Brussels, 24/01/2012 (Agence Europe) - Any EU member state in financial trouble will only be able to receive a loan from the European Stability Mechanism (ESM), the new bailout fund, if it has ratified the intergovernmental treaty on budget convergence (the Budget Pact), explained eurozone finance ministers on Monday evening. The chair of the Eurogroup, Jean-Claude Juncker, said that the ministers had made the Budget Pact a condition for the ESM and this would be set out in the treaty setting up the new bailout fund. This condition was demanded by Germany, which wants the struggling member states to sign up to stronger budget discipline.
Faced with repeated demands from partners like the International Monetary Fund, Germany may consider making a huge concession to boost the firepower of the European bailout funds in order to prevent the debt crisis spreading. The German government is reported by the Financial Times to be agreeable to the idea of the current bailout fund, the EFSF, which has €250 billion lending capacity left, to continue to operate alongside the ESM, but this has been denied by a spokesperson for German Chancellor Angela Merkel.
On Tuesday 24 January, Italy's Prime Minister Mario Monti said that views could change on the question of boosting the European firewall because the people who wanted the Budget Pact wanted it in order to feel more reassured in the face of domestic public opinion about everyone playing their fair share in ensuring budget discipline. Monti said the ECB could well intervene to shore up the bailout fund.
ESM. Juncker commented that the EFSF would remain in operation and would continue to shore up Ireland and Portugal, the two countries in receipt of a bailout programme. The ESM that will kick off in July this year could be speedily activated by means of a new qualified majority decision-making procedure, said Juncker, referring to the draft ESM treaty that the ministers are in the process of fine-tuning. EU Commissioner for the Euro Olli Rehn welcomed Finland's constructive attitude in this connection. The ESM will start with capital of some €80bn and an effective lending capacity of €500bn, although Europe's leaders will decide in March whether the lending capacity needs to be increased. In line with IMF practice, private sector involvement in the restructuring of a country's debt would not be automatic for countries in receipt of ESM cash.
Rehn said that the European Commission wants a stronger bailout fund to boost investor confidence and hoped that Europe and its international partners would be able to agree on a substantial increase in IMF resources. Discussions are ongoing at the IMF on a potential €600bn increase, of which €150bn would be contributed by European countries (see EUROPE 10535).
Ratings. Ministers took note of the downgrading of the EFSF's long-term credit rating by one notch by Standard & Poor's, although the other two of the Big Three, Moody's and Fitch, are not planning to follow suit. The EFSF CEO, Klaus Regling, said the downgrade would not alter the EFSF's lending capacity of €440 billion and the fund has enough cash to last until the ESM comes on stream. It will also not affect the EFSF's leverage that is currently being established in order to treble the effective lending capacity of the balance of funds in the account. The EFSF will be leveraged by means of a special SPIV unit that will come on stream in February 2012 and be piloted by the former Luxembourg prime minister Jacques Santer to provide insurance for the bonds of struggling countries; and “CIV”, co-investment funds under the aegis of the IMF. The appointment of the former president of the European Commission, Jacques Santer, to head the SPIV was immediately criticised by British Eurosceptics at the European Parliament because Santer had been forced to resign in 1999 on corruption charges. However, Jean-Claude Juncker says he is the right man for the job.
Budget Pact. European finance ministers discussed the latest version of the draft Budget Pact treaty (see EUROPE 10536) and Juncker said the version on the negotiating table was a good basis for discussion at the European summit on Monday 30 January. He said it fully complied with the EU's legal framework and would give the European Court of Justice the right to fine countries that fail to properly transpose the golden rule debt limits into their own legislation.
Money raised from the fines of up to 0.1% of the offending country's GDP, would be paid into the ESM bailout fund. Poland is demanding the right to attend future eurozone summits along with other EU countries that have not yet joined the Euro - this demand being opposed by France. The draft version of the pact would allow non-euro countries to attend summits at least once a year, but a new version is expected to be unveiled by Monday 30 January. (MB/transl.fl)