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25th Aug 2019

Private sector to share in future bail-out costs

  • EU Council: the tweak to the Lisbon Treaty is to be carried out via 'simplified procedure' (Photo: consilium.europa.au)

A two-sentence paragraph to be inserted into the Lisbon Treaty will prepare the legal groundwork for a permanent European Stability Mechanism (ESM) from mid-2013 onwards, under which the costs of future eurozone bail-outs may also be shared by sector private sector participants.

"The member states whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality," reads the paragraph, contained in draft EU summit conclusions seen by this website on Monday (13 December).

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German Chancellor Angela Merkel has pressed EU leaders to accept the treaty change as she fears Germany's powerful constitutional court may raise objections to the €440 billion temporary European Financial Stability Facility (EFSF), agreed in May and set to provide aid to Ireland.

While EU policymakers insist the temporary facility and earlier aid to Greece do not contravene the EU treaty's 'no bail-out clause', Berlin is keen to remove any legal uncertainty, with a number of legal challenges currently under examination by the German court.

The future ESM will also replace the European Financial Stabilisation Mechanism created in May, under which the European Commission may lend up to €60 billion to eurozone governments in need, having first borrowed the money by issuing bonds, backed by the EU budget.

Each member state must formally ratify the treaty change in accordance with national procedures after leaders give their political backing at this week's summit (16-17 December). The European Parliament's consent is also then needed before the amendment can enter into force on 1 January 2013.

The treaty change is to take place under a new procedure introduced under the Lisbon Treaty - the simplified revision procedure - allowing for limited treaty changes without the setting up of a convention, on condition that new powers are not transferred from the national to EU level.

In the draft conclusions, EU leaders also call on euro area finance ministers and the commission to finalise work on setting up the permanent aid mechanism, including features that could force sovereign bond holders to accept diminished returns on their investments, should a eurozone government be forced to call for aid under the ESM from 2013 onwards.

The move stands in marked contrast to aid terms recently agreed for Ireland, under which holders of Irish sovereign debt and senior debt in Irish banks were not forced to accept a 'haircut.' Instead, Irish taxpayers will indirectly pay back the €85 billion borrowed from the EU-IMF for many years to come.

Analysts say this move was partially designed to prevent further instability in the European banking sector, with many firms considerably exposed to the Irish market.

Ms Merkel and French President Nicolas Sarkozy have both indicated however that taxpayers should not be liable for the entirety of the bill in the future, with euro area finance ministers last month laying out a system for private sector involvement.

"Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers' money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan," read the statement.

The ministers indicated that insolvent eurozone governments seeking aid from the ESM in future would have to "negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices".

On Monday a spokesman for the German government said it was increasingly unlikely that EU leaders would discuss the issue of eurobonds at this week's summit, a concept Berlin opposes.

The draft summit conclusions also say EU leaders will agree to give Montenegro EU candidate country status.

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