Globalisation debt & banking

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Eurozone needs 'mother of all firewalls', says
OECD



The eurozone needs "the mother of all

firewalls" if it is to protect the EU's single currency from debt contagion, the Organisation for Economic Co-operation and Development (OECD) has warned.Jean-Claude Juncker, the chairman of eurozone finance ministers, argued that opponents of an increase risked leaving the euro exposed to future contagion from financial markets.


By Bruno Waterfield, in Brussels
9:20PM BST 27 Mar 2012

Angel Gurria, OECD's secretary general, urged EU finance ministers meeting in Copenhagen on Friday to increase the eurozone's bailout fund to at least €1 trillion (£835bn).

"Weak financial conditions, fiscal consolidation and
economic adjustment are restricting demand in the short-term before the long-term benefits on stability and growth are felt," he said. "Decisive action to restore confidence and support demand is needed now."


Germany is trying to hold down any increase to €700bn but Mr Gurria stressed a big fund, the bigger the better, would be needed to fight a eurozone crisis that is not yet over.

"When dealing with markets you must overshoot
expectations," he said. "The mother of all firewalls should be in place, strong enough, broad enough, deep

enough, tall enough, just big."

The International Monetary Fund has made the increase the pre-condition of increasing its resources to provide credit lines to the euro area, which is facing turbulence on the bond markets.

Heralding a major battle with Germany, Jean-Claude Juncker, the chairman of eurozone finance ministers, argued that opponents of an increase risked leaving the euro exposed to future contagion from financial
markets.


"The firewalls have to be increased," he said. "For me it
is obvious that we would underestimate the current crisis and remaining consequences of that crisis if we would not be prepared to increase the firewall."


Berlin is fiercely resisting plans to combine the euro's
existing bailout "facility", worth €440bn, with a $500bn European Stability Mechanism (ESM), due to begin operating in July to create a combined fund of €940bn.


On Monday, German Chancellor Angela Merkel, who faces stiff parliamentary opposition to an increase, refused to combine the two funds, only conceding that €200bn in existing loans to Greece, Portugal and Ireland would be able to run in tandem with the ESM.

In contrast to Germany's position, the OECD's annual 2012 report on the eurozone warns that refinancing needs, both for highly indebted countries and fragile banks, could be more than €1 trillion within the next two years.

"Although it is unclear that funds on this scale would ever need to be drawn down, the availability of credible firewalls may enhance confidence," the report concluded.

"Euro area stability funds should be expanded further,
subject to conditionality, to provide credible support."


The OECD, which sees 0.2pc growth in the bloc in 2012,
rather than contraction, has cautioned the eurozone against complacency following the calmer financial markets in the wake of a massive European Central
Bank liquidity operation carried out at the start of the year.


"The pressure has come down, but we can't draw too much comfort from signs of healing. How many times have we seen conditions ease only for the crisis to
return? Risk spreads on government debt remain at
unsustainable levels for several European countries, and they have shown recent signs of creeping up again," said Mr Gurria