Ireland, Portugal given breathing space
Eurozone finance ministers have agreed to give Ireland and Portugal more time to repay their bailout loans after a disastrously chaotic rescue for Cyprus renewed animosity towards the authorities overseeing the single currency area.
They also made some progress on a bundle of initiatives to create a banking union aimed at breaking the vicious circle between indebted sovereign governments and shaky banks, and preventing a rerun of the crises that have repeatedly threatened to sink the euro in the past three years.
The most important step taken by the ministers on Friday was an agreement, in principle, to extend the maturities for emergency loans to Ireland and Portugal by seven years. Prolonging the payment schedules could ease pressure on the countries' public finances and improve their borrowing terms with private lenders.
Because some of the loans were granted by a fund backed by all 27 European Union countries, finance ministers from the 10 EU countries not in the eurozone had to give their approval, too. The extensions must still be approved by the parliaments of some European Union countries, including Germany.
"This is another very important step forward toward a sustained return to full market financing for both countries," European commissioner for economic and monetary affairs Olli Rehn said after the meeting.
However, he stressed that Irish and Portuguese officials had to stick to promises to overhaul their economies, including the kind of painful belt-tightening that has been criticised for restraining growth, leading to wider deficits and making it harder for governments to pay down debt.
"Ultimately it is the combination of growth-enhancing structural reforms and consistent fiscal consolidation that will firmly re-establish investor confidence and ensure that the Irish and Portuguese people can put this very hard crisis behind them and move on," Dr Rehn said.
The president of the Eurogroup of finance ministers, Jeroen Dijsselbloem, said the authorities in Portugal, where the constitutional court recently overturned some austerity measures, would be able to pass "compensatory measures" to control spending.
The ministers are struggling to fend off a return to full-blown crisis mode in the eurozone as the ramifications of the Cypriot bailout become clearer and as other concerns, including Slovenia's perilous economy, rise up the agenda.
The Cypriot bailout raised questions about whether efforts to save the euro were on course. Investors were rattled by terms that included raiding the savings of uninsured depositors and by a forecast last week by the troika of international bodies overseeing bailouts that the downturn in the Cypriot economy in the next two years would be far more severe than expected just weeks ago.
The worry is that Cyprus may eventually need another bailout to keep it as a member of the euro area. On Friday, the ministers gave their political approval to the terms of the bailout, which involves eurozone member states contributing €9 billion ($11 billion) in loans and the International Monetary Fund providing €1 billion.
Officials said the first payments of aid to Cyprus from the bloc's bailout fund, the European Stability Mechanism, could be made in mid-May.
Dr Rehn said there would be more aid for Cyprus, but that it would involve directing more structural money to the country, rather than changing the total amount of the bailout.
Cyprus must raise billions of euros to stay within the terms of the bailout, and one option is for its central bank to sell gold reserves.
European Central Bank president Mario Draghi said the decision would be left to Cyprus's central bank, but he added that "profits made out of the sales of gold should cover first and foremost any potential loss the central bank might have" from the emergency liquidity assistance that has been provided by the European Central Bank. Another concern is the slow progress among euro governments on policies that were meant to break the doom loop, where member states incur enormous debts bailing out their banks.
In recent days, Germany has raised new concerns about a proposal to create a single banking supervisor for the European Union under the aegis of the ECB.
The creation of a single overseer is a precondition for the European Stability Mechanism to be tapped to directly recapitalise struggling lenders. Pumping bailout money into banks avoids putting the loans on national balance sheets and should help keep a lid on sovereign borrowing costs. Ireland and Spain are among the nations lobbying strongly to speed up the change.
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