Eurozone gets new bailout fund

A new permanent bailout fund for the eurozone will come in to force later Monday at a meeting of finance ministers in Luxembourg.

A new permanent bailout fund for the eurozone will come in to force later Monday at a meeting of eurozone finance ministers in Luxembourg.

Luxembourg's Prime Minister Jean-Claude Juncker says he hopes the new fund will be able to raise at least €200 billion by the end of October. (Eric Vidal/Reuters)

The European Stability Mechanism (ESM) is designed to support faltering economies and banks in countries that use the euro currency.

It will eventually replace the old system, the European Financial Stability Facility, which has already lent about €200 billion, or more than $250 billion, to Greece, Ireland and Portugal over the past two years.

Eurozone countries will make the first capital payments into the fund this week to ease a deepening debt crisis .

Each eurozone government will contribute start-up money in amounts roughly proportionate to the size of the country’s economy.

Germany, with the largest economy, will contribute about 27 per cent, followed by France and Italy.

The fund should reach its full lending capacity of €500 billion by 2014 by selling ESM bonds in the open market.

The head of the ESM board of governors, Jean-Claude Juncker, has said he hopes at least €200 billion will have been raised by the end of October.

European finance ministers meeting in Luxembourg will also discuss how to recapitalize Spain's banking sector, hit hard by a collapse of the country's real estate market.

Less pessimistic

Olli Rehn, the EU's financial and monetary affairs commissioner, said the organization's ability to react to the financial crisis in the 17 countries that use the euro has much improved compared with two years ago when the crisis began. He also welcomed the launch of the permanent bailout fund.

"We have enough challenges in Europe," Rehn said as he entered a meeting of finance ministers from the eurozone. He added that while nobody was in a " party mood," he was "less pessimistic for the moment of the future prospects of the eurozone than, for instance, in the spring."

On Tuesday, German Chancellor Angela Merkel makes her first visit to Greece since the debt crisis began in 2009 — and on Wednesday, Spanish Prime Minister Mariano Rajoy travels for talks with French President Francois Hollande in Paris.

With files from The Associated Press