A year ago, the reform of the ESM euro rescue umbrella was as good as finished. Then Italy turned across the board. Now one is “quite optimistic”, it said before the meeting of the Eurogroup.
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The eurozone is making renewed efforts to arm itself better against future financial crises. After years of dispute, the finance ministers of the 19 euro states and the other EU countries could finally approve the reform of the ESM euro rescue fund on Monday. This would also pave the way for the rapid introduction of a final safety net for processing bankrupt banks.
The details are technical, but the political significance is clear: In the middle of the Corona crisis, a signal should come that the countries in the currency area are sticking together. But first, the ministers have to clear up the last stumbling blocks.
What is the ESM reform about?
The main task of the European Stability Mechanism (ESM), which was founded in 2012 after the economic and financial crisis, is and remains to save euro countries from bankruptcy in the event of a crisis with loans against reform requirements. The ESM has 705 billion euros of share capital, of which the 19 euro countries have paid in 80.5 billion euros and issued guarantees for the rest. Germany is there with 21.7 billion euros paid in and 168.3 billion euros available capital. On this basis, the ESM can borrow money on the capital market at very favorable terms and pass it on as loans.
The aim of the reform is primarily two points: In the event of a crisis, the ESM should be able to more easily open “precautionary credit lines” (so-called PCCL) for economically healthy countries. And the ESM is to take on the function of a common “backstop” for the SRF bank resolution fund established in 2014.
What is the common backstop?
The backstop is quasi a state-guaranteed reinsurance for the liquidation of bankrupt banks. This is actually supposed to be financed by the SRF resolution fund, which the banks are currently building themselves and which will ultimately have more than 55 billion euros. So far it’s around 47 billion. If there is not enough money, the ESM can in future lend the resolution fund money that it has to repay. Ultimately, the shareholders of the ESM stand for this backstop – i.e. the 19 euro countries and their taxpayers.
Where is the problem?
The main features of the ESM reform were agreed in 2018 and should actually be wrapped up in December 2019. But Italy took a stand. Domestically, the ESM is a sensitive issue there. The right-wing Lega in particular scores with criticism of the austerity programs that the ESM is demanding in return for rescue loans.
Specifically, a year ago the Italian government raised concerns about one aspect of the ESM reform: creditor participation as a prerequisite for ESM aid. An instrument called “single limb collective action clauses” is planned. This should make it easier to decide on a haircut or an extension of the term of government bonds. Critics in heavily indebted Italy fear that this innovation could make loans on the capital market more expensive because investors would let themselves be paid for the risk.
What does Germany want?
Germany supports the ESM reform, but has another sore point: the reduction of risks – especially bad loans – in bank balance sheets before the common backstop is introduced. This should start “at the latest by 2024”, but can be brought forward as soon as the ESM reform is in place and bank risks have been reduced. The latest inventory actually certifies a reduction in risks, as a representative of the Eurogroup said last week. Germany wants the assurance that this will continue.
Will the agreement work this time?
Although the substance of the reform has not changed for a year, one can be “quite optimistic” that a result will be achieved this Monday, said the representative of the Eurogroup last week. Count on political commitments from Italy. But he wasn’t quite sure. There is still a lot to talk about, it said. Night session not excluded. (dpa)
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