EU plans package to confront debt crisis

THE Eurozone is preparing a “comprehensive” package to confront its sovereign debt crisis, as Spain prepares for today’s first crucial bond sale of 2011, a year in which it must refinance a quarter of its debt.

European Commission president Jose Manuel Borroso called for Eurozone leaders to beef up the region’s rescue facility yesterday, with increased borrowing powers thought to be on the agenda.

“The financing capacity must be reinforced and the scope of the activities of the European Financial Stability Facililty (EFSF) should be widened,” Barroso told reporters.

The €440bn EFSF, which was created in the wake of the Greek bailout, is already set to increase this year through several debt sales, but with Portugal on the brink of a €50-€100bn rescue and investors turning wary eyes on Spain, EU officials are worried that more action is needed.

German finance minister Wolfgang Schaeuble said yesterday that the February meeting of the European Council would see a wide-ranging solution thrashed out between leaders.

“We can’t just solve the problems over the short term -- if there are short term problems -- but also over the mid-term,” he said.

But Eurozone members will go to the market for billions before Feburary, with Spain and Italy both holding auctions today. Spain’s sale in particular marks the start of a crunch period. It will auction €173bn’s worth of debt this year and must keep its borrowing costs down to avoid being saddled with unsustainable bills for the future.

Meanwhile, Portugal held a successful auction of €1.25bn of long-dated debt yesterday. Overall yields were down slightly to 6.7 per cent from 6.8 per cent in November.

Analysts suggested that the ECB could have been behind the drop, but Kevin Dunning of the Economist Intelligence Unit said: “ECB debt purchases will only be able to delay, not prevent, Portugal applying for a euro area bailout.”