Brussels, 28/03/2012 (Agence Europe) - At their meeting in Copenhagen on Friday 30 March, eurozone finance ministers will be deciding on the size of the European financial backstop (bailout fund) that they feel will prevent any further spread of the eurozone sovereign debt crisis. They are expected to appoint the governor of the Bank of Luxembourg, Yves Mersch, to become a member of the ECB's Executive Board on 1 June 2012. Together, the EU27 finance ministers and central bankers will discuss sensitive issues like financial regulations, the EU's bank crisis resolution system, tighter EU rules on credit rating agencies and the mooted financial transaction tax (FTT).
On the fringes of the spring European summit, eurozone heads of state asked their finance ministers to decide before the end of March on how the European bailout fund's lending capacity, which stood then at €500 billion, could be increased. On Wednesday 28 March, a close European source said he was confident that a solution would be reached at the weekend, forecasting that the €500bn cap would be lifted. On Tuesday, at the EU-South Korea summit, the president of the European Council, Herman Van Rompuy, predicted a positive outcome on the bailout fund question.
Politicians are divided into two groups - maximalists and minimalists. The maximalists want the bailout funding to be at least €940 billion (the lending capacity of the current fund, the European Financial Stability Facility - EFSF - and the new European Stability Mechanism (€500bn from July 2012 onwards). The minimalists (Germany, Finland and Estonia) suggest €700bn, comprising the cash already pledged in aid by the EFSF (€200bn) running alongside the €500bn of the ESM (see EUROPE 10583). The main thing for both options is to work out how to generate the most positive reaction on the money markets.
The above-mentioned source said that one thing was clear - no delegations want to increase the amount they are due to pay to the ESM. The option of converting the national guarantees for the EFSF into additional subscribed capital for the ESM, which would increase the permanent lending capacity to €940bn, has been set to one side. Assuming that the final solution will be more than the basic minimum currently on the cards, the talks will focus on the €240bn remaining in the EFSF. As the European Commission has suggested in a memorandum to member states, the EFSF could continue to lend out cash, up to €240bn, until the end of June 2013. Under the treaty establishing the EFSF, it will have to stop lending money on 1 July 2013. This option would temporarily set the European firewall's lending capacity at €740bn.
The speed at which member states provide the initial €80bn capital for the ESM might be negotiable. The ESM treaty stipulates that the initial capital must be paid in five annual instalments and fast enough to ensure the combined EFSF/ESM lending capacity is always €500bn or more. At the start of the month, the eurozone leaders agreed to speed up the first two instalments, and this could be speeded up yet again to ensure that there is lending capacity of over €500bn in July 2012. The source says that this option is not needed, however.
The Eurogroup's decision will impact on global talks on increasing the IMF's resources because other members of the IMF require Europe to substantially increase the European bailout funding. The Eurogroup's decision will determine Europe's position for the G20 finance summit and the IMF summit, both in April 2012.
Spain. The Spanish economy minister, Luis De Guindos, will brief his colleagues on the planned Spanish budget for 2012, which should cut the country's excess deficit from 8.5% of GDP to 5.3% (see EUROPE 10582), on the same day as it is discussed by the Spanish parliament. Sources suggest the briefing will go down well; the new budget target makes sense and Spain would definitely not need any help from the ESM. On Wednesday, the European Commission said that rumours in the Spanish media that the EU's bailout fund could be used to provide cash for Spanish banks were totally unfounded. The banks have been suffering due to the economic recession and the bursting of the property bubble.
Managing the bank crisis. The ECOFIN Council will be discussing the EU's future bank crisis management system, the presentation of which has been delayed for several months. The system will coordinate at EU level a series of measures that national bank supervisors can use to prevent a bank going bust. The measures include living wills for banks, along with private investor systems like bail-ins and convertible capital. The Danish Presidency will ask ministers to express their views on the various measures and when the new legislation should come into force.
Rating agencies. The ministers will examine progress in the current talks on rules to cover credit rating agencies (see EUROPE 10495). The Danish Presidency says that the member states are divided on the question of requiring a rotation of rating agencies, which the Commission would like to see every three years. Some countries say that the ratings market is not sufficiently mature for this, others want a transition period. Some countries see the idea as a good starting point. As a compromise, the Danish Presidency suggests that rotation should be possible after three years, with exemptions for small agencies. Another area of dispute is the suggested changes in the rules on the admission of ratings issued by agencies registered outside the EU.
FTT. The ECOFIN Council will examine progress in the talks on a financial transaction tax. In the face of resistance to the idea even within the eurozone, not to mention the United Kingdom or Sweden, several important delegations, such as Luxembourg and Germany, are now openly talking about an alternative to the FTT idea, while still wanting the financial industry to be forced to pay some of the cost of bailing out the system in the crisis that it itself caused (see related article). (MB/transl.fl)