FRANKFURT (MNI) – European governments appear poised to boost the
Eurozone’s bailout fund at least temporarily as European Central Bank
policymakers signal no more support from monetary authorities.

Dropping its long-held resistance, the German government is willing
to compromise on an increase in the size of Europe’s firewall against
the debt crisis at the ECOFIN meeting in Copenhagen later this week,
German media report.

German chancellor Merkel said Monday that she can imagine the E200
billion already committed to Greece, Ireland and Portugal by the
temporary bailout fund, the European Financial Stability Facility
(EFSF), running in tandem with the E500 billion earmarked for the
permanent fund, known as the European Stability Mechanism (ESM).

Most other EMU governments, along with the European Commission,
still favor allowing the EFSF to operate at its full capacity of E440
billion alongside the ESM, which would create a combined total of E940
billion.

The head of the EFSF, Klaus Regling, called over the weekend for a
bold increase in bailout fund firepower to calm the financial markets,
after renewed jitters over Spain pushed Italian and Spanish yields up
late last week. “More money would indeed further calm markets. Whether
this is right or wrong, it is a fact,” Regling said.

The EFSF chief said that the generally more stable tenor of debt
markets since the ECB pumped E1 trillion of cheap 3-year cash into the
banking system could make it politically harder to boost the fund.
However, he stressed that “the majority of market players do not believe
the crisis is over and expect further sovereign ratings downgrades this
year.”

The ECB has long urged a larger firewall, and it sharpened its
demand by signalling that it has done its part, thus putting the onus on
governments.

Following the renewed rise of Spanish and Italian bond yields last
week, ECB Executive Board member Joerg Asmussen stressed on Monday that
governments must take advantage of the relative calm in the markets
following the ECB’s 3-year tenders “to improve their fiscal position and
improve their competitiveness.”

Asmussen did not slam the door entirely on further ECB support
measures, noting that the central bank never pre-commits, but he
suggested that markets should not bet on further easing measures.

“All non-standard measures are by their nature temporary. Nobody
should expect that we will do a third LTRO based on the fact that we
have already done two LTROs,” Asmussen said. “In our view it is too
early to decide on the exit from non-standard measures, but we have to
start to think about how to prepare the exit.”

Fellow Executive Board member Benoit Coeure on Monday also stressed
that a “timely exit” from these measures “and a return to a less
accommodative policy stance – once the economic conditions are ripe –
are essential.”

Asmussen and Coeure are just the latest two policymakers to
publicly mull an ECB exit strategy. While it is certainly premature to
expect a large-scale reversal of ECB support measures, the exit rhetoric
makes clear that the central bank is not planning any additional
non-standard easing measures.

Asmussen also signalled that last week’s disappointing PMIs have
not changed the ECB’s monetary policy assessment yet. Germany’s key IFO
indicator, which unexpectedly rose further on Monday, will likely
reenforce this assessment.

“What we are seeing is a stabilization of the economic activity at
low levels. This is undisputed,” Asmussen asserted. “The likely outcome
is a mild recession this year, with a small contraction in the Eurozone
as a whole.”

Asked whether consumers and companies can expect rates to remain at
exceptionally low levels for many years to come, he said: “We never
pre-commit in our actions. Our standard measures such as changes in the
interest rates will always be set with the objective to ensure price
stability.”

Asmussen added: “All our policy decisions are guided by this
objective. Other economic goals fall into the competence of governments.
There is a clear division of labor.”

As governments gear up for the ECOFIN meeting and a decision on the
Eurozone’s bailout fund later this week, the focus is now clearly on
their share of the job.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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