Eurozone leaders meet today to discus debt crisis

 

EU Chiefs are meeting today to discuss how to strengthen the Eurozone's 440 billion euro bailout fund find agreement on how to protect themselves from the on-going debt crisis.

Germany and France will submit their plans for tighter economic and fiscal coordination, which they hope will be included in a unified proposal that leaders will agree in March, along with changes to the European Financial Stability Facility, the bailout fund which was agreed last year.

The 27 state representatives have already provisionally stated that they would consider solid proposal to strengthen the EFSF in order to ensure the necessary flexibility and financial capacity to provide adequate support, with those discussions due to be finalized next month.

Nothing is expected to be agreed to today, being described instead as 'a stock-taking exercise' to check on progress since December's meeting, when concerns about the debt crisis spreading from Greece and Ireland were discussed.

Spain has seen borrowing costs drop considerably following a bond auction held yesterday - a sign of increasing confidence from the markets.

Strengthening the EFSF has been the focus of discussion over the last few months, after it became evident that its effective lending capacity was actually only 250 billion euros, and not 440 billion originally thought, due to guarantees built into the fund to maintain its triple-A credit rating. Because of this, there have been concerns that if both Portugal and Spain were to require a bailout, the EFSF would not have sufficient funds.

The President of the ECB, who will hold talks with EU leaders over lunch today, is among those calling for the EFSF to be enlarged and made more flexible, so that it is not just a bailout lender of last resort.

One proposal for increasing the value of the fund is for the 6 countires with triple-A credit ratings to increase their own guarantees, with the other 11 countries having to make larger cash deposits to enlarge the und.

Another proposal is to allow the fund to buy the bonds of distressed euro zone states, either directly in the primary market or by lending money to states to buy back bonds, euro zone officials have said.

Discussions are also expected on the bailouts that have already taken place, and on whether the interest rate being charged on their loans should be lowered, or the term of the loans lengthened.

The EFSF is seen as the main solution to the Eurozone's debt problem, but disagreement remains over how it could be improved, with Germany set on securing stricter budgetary commitments from other member states in exchange for agreeing changes to the EFSF.

Germany's proposals include raising the pensionable age depending on a country's demographics, limiting wage increases, and agreeing a common tax base for corporations. There remains the risk that Friday's summit will underline just how far apart states remain, with Germany largely backed by the likes of France, Finland and the Netherlands, while Greece, Italy, Spain and others pull in different directions.

Some euro zone officials have concerns about the lack of progress, saying how they doubt whether a functioning package can be agreed to by the end of March. Leaders may consider holding a further summit in early March to keep the pressure on.

Today's summit was initially to discuss energy issues, and whilst will still be discussed, the debt crisis and the situation in Egypt are expected to take precedence.