Weber hints at bigger EU rescue package

FRANKFURT: European Central Bank council member Axel Weber said governments can increase the size of the European Union-led bailout fund if necessary to restore confidence in the euro.

“Seven hundred and fifty billion should be enough to assure the markets,” Weber said at the German embassy in Paris late on Wednesday. “If not, it will have to be increased.”

Contagion from Europe’s sovereign debt crisis is spreading to Spain, sparking concern that the bailout fund set up in May isn’t large enough to rescue the euro region’s fourth-largest economy. The premium on Spanish debt over German bunds rose to a euro-era record yesterday and Portugal’s bonds fell on concern they will follow Ireland and Greece in asking for external aid.

“It is far from certain whether the fund can be increased as easily as that,” given governments may face domestic resistance to a top up request, Commerzbank analysts wrote in a research note today. “So there is a danger that markets are going to consider this statement to be premature, thus increasing market scepticism regarding the ability to act among those responsible.”

Spain’s economy is almost twice the size of Portugal, Greece and Ireland combined. Deputy finance minister Jose Manuel Campa said in an interview yesterday the country’s funding position for the rest of the year is “comfortable.”

The yield on Spain’s 10-year government bond rose to 5.14% at 10:19 a.m. in London. The euro fell to $1.3300 from as high as $1.3350 earlier on Thursday.

Weber, who has said the ECB needs to start withdrawing some of its emergency stimulus measures next year, said governments will “do what is necessary to see the euro maintained”.

The European Union and the International Monetary Fund established the 750 billion-euro ($1 trillion) fund in May after Greece’s near-default threatened the survival of the euro. Klaus Regling, who runs the largest part of the fund, told Bild- Zeitung in an interview published today that it’s large enough for all member states.

Weber, a leading candidate to take over from Jean-Claude Trichet as head of the ECB next year, backed German government proposals to create a permanent crisis-resolution mechanism once the bailout fund expires in 2013. “In order not to distort incentives for investors, private creditors shouldn’t be relieved of their responsibility,” said Weber, who heads Germany’s Bundesbank. Future aid for euro- member states should be tied to “strict conditions” and only be used “when the stability of the monetary union as a whole is in danger,” he said.

Ireland on November 21 applied to the EU for a rescue to bail out its banking system. Weber said the ECB “welcomes” Ireland’s request for help and is “confident” the package will help stabilize the country’s financial system.