2010-06-08 09:44

LUXEMBOURG - Finance ministers from the debt-stricken euro zone sought to restore financial markets' confidence on Monday by agreeing how to deploy a vast anti-contagion programme if needed by struggling members.

Germany's coalition government agreed in parallel to budget cuts and taxes worth 11.2 billion euros next year -- and more than 80 billion euros by the end of 2014 -- in the latest of a series of austerity plans being hatched across the euro zone.

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Ministers from the 16 countries that use the euro finalised arrangements for a Special Purpose Vehicle (SPV) to raise up to 440 billion euros ($525.4 billion) to lend to euro zone countries that run into Greek-style payments problems.

"There is no uncertainty left about the euro zone's capacity to provide conditional aid to countries in fiscal trouble," European Economic and Monetary Affairs Commissioner Olli Rehn told a news conference after talks in Luxembourg.

Jean-Claude Juncker, who chaired the meeting, said the SPV would be operational this month.

A statement issued by the ministers said governments would make bigger commitments than first planned to ensure smooth operation and to justify a top credit rating.

The SPV is essentially a company that will be able to raise money on markets by issuing bonds thanks to loan guarantees provided by governments of the euro zone. Member states hope it will never be mobilised but that its existence will convince markets that default fears are unfounded.

Juncker and Rehn also welcomed additional austerity measures announced in mid-May by Spain and Portugal, which markets see as potential troublespots after Greece, the first country in the euro zone's 11-year history to require a financial rescue.

International Monetary Fund chief Dominique Strauss-Kahn, who joined the ministers, said the anti-contagion plan -- a safety net worth up to 750 billion euros once an IMF commitment of 250 billion euros is included -- was a "good step forward".

WARNING BY BRITISH PM

British Prime Minister David Cameron said the scale of his country's budget problems was worse than he had anticipated and cited Greece as an example of what happens when countries lose credibility or pretend difficult decisions can be avoided.

Hungary's new centre-right rulers, who alarmed markets last week by suggesting the country could face a Greek-style crisis, tried to reassure investors on Monday by pledging to stick to deficit-cutting targets their predecessors agreed with the IMF.

Britain and Hungary are not in the euro zone, but the risk of financial turmoil in wider EU countries is a factor weighing on confidence in the euro and in euro zone banks which have substantial exposure to central and eastern Europe.

Juncker said he saw "no problem at all" with Hungary, adding: "I only see the problem that politicians from Hungary talk too much."

The finance ministers also discussed ways of tightening surveillance of national budgets and applying earlier and tougher sanctions against countries that breach EU deficit limits or misrepresent their statistics, as Greece did.

EU President Herman Van Rompuy said they agreed in principle on the need to subject national budget strategy to greater peer scrutiny and to find more effective penalties for countries with wayward or potentially wayward public finances.