework on European firewalls.”
However, he warned that “a firewall is no substitute for reform.”
Ministers were under huge international pressure to clinch a deal that top and emerging G20 economies have said is the precondition for boosting their own contributions to the IMF to aid the eurozone.
However, many analysts were skeptical.
“It is a load of window dressing,” said Carsten Brzeski, senior economist at ING bank in Belgium.
The deal is a “classic European compromise” with extra elements added on “to present the 1 trillion number to financial markets,” Brzeski said.
“This so-called firewall is about as much use as a chocolate fireguard,” said Michael Hewson at CMC Markets. “The bottom line, is unless EU leaders mobilize a firewall in excess of 1.0 trillion euros, doubts will remain about their ability to prevent a contagion.”