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Eurozone countries build a bigger financial 'firewall'

March 30, 2012 |  8:14 am

Schaeuble
REPORTING FROM LONDON –- The 17 nations of the Eurozone agreed Friday to increase their bailout resources in an attempt to keep a lid on the debt crisis that has hobbled the region’s economy and raised doubts about the future of the euro.

But the establishment of about $1-trillion in rescue funds still falls short of what many analysts and investors have suggested is necessary to insure major economies such as Spain and Italy against a possible default. Also, more than a third of the money is already committed to rescue packages for Greece, Ireland and Portugal, meaning that the actual amount available for use is considerably less.

Meeting in Copenhagen, Eurozone finance ministers said they would allow their temporary and soon-to-be-launched permanent bailout funds to overlap for a year, for a total lending capacity of 800 billion euros, or $1.06 trillion.

Officials hope that combining the two funds, if only for a short time, will create a backstop large enough to convince investors that the Eurozone stands behind countries like Spain and Italy. That, in turn, would help keep their borrowing costs down and ward off the specter of bankruptcy.

“We have a strong agreement on the firewall, which is a very good answer from the Eurozone,” Francois Baroin, France’s finance minister, told reporters.

But many analysts have said that only a bailout fund approaching twice the size of that agreed on Friday would be sufficient to reassure investors.

After a major flare-up in the second half of 2011, the debt crisis has abated somewhat in the past few months. But analysts warn that the crisis is liable to erupt again, especially if Europe falls back into a recession that would worsen countries’ debt loads.

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-- Henry Chu

Photo: German Finance Minister Wolfgang Schaeuble speaks to reporters outside a meeting of Eurozone finance officials in Copenhagen. Credit: Torkil Adsersen / Agence France-Presse / Getty Images

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