Brussels, 03/11/2010 (Agence Europe) - Finland would like to see a permanent crisis management mechanism that would force private creditors to take on some of the financial cost of restructuring the sovereign debt of eurozone countries and it put ideas to the recent European summit in this connection (see EUROPE 10247). A Finnish diplomat said that various important decisions had been taken at the European Council and Finland wants a mechanism guaranteeing that creditors take their own responsibilities on board, that countries take their own responsibilities on board and that whatever mechanism is in place, Article 125 of the European Treaty will not be affected. Article 125 of the Lisbon Treaty bans any country from assuming another country's financial commitments.
This newsletter has obtained a copy of the Finnish idea, which is that eurozone countries would pledge to include harmonised collective action clauses when emitting bonds (sovereign debt). Such clauses are already used by most of the 16 countries in the eurozone as a mechanism to allow a majority of the holders of the bonds to agree on a restructuring which would be agreed to by all holders of identical bonds. The clauses would be introduced under an intergovernmental agreement similar to the one used to set up the current European Financial Stability Facility (EFSF). The above-mentioned Finnish diplomat points out that this idea would not need any change in the treaty and measures could also be prepared to allow a “European” body to coordinate the debt restructuring process.
Once a sufficient number of bonds have been issued (between 40% and 50% has been suggested), then the current financial stabilisation mechanism introduced in the spring to help the eurozone would be phased out. The EFSF will apply until June 2013 but can be extended until 2015. The Finnish government suggests that it would take 5 or 6 years for half of all sovereign debt in the eurozone to incorporate collective action clauses.
Debt restructuring means reducing the value of the debt and/or rescheduling repayment. Once its debt has been restructured, a eurozone country would have to guarantee any new bonds. If a member state finds it difficult to raise loans on the market, the EU section of the EFSF could intervene in the short-term, rather like the way an International Monetary Fund loan works, by making the funding conditional upon the introduction of a drastic structural adjustment plan. The amount available under the EU section of the EFSF has been set at €60 billion, but this might be increased.
Reluctance. An idea strongly defended by Germany, that of getting the private sector involved in the future permanent eurozone crisis management mechanism, has been included in the final report of the economic governance taskforce (see EUROPE 10239), but it is coming in for criticism. After the European Council, the Spanish prime minister José Luis Rodríguez Zapatero said that he was currently closer to those who are very cautious about getting the private sector involved in the mechanism. The president of the European Central Bank, Jean-Claude Trichet, believes that getting private creditors involved in the eurozone crisis management mechanism would increase the cost of re-financing the debt of the countries facing the greatest problems finding funding. German Chancellor Angela Merkel says that she has a different view and that like the president of the ECB, she also wants to ensure that the markets do not panic about the eurozone, but it must be borne in mind that taxpayers rightly do not want to be the only ones paying out and private investors have to be involved.
Earlier this week, the interest rate charged on a ten-year loan for Ireland reached its highest level since the creation of the euro, namely 7.22%. With a public deficit of above 30% this year, Dublin will be announcing a multi-annual adjustment programme later this month, setting out how it is planning to meet its deficit reduction targets. In Portugal, sovereign debt re-financing rates have risen to 6.15% and the government and opposition have agreed to a new package of austerity measures. (M.B./transl.fl)