BRUSSELS, (Reuters) – The European Central Bank moved to increase its financial firepower to fight the euro zone debt crisis yesterday, and European Union leaders agreed to change the EU treaty to create a permanent financial safety net.
The ECB, in charge of monetary policy in the 16-nation euro area, said it would almost double its capital to 10.76 billion euros to cope with bigger credit risk and market volatility. Euro zone members will provide the increase.
IMF Managing Director Dominique Strauss-Kahn, who has been critical of EU leaders’ disjointed response to the rolling crisis, said he was worried about slow growth and the threat of contagion in Europe.
“I’m worried and that’s why I’m urging the Europeans to provide for a comprehensive solution, because this piecemeal approach obviously doesn’t work,” Strauss-Kahn told a Thomson Reuters Newsmaker event in Washington. “And the markets are just waiting for what’s next.”
EU leaders approved a two-sentence amendment to the EU’s governing treaty at Germany’s behest to permit the creation of a European Stability Mechanism to handle financial crises from 2013, a draft summit statement said.
The ESM, to replace a temporary European Financial Stability Facility created in May, will be empowered to grant loans on strict conditions to member states in distress, with private sector bondholders sharing the cost of any sovereign debt writedown on a case-by-case basis.
The aim is to have the treaty change ratified by all 27 member states by end 2012. Decisions will be taken by unanimity, ensuring that EU paymaster Germany retains a veto.
The leaders papered over differences over whether to increase the existing rescue fund by agreeing on the principle of “ensuring adequate financial support through the EFSF pending the entry into force of the permanent mechanism”.
“We stand ready to do whatever is required to ensure the stability of the euro zone,” said the draft statement, which may be viewed sceptically by uneasy bond investors.
The EU, together with the IMF, has set up a 750 billion euro ($1 trillion) emergency loan pool to help highly indebted euro zone states unable to finance themselves in volatile financial markets.
The leaders were holding their seventh summit of the year, a record number due to the debt crisis, in which Greece and Ireland have received EU/IMF bailouts and Portugal and Spain are seen by markets as potential risks.
The decision by the Frankfurt-based ECB to raise its subscribed capital base was the first such increase in its 12-year lifetime, a mark of the severity of the situation.
“We infer from this that the ECB … is seeking a greater cushion in order to offset potential losses, given that its portfolio of securities holdings has risen substantially, as well as to protect itself from potential collateral losses,” Barclays Capital economists said in a research note.
The central bank has bought some 72 billion euros in euro zone government bonds since May but has resisted political pressure to substantially step up these asset purchases to help indebted governments avoid having to seek a bailout.
