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Euro up despite no sign of quick rescue fund deal Euro up despite no sign of rescue fund deal
(about 1 hour later)
The euro has risen sharply, despite indications the eurozone rescue fund will not be increased any time soon. The euro has risen sharply, despite signs that governments are in no rush to increase the eurozone rescue fund.
The single currency gained more than a cent against the dollar on Tuesday morning to more than $1.34.The single currency gained more than a cent against the dollar on Tuesday morning to more than $1.34.
On Monday, German finance minister Wolfgang Schaeuble downplayed the need to increase the European Financial Stability Facility (EFSF) to pre-empt any debt crisis in Spain or Portugal. Meanwhile, an agreement is emerging over the terms of a much tougher round of stress tests for European banks, to be conducted later this year.
European ministers will finish a two-day meeting on Tuesday. European finance ministers are discussing the tests on the second day of a two-day meeting in Brussels.
'Speculation''Speculation'
The EFSF was set up in May last year, and benefits from eurozone government guarantees for 440bn euros (£368bn; $590bn). The European Financial Stability Facility (EFSF) was set up in May last year, and benefits from eurozone government guarantees for 440bn euros (£368bn; $590bn).
But in order to maintain its maximum triple-A-rating, the fund is effectively limited to borrowing about just 250bn euros, which many investors fear may prove insufficient to fund any future bail-out of Spain.But in order to maintain its maximum triple-A-rating, the fund is effectively limited to borrowing about just 250bn euros, which many investors fear may prove insufficient to fund any future bail-out of Spain.
"Portugal doesn't want or need a bail-out at all," said Mr Schaeuble, speaking on German radio on Monday. On Monday, German finance minister Wolfgang Schaeuble downplayed the need to increase the EFSF to pre-empt any debt crisis in Spain or Portugal.
"Portugal doesn't want or need a bail-out at all," said Mr Schaeuble, speaking on German radio.
"There's enough funds for Ireland and the rest is speculation that is not being stirred up by anyone.""There's enough funds for Ireland and the rest is speculation that is not being stirred up by anyone."
Mr Schaeuble has however suggested his government may be willing to increase its guarantee for the fund so that it is able to lend the originally-intended amount. However, Mr Schaeuble has suggested his government may be willing to increase its guarantee for the fund so that it is able to lend the originally-intended amount.
The euro initially fell against most currencies on Monday in the immediate wake of Mr Schaeuble's comments.The euro initially fell against most currencies on Monday in the immediate wake of Mr Schaeuble's comments.
But it has since quickly recouped all of its losses and pushed significantly higher against nearly all currencies as speculation grows that an agreement will eventually be reached.But it has since quickly recouped all of its losses and pushed significantly higher against nearly all currencies as speculation grows that an agreement will eventually be reached.
Only the pound rose slightly against the euro, to 1.196 euros, due to higher-than-expected UK inflation data, which raised expectations of an interest rate rise in sterling.Only the pound rose slightly against the euro, to 1.196 euros, due to higher-than-expected UK inflation data, which raised expectations of an interest rate rise in sterling.
'Broad' discussion'Broad' discussion
Jean-Claude Juncker, who is chairing the ministerial meeting, said that many options for bolstering the crisis response mechanism had been discussed, but none was favoured.Jean-Claude Juncker, who is chairing the ministerial meeting, said that many options for bolstering the crisis response mechanism had been discussed, but none was favoured.
"All of the ingredients of the solutions we have to form are on the table," he said. "The discussion was broad and will be narrowed in the next couple of weeks.""All of the ingredients of the solutions we have to form are on the table," he said. "The discussion was broad and will be narrowed in the next couple of weeks."
European monetary affairs commissioner Olli Rehn also sought to create an air of inevitability that a solution would be reached.European monetary affairs commissioner Olli Rehn also sought to create an air of inevitability that a solution would be reached.
"We shall improve our current existing financial backstops so that the so-called market forces cannot even have the slightest doubt about our capacity to act even in the most stressed scenarios," he said."We shall improve our current existing financial backstops so that the so-called market forces cannot even have the slightest doubt about our capacity to act even in the most stressed scenarios," he said.
