Brussels, 14/10/2011 (Agence Europe) - In a joint press release issued on Thursday 13 October 2011 after Slovakia ratified the changes to the European bailout fund, Herman van Rompuy and José Manuel Barroso commented: “Today the enhanced European Financial Stability Facility is fully operational after Slovakia's ratification. The EFSF provides us with a stronger, more flexible tool to defend the financial stability of the euro area. This is in the clear interest of every one of the 17 member states directly concerned, as well as for the wider European Union.'
Giving the EFSF greater powers will enable it to take preventive action, intervening on secondary markets or helping bail out banks, commented French European affairs minister Jean Leonetti, adding that it was a way of the eurozone nations meeting their pledge to continue to take advantage of the euro to boost the power and competitiveness of the European economy.
Slovakia removed an enormous obstacle by ratifying the changes to the European Financial Stability Fund (EFSF) on Thursday, to enable the eurozone to take more effective action to counter the debt crisis. Slovakia was the last of the 17 euro nations to do so, but on Tuesday of this week, the country's parliament initially rejected the idea of expanding the EFSF's effective lending capacity to €440 billion, a move decided upon by eurozone ministers on 21 July 2011, and this refusal to ratify led to the collapse of the government coalition under prime minister Iveta Radicova. A deal was reached to ensure ratification was voted through on Thursday under which the ruling coalition agreed to the opposition social democrats' demand for early elections to be called in March 2012. President of Slovakia Ivan Gasparovic said on Friday that he would be appointing a caretaker government to rule the country in the meantime, following the collapse of the coalition under PM Iveta Radicova. Gasparovic has decided to remove the outgoing government and appoint a new one, along with a new prime minister. The new government (majority, minority or a government of experts) would run the country until the elections.
The EFSF and its board will rapidly finalise the various procedures needed to make practical use of the fund, explained the EFSF president Klaus Regling, the idea being to avoid countries having to fork out any more. One option under examination is to increase the bailout fund's lending capacity from the present €440 billion to €2,500 billion. European sources suggest that this could operate by means of a partial guarantee for holders of eurozone bonds.
AFP reports that the French government favours this idea, but wants the EFSF to be turned into a bank, a move opposed by both the ECB and Germany. In the Financial Times, the head of the ECB, Jean-Claude Trichet, comments that the ECB cannot step in and solve the public debt crisis for the member states because, at the end of the day, it is countries and their taxpayers that are the ultimate guarantee and any move to relieve countries of their responsibilities is doomed to failure.
Irrespective of its scale, the extra EFSF funding will not prevent European banks from making a greater contribution. Greece's creditors will probably have to write off more debt than expected, possibly more than the 21% reduction in the value of Greek bonds held by banks that was agreed on 21 July. AFP reports that cuts of 50% are now under discussion, quoting a source at a European government.
On the recapitalisation of banks, the European Commission says that Europe's banks must raise cash themselves from the money markets and only opt for government handouts if they are unable to find the cash themselves, using the EFSF only as a last resort. Reacting to criticism from the banking lobby (see EUROPE 10473), particularly in Germany, the Commission said on Friday that the banks were closely connected to the lack of confidence generated by the eurozone debt crisis and the two issues could not be resolved separately. The president of the Commission has called for a broad approach, stressing the way the five key points in his road map for growth and stability were inter-dependent (see EUROPE 10472). The Commission pointed out that banks needed more capital to restore confidence and free up cash that can be used for the real economy.
Finance ministers and central bank chiefs of the wealthy G20 nations will be meeting in Paris on Friday and Saturday, ahead of a meeting of the European Council on 23 October, where the EU will be examining the EFSF's clout and preparing bank capital requirement rules to ensure that European banks have enough cash in their coffers to absorb bigger write-offs of Greek debt than initially planned. (LC/transl.fl)