Wheels set in motion to solve the crisis
THINGS, finally, are beginning to move. The European authorities pulled out all the stops to ensure Portugal was able to borrow on the markets yesterday. But it is becoming clear they also knew this was only a stopgap measure, and far more radical steps must be taken.
Brian Lenihan may have been hinting at the new architecture when he told the Dail yesterday the next government might be able to negotiate a lower interest rate on the €60bn EU/IMF rescue fund.
Lower rates are reported to be one of the measures raised in private discussions in the corridors of power. They also include a much bigger rescue fund and direct purchases of government debt to help reduce interest payments.
Asian loans and ECB bond purchases may have kept the interest rate below the psychological 7pc at yesterday's Portuguese €600m auction. However, there is general acceptance that the markets are unwilling to fund the country's €20bn borrowing requirement for this year. The fact that the same may soon be true of Spain has concentrated minds.
The EU Commission has already gone public on what was, until very recently, dismissed as unthinkable. Economic and Monetary Commissioner Olli Rehn said "all options for the size and scope" of the EU rescue funds.
There is no doubt the €250bn size of the funds is not enough, but observers seized on the word "scope". It has been obvious that, not only is the fund too small, but having to charge 5.5pc on the loans to Ireland is self-defeating in a country trying to reduce budget deficits.
What is obvious financially will still be difficult politically. Finance ministers may be able to move things forward at their meeting next week but real progress, if it happens, will depend on the meeting of government leaders on February 4. The biggest political difficulties will be in Germany. Yet Chancellor Merkel was quite explicit yesterday, saying everything would be discussed step by step and Germany would do whatever is necessary to keep the euro stable.
Political difficulties elsewhere should not be under-estimated. While Ms Merkel must explain to her voters why they have to help rescue the deficit countries, the leaders of the recipients, including Ireland, have to explain why there can be no letup on the austerity programmes agreed with the lenders.
Indeed, the end result, if all this comes to pass, will be a significant, permanent reduction in fiscal freedom for members of the eurozone.