Monday

5th Dec 2022

Eurozone to launch new rescue fund

  • The ESM will move into this building early next year (Photo: Valentina Pop)

Eurozone finance ministers meeting in Luxembourg on Monday (8 October) will hold the inaugural session of the permanent bailout fund, the European Stability Mechanism (ESM), which is to have a firepower of €500bn by next year as countries gradually pay into it..

The fund should have already been operational on 1 July, but constitutional challenges in Germany delayed the launch by three months.

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For now, its headquarters remain within the European Financial Stability Facility (EFSF), a temporary fund set up in 2010 and located in an office building in Luxembourg. Both will move to a bigger nearby location early next year.

Klaus Regling, a German finance official who also worked in the EU commission and is currently in charge of the EFSF, will head up the fund.

But all decisions will be taken by the board of governors, consisting of finance ministers from the 17 eurozone countries. The voting system reflects the share of paid-in capital to the fund, meaning that Germany can veto decisions.

Spain meanwhile is still "considering" formally asking for financial assistance in a bid to lower its borrowing costs. This would take the form of bond-buying by both the ESM and the European Central Bank.

The ESM can buy the bonds of a country only if the country signs up to deadlines for reforms. The ECB, unlike the ESM, can buy unlimited amounts of Spanish bonds, but has also warned that if the country does not stick to the promised reforms, it will halt the purchases.

Ministers are also likely to look at the issue of the ESM being used to directly fund ailing banks in the eurozone. A deal in June said that once a eurozone-only banking supervisor is in place, banks can tap the ESM directly. The move is again aimed at lifting the debt and deficit burden off Spain, whose banks are in need of €60bn.

But Germany, the Netherlands and Finland last week said in a joint letter that no 'legacy assets' should be put on the ESM books, meaning that the €60bn would stay on the Spanish government's books.

Talks will also continue on the banking union and the relation of non-eurozone banks to the new supervisory authority within the euro-area.

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