24th Mar 2018

EU bail-out deal proving hard to implement

  • New-model EFSF: The options on the table keep multiplying (Photo: Images_of_Money)

Eurozone finance ministers are to hold consultations with creditors throughout November because the "extremely complicated" legal details of last month's euro rescue plan are proving hard to implement.

Ministers on Monday night issued a technical note aimed to alleviate market concerns of the lack of details on how the eurozone plans to boost the firepower of its bail-out fund, the European Financial Stability Facility (EFSF) from €440 billion to €1 trillion by means of credit guarantees and one or more "co-investment funds" involving the International Monetary Fund and other creditors.

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"The two options detailed in the paper will be finalised by end of November in the form of guidelines so that implementation can take place in December," Luxembourg finance minister Jean Claude Juncker, chairman of the so-called eurogroup, told journalists at the end of the meeting.

Earlier that day, he had downplayed expectations about the outcome of the meeting by saying there was an "extremely complicated juridical process" which required more than one get together to iron out.

EFSF chief Klaus Regling explained that the credit guarantees will be issued as certificates attached to bonds issued by troubled eurozone countries and "sold as a package," with ministers and market players set to iron out at a later stage if these partial guarantees will be able to be traded freely afterwards. The creation of the CIFs - formerly known as the 'special purpose investment vehicles' - will "allow a combination of public-private funding to enlarge EFSF liquidity" so as to purchase bonds on the markets.

Emerging economies like China and India have so far shown little appetite for getting involved in such special funds connected to the IMF, however.

And the €1 trillion figure is meanwhile looking increasingly inadequate as markets continue to drive up the costs of borrowing for Italy and Spain, the third and fourth-largest economies in the single currency.

EUobserver understands around €2 to 3 trillion would be needed to "comfort" markets on Italy and Spain's capacity to repay debt.

The only way to come up with that kind of money - even if it is only in the form of loan guarantees, not actual cash - would be for the European Central Bank (ECB) to underwrite the EFSF.

Germany and its pro-austerity allies, the Netherlands and Finland, say the ECB option is "off the table." Given its post-war experience with inflation, Berlin is particularly wary of giving a green light to the ECB 'printing money' - a move which would affect German price stability.

But France, Italy and Spain are pushing Germany to take the step. According to Reuters, US President Barack Obama also backs the ECB solution as a first resort before turning to the International Monetary Fund for more help. Russian Prime Minister Vladimir Putin on Monday also said "the participation of the European [Central] Bank in the resolution of tasks facing the EFSF would, in the current situation, not be out of place."

Another - rather extreme - idea is to use countries' national gold reserves as EFSF collateral. "We did not talk about this and I don't understand why the German media keeps reporting about it," Juncker said after the meeting. "I understand, but I don't understand," he quipped.

The gold reserve issue, was not on the official agenda of last week's G20 summit in Cannes either. But it was discussed in any case as a way of scaring Germany, which abhors the gold idea, to back down on the question of ECB involvement.

The G20 leaders will also meet again before Christmas to strong-arm Berlin on the issue.

For G20 chairman Nicolas Sarkozy it is a matter of political survival - with presidential elections approaching, the French leader is trying to do everything he can to ensure that France, which lent heavily to Greece, does not lose its own triple-A credit rating.

Markets already gave their verdict on the state of play on Monday, when the EFSF auctioned €3 billion worth of bonds to fund the Irish bail-out - a sale which was postponed last week as the political crises in Greece and Italy brought gloomy sentiment on the euro to new lows.

The EFSF's borrowing costs were at a record high compared to June. Regling explained that this has to be seen in the context of market jitters about Italy and Greece. "But also, the basis has lowered," he noted, in reference to the record-low borrowing cost for the German government. Berlin's six-month bunds - considered a reference point for other national bonds - has inched near-zero: 0.08 percent on Monday compared to 0.3 percent only a month ago.

This story was updated with information about the outcome of the eurogroup meeting at 11.30pm Brussels time

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