Finland ready to compromise on bigger bailout fund

SAARISELKA, Finland Sat Mar 24, 2012 7:19pm GMT

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SAARISELKA, Finland (Reuters) - Finland is prepared to compromise on creating a bigger rescue fund for the euro zone despite scepticism over whether it is needed, Prime Minister Jyrki Katainen said on Saturday.

Euro zone finance ministers will discuss the issue at a meeting in Copenhagen on March 30-31.

While almost all of the currency bloc's 17 member states favour a stronger firewall, Germany and Finland have been reluctant to commit.

"We are ready to find a compromise," Katainen told Reuters in an interview on the sidelines of a gathering of senior European policy makers in Saariselka, a resort in Finnish Lapland. "What's important is that the firewall is credible."

The firewall is one of the longest-running challenges the euro zone has faced in trying to get on top of the sovereign debt crisis over the past two years.

The hope is that by increasing its size, it will make it easier to handle the fallout if the crisis spreads to bigger economies such as Spain.

German news magazine Spiegel said in a report made available on Saturday that German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble had dropped their opposition to a larger firewall, citing unnamed government sources. <ID:L6E8EO0JG>

The euro zone currently has a temporary crisis fund, the 440 billion euro EFSF, and from July will also have a permanent mechanism, the 500 billion euro ESM.

The European Commission, in a paper obtained by Reuters, has put forward three options for increasing the size of the firewall, using different methods of combining the resources of the EFSF and ESM.

Of the three, diplomats say the most likely to win backing at the meeting in Copenhagen is one in which the resources left in the EFSF - after its disbursements of around 200 billion euros to Portugal, Ireland and Greece - are combined with the ESM to create a facility of around 750 billion euros.

OVERCOMING OPPOSITION

Finland has been wary of increasing the fund, with public opinion in the country - one of only three triple-A states left in the euro zone - against taking on more liabilities. But Katainen indicated that opposition could be overcome.

While European financial markets have stabilised in recent weeks with the help of 1 trillion euros of three-year loans from the European Central Bank (ECB) and a new bailout fund for Greece, policymakers are under pressure to create a stronger firewall.

They hope that in turn will open the way for the International Monetary Fund (IMF) to increase its crisis-fighting resources, building another layer of protection.

The IMF will meet in Washington on April 20-22.

Olli Rehn, the EU's top economic official, has been pushing for a fund that is big enough to bail out countries such as Italy and Spain should they be cut off from the markets, and said he was confident of a breakthrough in Copenhagen.

"The Commission has prepared a number of options for the Eurogroup," Rehn, also a Finn, told reporters in Saariselka.

"I am confident that we will reach a satisfactory compromise towards the end of next week to reinforce the euro area firewall, which will also help to increase the IMF resources in April in the spring meetings."

Katainen convened the gathering in Saariselka, which also included ECB board member Joerg Asmussen and the head of the World Trade Organization, Pascal Lamy, to discuss the longer-term future for the EU and how to stimulate growth.

Katainen said the firewall issue had also been a critical topic of the talks, held in a snowbound log cabin in a village 200 km (125 miles) north of the Arctic Circle.

"Firstly, it must be high enough, and secondly, it cannot be too high," Katainen said of the firewall. "Otherwise the liabilities of the member countries would rise too much and it might have a negative impact on the countries' credibility."

He also said the euro zone must be prepared to cut its reliance on the ECB's crisis support measures in a few years, a view seconded by Asmussen.

"We cannot outsource crisis management to the ECB only," Katainen said. "Now we have a couple of years' time to do what's necessary in order to strengthen the growth basis and strengthen the EU's credibility."

(Reporting by Ritsuko Ando and Luke Baker; editing by Jason Neely)

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