In an effort to cool worries about the stability of the currency bloc, European finance ministers approved new European Stability Mechanism for bailouts to deal with debt crises in the 16 countries in the futures. A permanent mechanism was agreed on Sunday.
The new rules will be taken into effect in mid-2013. Banks and hedge funds could have to take losses if a country runs out of money. They could be forced to do so only after other countries in the euro-zone have agreed that the country is not solvent.
A country which can not access funds quickly enough to pay back its debts, will receive emergency loans like those for Ireland.
On Sunday, European ministers reached an agreement over a 85bn euro-bailout for the Irish Republic. The deal will see 35bn euros go towards to shore up the Irish banking system. The rest will be for the government’s day-to-day spending. An average interest rate payable on the loans is 5.8%.
According to Irish PM Brian Cowen, the deal had been the best available one for Ireland. The deal provides “vital time and space to successfully and conclusively solve the problem”.
European finance ministers agreed on the new rules but no agreement on the amount of money paid into the mechanism was given. EU Monetary Affairs Chief Olli Rehn reported that it would be closely modeled on the $582 billion financial backstop for the region.
According to Jean-Claude Juncker, the stability of the whole eurozone could be quickly threatened by its member’s financial problem.
Bonds from debt-burdened eurozone countries have been sold off massively in the recent weeks. This happened mainly in Ireland, Greece, Portugal, and Spain.
There had raised questions of sufficiency of the euro750 billion EU bailout fund to prop up highly-indebted nations to overcome safely from the crisis by 2013 when the mechanism expires.
Ireland and Greece had to slash government spending and hike taxes to get the bailout. Therefore, any bailout in the future would come with strict conditions like these two countries.