Brussels, 14/03/2011 (Agence Europe) - On Monday 14 March, eurozone finance ministers looked at how to implement the European bailout fund decisions reached by eurozone heads of state on Friday (see EUROPE 10335), examining the financial commitments to be made to increase the EFSF (bailout fund)'s lending capacity to €440 billion. Joined by representatives of the 10 non-euro member states, they then looked at plans to set up a European Stability Mechanism (ESM) to replace the EFSF in July 2013. The final decisions on how to deal with the eurozone debt crisis will be taken at the European Council at the end of this month.
The EFSF has been used to bail out Ireland by raising the required funding on the money markets, relying on the guarantees supplied by other eurozone countries. The guarantees are set at €440bn in total but this means that this intergovernmental bailout fund has an effective lending capacity of €250bn because lending any more than that would jeopardise its AAA rating (the highest credit rating). It is said that this €250bn would not be enough if countries like Portugal and Spain were to request financial aid. One simple way of increasing the EFSF's lending capacity would be for the six AAA-eurozone countries (Germany, Austria, Finland, France, Luxembourg and the Netherlands) that have provided two-thirds of the guarantees to increase those guarantees. These countries are placing conditions on any extra guarantees, requiring struggling countries to take additional measures over and above their current austerity and reform programmes. On Friday, Portugal announced new measures to clean up public finances and bring its national debt back below the 3% of GDP cut-off point by next year (see EUROPE 10334).
The eurozone leaders have decided that the ESM will have a lending capacity of €500 billion, provided as a mixture of paid-in capacity, callable capital and guarantees. A timetable of part-payments will be drawn up, without trampling on the powers of national parliaments.
Investing in sovereign debt. The eurozone decided that the temporary EFSF and the permanent ESM will be able to invest in sovereign debt only directly from struggling member states and will only be allowed to buy bonds held by stakeholders like the European Central Bank on the secondary market (the ECB holds close to €80 billion of eurozone sovereign debt bonds). Any purchase by the EFSF or the ESM of bonds direct from a eurozone country would be exceptional and subject to the criterion that the country selling the bonds must introduce a structural adjustment programme.
Later in the evening, the ministers were due to iron out any obstacles to agreement in principle on the six items of draft legislation to reform economic governance in Europe (see EUROPE 10334) and it was hoped that political agreement would be reached on Tuesday. On Friday, the eurozone countries agreed to introduce the requirement of excess public debt (over 60% of GDP) being reduced by a twentieth a year, noting that the excess debt should be measured using all relevant elements. This would include household debt, a measure that Italy has been calling for. (M.B./transl.fl)