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Rescue fund 'has enough for Portugal & Spain'

Source: AFP - Thu 20th Jan 2011

Europe's bailout fund has enough money to cover potential rescues of both Portugal and much larger Spain, while Greece doesn't need a debt restructuring as some investors fear, the head of the fund insisted Thursday.

European officials are contemplating whether and how to overhaul the euro750 billion fund, which currently is able to lend out less than the full headline amount because of the need to secure a top credit rating.

Talk of an overhaul has been prompted by fears that possible rescues for Portugal and, particularly, Spain might overstretch the fund.

"I don't want to predict now whether these countries will need money; that is not the case at the moment, they are in a position to refinance themselves on the market at the moment," Regling told Germany's Deutschlandfunk radio.

"But if they were to come, then there is enough money. So there is no acute need to increase the EFSF," or European Financial Stability Facility, he added.

Eurozone governments make their euro440 billion contribution to the bailout fund by guaranteeing bonds issued by Regling's EFSF. The remaining euro310 billion come from the European Commission and the International Monetary Fund.

However, to get a triple-A credit rating for EFSF bonds - and make them attractive to investors - governments had to guarantee 120 % of their value, while rescued countries have to deposit a certain portion of the loans they receive "as a cash buffer."

That takes the EFSF's lending capacity down to only about euro250 billion, which many analysts say is insufficient to deal with a bailout of Spain.

"There may be possibilities to close this gap ... through other new mechanisms, and it certainly makes sense to consider that," Regling said.

Greece received a separate rescue loan package worth a total euro110 billion before the EFSF was established last year. Regling rejected suggestions that Greece is headed for a debt restructuring despite the bailout.

"The markets do indeed assume in their evaluation that Greece needs a restructuring, but that is not backed by developments - because the program in Greece is going well, the economic policy conditions connected with this credit," he said.

Reforms being pushed through to heal Greece's finances in the longer term will make the economy more dynamic, so the IMF, European Commission and European Central Bank believe "that Greece doesn't need a restructuring, that markets are overestimating this risk," Regling said.

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