Brussels, 22/03/2011 (Agence Europe) - In the early evening of Monday 21 March, European finance ministers put the finishing touches to how the European Stability Mechanism (ESM) will operate, a fund to replace the current EFSF in July 2013. The EFSF bailout fund was set up in May 2010 to ensure stability in the eurozone and has been used once so far, to provide aid for Ireland. The creation of bailout funds with more bite is part of the overall package of measures to deal with the eurozone sovereign debt crisis that the European Council will formally adopt on Thursday 24 and Friday 25 March. Prospects for the summit agreeing on an overall package have been cast in doubt by the upcoming elections in Finland, political turmoil in Portugal and Ireland's desire to renegotiate the strings attached to its loans from the EFSF.
Like the EFSF, the ESM will be an intergovernmental fund under international public law and based in Luxembourg. In order to be able to lend up to €500 billion without jeopardising its top credit rating (AAA), i twill need to have paid-up capital of €700 billion. The countries in the eurozone will provide €80bn in capital, half in July 2013 and half over the following three years. France is isolated in its view that there should be only €10bn in paid-up capital to start with, the remaining €70bn coming in the form of guarantees. France argued that this would have cost less and would have sent a message to the markets that the eurozone was not planning to actually use the bailout fund. Alongside the €80bn of paid-up capital, an extra €620bn will be found, if needed, from callable capital and guarantees.
The chair of the Eurogroup, Jean-Claude Juncker, admitted that the experience with the EFSF had demonstrated that this kind of margin was required. EU Economic and Monetary Affairs Commissioner Olli Rehn recognised that the capital reserve could be used to deal with changes in the entry conditions for some countries. The ministers say that fines levied for infringement of the stability and growth pact will go to the ESM as long as there is an interinstitutional agreement on the economic governance legislation.
As with the EFSF, the ministers decided to use the same contributions breakdown for the ESM as is used for deciding how much each country pays to the European Central Bank. As suggested by Estonia, countries whose gross domestic product is less than 75% of the EU average will get a refund during the first 12 years of being in the eurozone. The eurozone countries will contribute as follows: Germany 27.1%; France 20.4%; Italy 18%; Spain 12%; the Netherlands 5.7%; Belgium 3.5%; Greece 2.8%; Austria 2.8%; Portugal 2.5%; Finland 1.8%; Ireland 1,6% and less than 1% for the six remaining countries. Non-eurozone countries will be able to participate in ESM intervention or provide bilateral loans.
Strict criteria. Use of the European Stability Mechanism will be subject to strict criteria, meaning that any country being bailed out will have to introduce a structural adjustment programme. The European Commission will assess the risk of instability in the eurozone and the nature of the debt of countries requesting aid. The “active” intervention of the International Monetary Fund will always be sought.
The ESM will be able to provide short and medium-term, fixed or variable interest rate loans and the repayment timings will depend on the nature of the macroeconomic problems observed in the country in question and its ability to roll over its debt on the money markets. In line with IMF rules, the cost of the loans will be decided as follows: the interest rate will be the market rate charged to the ESM when it raises funding plus 2% or 3% for loans for more than three years. French Finance Minister Christine Lagarde said the politicians had applied the decision taken by the eurozone heads of state and reduced the interest rate on loans by 1%. Initially, the idea was for a lesser increase of 1.85% and 0.5%, but the Netherlands opposed this on the grounds that it was not possible under their legal system.
In addition to issuing loans, the ESM will be able to buy up sovereign debt direct from the country in question on an exceptional basis. One diplomat suggested that it would also be possible to buy bonds from other sources but the request of the ECB was rejected (the ECB already holds more than €80bn of sovereign debt) that the ESM not be allowed to buy bonds from investors that already own them. It is Germany that has dug its heels in here, but the ESM managers will be allowed to review and change the operational details.
Like the IMF, the ESM will have preferred creditor status whereby its loans will have priority over other debts when it comes to payment. Greece and Ireland want this to apply without hindering the details of the financial aid already issued, fearing that investors might be put off.
Involvement of the private sector. Setting up the ESM will pave the way for restructuring the debt of a eurozone country, which would lead to potential financial losses for private investors. Any financial aid package would have to include suitable and proportionate involvement of the private sector, the details of which would be decided on a case-by-case basis depending on the results of the Commission's analysis of the sustainability of the country's debt and in line with IMF rules. If the Commission's analysis reveals that the country will be able to return to good public finance by means of an austerity programme, then the country would have to encourage its private creditors to keep their debt. If the debt is so bad that an austerity programme would not restore the country to a sustainable trajectory, then it would have to enter negotiations with its private creditors to get them to absorb some of the costs of rescheduling or restructuring the debt. Ministers commented “measures reducing the net present value of the debt will be considered only when other options are unlikely to deliver the expected results.”
To facilitate the talks, all eurozone countries issuing sovereign debt for longer than a year from July 2013 onwards will have to include standard collective action clauses (CAC, see EUROPE 10249) to allow a majority of holders of the bond in question to agree on a restructuring that would then be compulsory for all other owners of said bonds.
EFSF. The ministers echoed the eurozone heads of state's pledge to increase the effective lending capacity of the EFSF to €440 billion by the summer break but did not confirm that this would be done by doubling the existing guarantees. The caretaker Finnish government ahead of the general elections in Finland next month does not have the power to take decisions of this nature. Like Germany, Finland is calling for the increase in the guarantees to be accompanied by extra capital provided by countries with less than the top credit rating (AAA). Jean-Claude Juncker said that the EFSF would remain operational beyond July 2013 to deal with current business until all its loans have been repaid. During the coexistence of EFSF and ESM, effective lending capacity would never exceed €500bn, however.
The renegotiation of the deal to set up the EFSF will provide Ireland with an opportunity to renegotiate the strings attached to its loans. It is refusing to increase its company taxation rate. The political crisis in Portugal following the government's problems in getting its fourth round of austerity measures passed led Juncker to refuse to consider any changes to the announced measures. Portuguese Prime Minister José Sócrates has promised to stand down if the austerity measures to be voted upon on Wednesday by the Portuguese parliament are rejected. (M.B./transl.fl)