Brussels, 01/08/2012 (Agence Europe) -Italian Prime Minister Mario Monti said in Finland on Wednesday 1 August 2012 after a meeting with Finnish Prime Minister Jyrki Katainen that the European Stability Mechanism (ESM), the new eurozone bailout fund that is expected to come on stream in September this year, would be given a banking licence “in due course”. He told a press conference: “I think this will help. It will occur in due course”.
Several big eurozone countries - France, Italy and Spain - are calling for the ESM to be given direct access to the European Central Bank's huge funds, which could be crucial for a credible backstop to prevent the debt crisis spreading, something that is always opposed by Germany and Finland, which say that direct financing of eurozone nations is not allowed under the operating terms of the ECB, which are enshrined in the EU treaties.
ESM activation. Before travelling to Helsinki, Monti said that Italy would not need a full bailout, but the country might require some breathing space in the form of lower borrowing costs. Italy is introducing huge spending cuts and making its economy more flexible, but is facing steep interest rates on the money markets. Monti told Finnish newspaper Helsingen Sonomat that aid might possibly be needed, depending on how long it took the markets to understand the reforms being carried out in Italy and how they are delivering. On Monday, Italy successfully rolled over five and ten-year bonds. The yield demanded for the ten-year bonds had fallen to less than 6%.
The lower interest rates demanded by the sovereign debt markets are due to comments by the head of the ECB, Mario Draghi, who said the bank was prepared to do “whatever it takes” to protect the eurozone. Words later repeated by the leaders of Germany, France and Italy. The head of the Eurogroup, Jean-Claude Juncker, said that the eurozone, by means of the ESM, and the ECB would be working together to protect the euro, but did not give any details. This joint action might involve the ESM in buying up Italian and/or Spanish bonds on the primary market (direct from the countries in question) and the ECB buying up Italian and/or Spanish bonds on the secondary bonds (from investors), but the two countries would first have to make an official request to this end. The meeting of the ECB Governing Council on Thursday 2 August is eagerly awaited by investors wishing to learn more about what the ECB has up its sleeve.
Bundesbank issues a warning. The governor of the Bundesbank, Jens Weidmann, who will be having a one-to-one conversation with Draghi ahead of the Governing Council meeting on Thursday, has issued a stinging warning about ECB intervention, stating that the bank's independence “requires it to respect and not overstep its own mandate”. His comments came in talks with former Bundesbank governor Helmut Schlesinger, and were published on the Bundesbank website on Wednesday 1 August. A clear hint that the ECB should not buy up bonds. “We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem” , said Weidmann, adding that “European governments overestimate the central bank's possibilities and expect too much of it by assuming that it can be used not only for price and stability, but also for promoting growth, reducing unemployment and stabilising the banking system”.
As decided at the eurozone summit in June, the European Commission will be unveiling draft legislation in September to set up a single eurozone bank regulatory body in cooperation with the ECB (see EUROPE 10645), which has been set as a precondition for the ESM's giving direct aid to struggling banks, bypassing the bank's host country and therefore not impacting on the country's debt and credit rating. (MB/transl.fl)