Both the European Commission and the European Central Bank (ECB) have called for an increase in the size of the EFSF, as well as giving it new powers, such as the right to buy up eurozone government debt.Both the European Commission and the European Central Bank (ECB) have called for an increase in the size of the EFSF, as well as giving it new powers, such as the right to buy up eurozone government debt.
Since the Irish Republic was rescued by the fund late last year, markets have been reassured by the ECB's decision to step up its own purchases of eurozone government debts.Since the Irish Republic was rescued by the fund late last year, markets have been reassured by the ECB's decision to step up its own purchases of eurozone government debts.
Last week, the ECB seemingly confirmed its role in propping up the more financially stressed governments, by buying an unusually high 2.3bn euros in government debts ahead of a key bond auction in Portugal. Last week, the ECB seemingly confirmed its role in propping up the more financially stressed governments, by buying an unusually high 2.3bn euros in government debts ahead of key bond auctions in Portugal and Spain, both of which were successful.
Government debt problems have not gone away, as illustrated on Tuesday when the Greek government contradicted comments by its deputy prime minister suggesting the country would seek to extend the repayment dates on all of its debts in order to be able to repay them in full.
But by putting a floor under bond prices, the ECB has also reduced the sense of urgency among policy-makers, particularly in Germany, which has sought to resist rushed decisions.But by putting a floor under bond prices, the ECB has also reduced the sense of urgency among policy-makers, particularly in Germany, which has sought to resist rushed decisions.
However, there are concerns at the central bank that by entangling itself in governments' finances, it is undermining its independence. "Market developments in the last week have, thank God, taken the urgency out of these discussions," commented Mr Schaeuble going into the talks.
However, there are concerns at the ECB that by entangling itself in governments' finances, it is undermining its independence.
Penalty interest ratePenalty interest rate
Mr Juncker said ministers had also discussed the option of lowering the interest rate charged on bail-out loans.Mr Juncker said ministers had also discussed the option of lowering the interest rate charged on bail-out loans.
The Irish Republic had to pay an average interest rate of 5.8% on its rescue loans - higher even than the 5.2% charged to Greece.The Irish Republic had to pay an average interest rate of 5.8% on its rescue loans - higher even than the 5.2% charged to Greece.
Some eurozone governments - notably Germany - wanted to charge an even higher penalty rate of up to 7%, to ensure that governments only seek a financial rescue as a last resort.Some eurozone governments - notably Germany - wanted to charge an even higher penalty rate of up to 7%, to ensure that governments only seek a financial rescue as a last resort.
But by placing an additional burden on the finances of distressed governments, the high interest rate has also increased market fears that they will be unable to repay their debts from private-sector lenders.But by placing an additional burden on the finances of distressed governments, the high interest rate has also increased market fears that they will be unable to repay their debts from private-sector lenders.
For his part, Mr Schaeuble made clear that he wanted to governments to provide more than just an improved crisis-management mechanism.
He has called for a package of policies to improve competitiveness and fiscal co-ordination, in order to "absolve us from the necessity to react again every couple of months".
Stress tests
Meanwhile, it emerged that ministers have agreed terms of a new round of stress tests for European banks.
Increasing the financial strength of Europe's banks is widely seen as a necessary step in solving Europe's government debt problems.
In a previous round of tests conducted last year, only seven of the 91 banks examined failed.
The tests were widely criticised, particularly when some of the Irish banks that had passed collapsed later in the year.
European internal markets commissioner Michel Barnier has been taking advice from his counterparties in Washington, after similar stress tests on US banks were seen as stricter, and were much more successful in restoring market confidence.
The US examined 19 banks in April, of which 10 were failed and forced to raise $75bn in additional capital.
The new round of European tests will take place this May, with results to be published in the summer.
They will include a new "liquidity" test, required by the ECB, to ensure the banks have enough readily-available cash to survive - at least for some weeks - a run by depositors and lenders.
The tests are also expected to include a cut in the value of government bonds held by banks on a long-term basis.
The previous tests were widely criticised for allowing banks to continue valuing these bonds at face value, even when markets said they were worth much less.
They were also criticised for allowing different countries to implement them in different, and inconsistent, ways - a point recognised by Commissioner Rehn at the sidelines of the meeting.