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EU calls for re-assessment of size of bailout funds

Source: Reuters - Thu 4th Aug 2011

The European Commission called on Thursday for a re-assessment of all elements of the euro zone's current and future bailout funds, including size, to persuade markets the euro zone can respond to the debt crisis.

"I... urge a rapid re-assessment of all elements related to the EFSF, and concomitantly the ESM, in order to ensure that they are equipped with the means for dealing with contagious risk," European Commission President Jose Manuel Barroso said in a letter to EU leaders.

His call comes after Spanish and Italian bond yields rose well above 6%, heading towards unsustainable levels that could, if the trend continues, force these countries to ask for euro zone emergency loans from the bailout fund, the European Financial Stability Facility (EFSF).

Greece, Ireland and Portugal already depend on emergency loans from the euro zone and the International Monetary Fund.

The EFSF's current lending capacity is too small to provide funding to both Spain, the fourth biggest euro zone economy and Italy, the third biggest.

Economists have said the bailout fund, now at 440 billion euros, should be bigger - maybe twice its current size.

Barroso did not explicitly mention in his letter an increase in the size of the EFSF, but a Commission spokeswoman clarified at a regular briefing that the call included the size of the funds - the EFSF and the European Stability Mechanism due to replace it from 2013.

Barroso said a re-assessment of the bailout funds was needed, because markets were unconvinced that the euro zone could handle the crisis, which was now threatening core euro zone countries.

"Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis," Barroso said. "It is clear that we are no longer managing a crisis just in the euro area periphery."

Barroso also seemed to make a veiled appeal to the European Central Bank to help manage the crisis.

"Euro area financial stability must be safeguarded, with all EU institutions playing their part with the full backing of euro area Member States," he said.

Markets expect the ECB will resume its programme of buying bonds of distressed governments, at least until the EFSF can legally take over later this year, once its new powers to do that are approved by some national parliaments in autumn.

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