20th Nov 2019

EU agrees new €500 bn permanent bail-out fund

  • The new fund will enjoy €620 billion in guarantees (Photo: Wikipedia)

EU finance ministers on Monday (20 June) in Luxembourg put the finishing touches on the eurozone's massive permanent bail-out fund, giving it an effective lending capacity of €500 billion.

To establish the new European Stability Mechanism (ESM), intended to replace the temporary €440 billion European Financial Stability Fund (EFSF) created last year, states will offer €620 billion in credit guarantees and a full €80 billion in cash.

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EU states agreed in March this year that the new rescue fund will take over from its predecessor in mid-2013.

Governments will gradually chip in the cash provision in five stages from 2013 to 2017.

Germany, the eurozone's paymaster, is responsible for the lion's share of the funding, delivering €168 billion in guarantees and stumping up €22 billion in cash payments.

Ministers also agreed that bonds issued by the new fund will not have preferred creditor status.

The aim is to allow countries that have taken bail-outs to return to the market more easily, because with such seniority held by states, private investors may have balked at the bonds they purchased enjoying junior status.

However, the move does imply greater risk for states involved.

"This is a serious blow for EU taxpayers," said Sony Kapoor, the head of Re-Define, an international economic think tank.

"Without a preferred creditor status, creditor governments will be much less willing to lend through the ESM. This will make it less effective and result in higher contagion and financial instability throughout the euro area," he said.

Meanwhile, the euro area's existing bail-out fund, the EFSF, saw its working capital boosted to €726 billion so that it would be able to hike its effective lending capacity to €440 billion.

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