Eurozone nations to increase bailout

The 17 nations of the Eurozone agreed Friday to increase their bailout resources in an attempt to keep a lid on the debt crisis that has hobbled the region’s economy and raised doubt about the future of the euro.

But the new total of about $1 trillion in rescue funds still falls short of what many analysts and investors have suggested is necessary to insure major economies such as Spain and Italy against a possible default. Also, more than a third of the money is already committed to rescue packages for Greece, Ireland and Portugal, meaning that the actual amount available is considerably less.

Meeting in Copenhagen, Eurozone finance ministers said they would allow their temporary and soon-to-be-launched permanent bailout funds to overlap for a year, for a total lending capacity of 800 billion euros, or $1.06 trillion. The temporary program would cease by mid-2013, leaving a permanent rescue fund of $670 billion.

Officials hope that combining the two funds, if only for a short time, will create a backstop large enough to convince investors that the Eurozone stands behind countries like Spain and Italy. That, in turn, would help keep their borrowing costs down and ward off the specter of bankruptcy for economies considered too big to fail without wreaking havoc in global markets.

“We have a strong agreement on the firewall, which is a very good answer from the Eurozone,” Francois Baroin,France’sfinance minister, told reporters.

But many analysts have said that only a bailout fund approaching twice the size of that agreed to Friday would be sufficient to reassure investors. It also remains unclear whether the $1 trillion will be a sufficient commitment by the Eurozone to persuade the International Monetary Fund to expand its own pool of money set aside to help debt-laden European nations.

After a major flare-up in the second half of 2011 that left some observers wondering whether the euro would live to see its 10th birthday on Jan. 1, the debt crisis has abated somewhat in the last few months. The relative calm has been ascribed largely to moves by the European Central Bank to provide unusually cheap loans to other banks across Europe and to pledges by lagging Eurozone nations to slash spending and overhaul their uncompetitive economies.

But analysts warn that the crisis is liable to erupt again, especially if Europe falls back into a recession that would worsen countries’ debt loads. Critics say that while some budget cuts are necessary, too much government austerity is already choking off economic growth in the financially troubled nations on the Eurozone’s periphery, making it even harder for them to service their debts.

In Madrid, the fledgling Spanish government Friday proposed a 2012 budget that is one of the harshest the country has ever seen and that comes on top of painful austerity measures enacted by previous administrations.

The draft budget envisions $36 billion in savings through major spending reductions by the state and through tax increases on electricity and on big corporations. Government ministries would see their expenses cut by about 17% on average.

Officials say such drastic measures are necessary to bring down Spain’s budget deficit, despite mounting anger among a populace saddled with an unemployment rate of nearly 25%. Friday’s announcement of the draft budget followed a general strike by millions of workers Thursday that disrupted transportation and shut down factories.

Public discontent has hampered the official response to the euro crisis in more than just the debtor nations. In Germany, Europe’s paymaster, taxpayers angry about having to rescue their profligate neighbors have kept the government there from agreeing to a bigger bailout fund.

The Eurozone’s permanent rescue fund, known as the European Stability Mechanism, is due to come online in July. However, the full $670 billion will not be available at once but rather over time as nations make their contributions in several installments.

henry.chu@latimes.com

Chu reported from London.