Al Jazeera takes a closer look at why the eurozone debt crisis matters, and possible solutions to the problem.
The chief of the eurozone’s bailout fund has said it has enough “firepower” to handle Europe’s debt crisis despite increasing market scepticism.
In an exclusive interview with Al Jazeera, Klaus Regling said that even if Italy were to run into trouble raising money from the markets, the European Financial Stability Facility (EFSF) along with the International Monetary Fund (IMF) could manage the situation for 12 months.
Italy and Spain, respectively the eurozone’s third and fourth largest economies, are both struggling with huge debts. Analysts say a default from both could spell disaster for the European Union.
Regling stressed that both countries have been able to refinance debt in the last fews days, but at an interest rate “higher than they wish and higher than a year ago or two years ago”.
“The important point is that they are able to refinance,” he said on Tuesday. “But if that were to change, then we would be available together with the IMF and the firepower certainly would be enough for a while and then we have a review clause so that the governments of the euro area countries would look at it.”
Asked specifically if the fund and IMF could handle a situation where Italy is unable to raise money in the markets, Regling said: “Certainly, for 12 months or so”.
The EFSF, set up in May 2010 in a move to tackle Europe’s debt crisis and preserve financial stability, is financed by members of the eurozone. It has so far provided financial assistance to Ireland and Portugal.
In July, the eurozone leaders expanded the effective lending capacity of the EFSF to $573bn.
“The euro is not doomed, the euro will exist for a long time. “
– Klaus Regling
To further strengthen the financial powers of the EFSF, a system is being developed in which its resources could be leveraged by attracting private investors. Such investors “otherwise might not be interested in buying bonds from some of our member states”, Regling said.
Regling dismissed pessimistic outlooks for the euro, the currency used by 17 European countries.
“The euro is not doomed. The euro will exist for a long time, and it’s not correct to argue that the strategy to preserve financial stability in the monetary union is not working,” he said.
“It is working in some countries. It’s not working very well so far in Greece, that’s correct … But Ireland is a big success story. That’s often ignored because so many are focused on negative news that comes out of Greece.”
Greece should narrowly avoid bankruptcy this year after European leaders and the IMF agreed to pay the latest tranche of financial aid that had been held up for weeks over political squabbling in Athens.
Greece’s parliament last week approved the government’s 2012 budget which was intended to shrink the country’s debt with tax rises and spending cuts, measures largely unpopular with the Greek public.
There have been growing concerns that Italy might be unable to pay its $2.5 trillion worth of debt. Its new government has proposed a package of $32bn in savings that would reduce the sum owed by cutting pensions and raising the retirement age.
To watch the full interview with Klaus Regling, tune into Al Jazeera English at 04:30 GMT on Saturday. The interview will also be available on livestream.