Brussels, 18/11/2010 (Agence Europe) - The seventeen finance ministers of the eurozone have decided to speed up their work on preparing an in-depth response to the sovereign debt crisis, as requested by the December 2010 European Council. We will be speeding up our work, explained the chair of Eurogroup, Jean-Claude Juncker, after the Eurogroup meeting of Monday 17 January 2011. He refused to give any idea of timing but said there was urgent need to prepare an in-depth response, even though the economic situation is picking up and the eurozone is no longer as vulnerable to pressure from the money markets because the most exposed euro area countries have been successful in their issue of sovereign debt. EU Economic and Monetary Affairs Commissioner Olli Rehn said that the ministers agreed that a detailed response had to be drawn up to the sovereign debt crisis and they would be putting the finishing touches to the response in the near future. A special meeting may be convened to draw up proposals for the February European Council, as demanded by the European Commission (see EUROPE 10292).
EFSF. Drawing up a detailed repose to the debt crisis in the eurozone will involve debates about increasing the borrowing capacity of the EFSF, an intergovernmental fund created in May 2010 to help struggling eurozone countries roll over their debt. It has national guarantees to the tune of €440 billion but, in reality, can only lend up to €250 billion because the remainder is needed in reserve to ensure the EFSF can raise cheap cash on the money markets because of its AAA credit rating (the top rating). “The decision taken in May said that the facility will make €440 billion available. We are looking at the different ways we can actually do that,” said Juncker. Rehn said: “I am confident that the effective lending capacity of the EFSF will be expanded”. Addressing the European Parliament on Tuesday 18 January, the President of the European Commission, José Manuel Barroso, said he was not planning to raise the upper limit of EFSF for the moment but it would have to be done sooner or later.
There are several options available for increasing lending capacity. Eurozone countries could decide to increase their public guarantees, knowing that each fund-raising by the EFSF would need guarantees of 120%. Or the EFSF's lending capacity could be boosted within the existing limits. Would extra funding be requested from the six eurozone countries with AAA credit ratings (Germany, Austria, Finland, France, Luxembourg and the Netherlands)? The six account for 61% of the guarantees in the EFSF and met together on the fringes of Monday's Eurogroup meeting. Jean-Claude Juncker (the prime minister of Luxembourg) said he was not keen to note any disagreement amount AAA countries, pointing out that they had special responsibility. Italian Finance Minister Giulio Tremonti, who was not at the meeting, spoke of a “technical meeting”. Dutch Finance Minister Jan Kees said that a greater contribution to the EFSF by AAA countries would be feasible if the countries granted financial aid were to generate results in terms of economic reforms, fiscal consolidation and restructuring their banks.
The EFSF could be given the power to buy into the public debt of euro area countries, an idea promoted by France and likely to appeal to the ECB. The ECB has just bought up more than €2 billion in sovereign debt, the second time in a week.
Interest rates. The debate also circled around the question of interest rates charged by the EFSF (the only country currently borrowing money from the EFSF is Ireland). The current market rate of 2.5% has been beefed up by an extra 3% to cover the risk of default. Juncker simply said that the ministers had discussed the general question of lowering interest rates for the countries in question.
The chair of the European Parliament's Economic and Monetary Affairs Committee, Sharon Bowles (ADLE, UK), has mooted the idea of giving back to the countries receiving financial aid the amount of money used as coverage once the entire loan has been repaid. That would give the country in question an incentive to meet its debt obligations.
ESM. Alongside the debate around EFSF, preparing a detailed response to the eurozone debt crisis also includes preparations for setting up the European Stability Mechanism (ESM) to replace the provisional funds (like the EFSF) in the summer of 2013. Juncker talked about two types of meetings he will be chairing - one with eurozone countries and one with non-euro countries that want to take part in the work (currently Denmark, Hungary, the Czech Republic, the UK and Sweden). The ESM will decide on a case-by-case basis whether private creditors should be involved in restructuring the debt of a eurozone country. Juncker will submit proposals to the March 2011 European Council.
On Tuesday, Hungarian Finance Minister György Matolcsy said that he hoped that new legislation on reform of economic governance would be passed in June, which would require agreement at the European Council in March. (M.B./transl.fl)