Brussels, 08/10/2012 (Agence Europe) - Managers of the new eurozone bailout fund, the European Stability Mechanism (ESM), with lending capacity of €500 billion, held their first meeting in Luxembourg on Monday 8 October to formally launch the ESM on the same day as a meeting of Eurogroup in the same city. The eurozone now has a permanent and effective backstop to back up financial stability in the single currency area, explained the president of the Eurogroup Jean-Claude Juncker. Euro Commissioner Olli Rehn said he was more optimistic now than in the spring about the euro, hailing the raft of flexible instruments that had now been provided for the eurozone. From Nicosia, the president of the European Commission, José Manuel Barroso, praised Europe's capacity to come up with lifeboats in times of tempest.
Based on an intergovernmental treaty, the ESM will be able to provide loans to struggling countries, buy eurozone nations' sovereign bonds, provide financial aid in the form of credit lines and finance the recapitalisation of banks through loans to the government of the country in question. On condition that a common eurozone bank surveillance mechanism is set up under the aegis of the ECB, direct recapitalisation of banks from the ESM will be possible without impacting on the country's debt following a decision to this effect by Eurogroup in June, but this will require unanimous agreement from the ESM management board. The talks focussed on exactly how the ESM would provide aid and the transfer of legacy assets from countries to the ESM.
Three triple-A countries, Germany, Finland and the Netherlands, have issued highly defensive statements on this (see EUROPE 10696) and the ESM director, Klaus Regling, says it has not been discussed at EU level, while France sees the triple-A countries' statement as a starting point for future talks.
The ESM will have subscribed capital of €700 billion, of which €80 billion as start-up capital. Some €32 billion will be provided by the eurozone Member States this month, €32 billion in 2013 and €16 billion in 2014. Germany (27%) and France (20%) alone will provide nearly half the cash, with the contributions of countries in receipt of financial aid, like Greece, being paid by the European Financial Stability Fund (EFSF). During the start-up period, which will run until all the start-up capital has been paid in to the ESM, the EFSF (the temporary bailout fund that has provided aid to Greece, Ireland and Portugal) will intervene where necessary up until July 2013 to ensure the total lending capacity of €500 billion. After July 2013, the EFSF will continue to manage the bailouts of the three above-mentioned countries. In total, the combined eurozone lending capacity will be €700 billion (€500 billion from the ESM and €200 billion already earmarked from the EFSF).
Any aid from the ESM will come with strings attached. Countries needing aid will have to negotiate with its lenders a structural adjustment programme to be set out in a Memorandum of Understanding (MoU). Like the EFSF, the ESM will have senior lender status for the reimbursement of its loans. At the end of June this year, eurozone heads of state decided that aid to recapitalise Spanish banks would not be given senior lender status (see EUROPE 10645). The €30 billion raised this summer by the EFSF as an emergency Spanish bank bailout will be disbursed through the ESM. (MB/transl.fl)