Merkel agrees to hike bailout for eurozone

German chancellor Angela Merkel said yesterday that her country may be willing, on a temporary basis, to hike the eurozone's bailout funds to €700 billion.

The 17-country eurozone is under pressure to raise its financial firewalls to boost confidence in struggling economies like Italy and Spain, and was debating on how to move from its interim rescue fund to a new, permanent one.

Merkel said yesterday that around €200 billion in rescue loans already promised to Greece, Ireland and Spain could run alongside a new €500 billion bailout fund until they had been repaid.

Without a policy change, the new European Stability Mechanism would only be allowed to extend some €300 billion in new loans, since existing bailout commitments had to be subtracted from its overall capacity.

Analysts say with Germany dropping its opposition to increasing the total bailout capacity, the EU has taken a big step towards building a financial firewall strong enough to prevent the spread of fiscal contagion to major economies like Spain.

Merkel's plan may however need to be approved by the German parliament.