The ESM, the permanent emergency fund for euro countries in financial difficulties, can be used from the beginning of 2022 as a safety net for problem banks in the euro zone. The finance ministers of the eurozone (Eurogroup) reached an agreement on this on Monday.
Since last year, an agreement in principle was on the table on a reform of the ESM that would take effect from 2024. Here, however, a treaty change is needed and that was politically difficult in Italy. Now that Rome says it will ratify, the Eurogroup has decided to bring forward the new powers by two years.
Until now, the ESM can only come to the aid of countries with loans, but soon also with a credit line the EU authority for the restructuring of problem banks and settlement of bank failures. Now the European banks have a pot for this, the so-called common resolution fund (SRF), but as a safety net, the ESM can help with loans if necessary.
Minister Wopke Hoekstra (Finance) is “very pleased” with the agreement, he said after the video conference. The Netherlands agrees with the revision because the banks have substantially cleaned up their balance sheets and made provisions to reduce the risks of bankruptcy. “The stock of bad loans has fallen significantly,” Hoekstra said. In addition, additional measures have been agreed for countries where the number of bad loans or non-performing loans (NPLs) must be further reduced. This mainly concerns Greece and Cyprus.
‘Preventing us from having a banking crisis too’
Hoekstra acknowledges that because of the corona crisis “it is absolutely probable that NPLs will increase”. Many banks temporarily do not allow their customers, both companies and individuals, to repay their loans. The question is how much of it will ever be repaid. But all measures such as higher buffers since the financial crisis have made the banking sector much more resilient to shocks. “We are very concerned that we will not have a banking crisis on top of the corona crisis.”
Last year, the member states had already agreed that in future the ESM may only grant loans to countries with a sustainable public debt. The Eurogroup will also have more say on aid programs such as those that have kept Greece afloat in recent years.
The agreement will be presented to EU leaders on 11 December. According to Eurogroup chairman Paschal Donohoe, the amended ESM treaty will be signed in January. Then it must be approved by the national parliaments.
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