Tag Archives: Bailout

Of Eurozone Mice and Eurozone Men

This week was tumultuous for the eurozone, in a string of equally tumultuous weeks that preceded it. The Greek Prime Minister proposed a referendum for the new bailout package for Greece, was promptly scolded by his fellow eurozone leaders at the G20 summit, and had to arrange his exodus from the scene. Meanwhile Italy panicked and started redesigning its own austerity programme.

What all this reveals is a new incursion into political entrepreneurship, mainly by the leaders of France and Germany, to somehow solve this crisis. This is also a sign of failure of the European governance mechanism that simply does not withstand the political pressure.

The leaders of the main EU institutions play only supporting roles in this spectacle. The governments of the Member States, aided by the IMF, are once again trying to pull themselves by their own hair.

The crisis of European political leadership notwithstanding, we are experiencing the incapability of the institutional mechanism of the European Union to deliver in this difficult moment. Important decisions are taken outside the multilateral decision-making track. This brings more instability to the system and delegitimizes the decision taken. One of the reasons is the blatant disregard for European Union law.

During the dinner in Cannes Mrs. Merkel and Mr. Sarkozy reportedly asked Mr. Papandreou whether Greece wants to stay in the eurozone or not. The problem of this question is that it has not been discussed with all 26 Member states other than Greece, and to my knowledge it would take all these 26 Member states AND Greece in order to decide on its exit from the eurozone. In other words the political entrepreneurship has neglected the very structure and substance of EU law, hiding behind the veil of urgency. Urgently taken decisions often are bad decisions, though. The European Union is much more than its currency and no economic crisis of any proportion should be used as a tool to destroy what has already been built.

While we, Europeans, remain surprisingly short-sighted, our American allies have already noticed and evaluated the huge importance of our weakness. Perhaps it is time to start thinking strategically and stop shooting in the dark.

 

 

The Second Greek Bailout: the Details

The leaders of the eurozone have approved the second bailout of Greece that is supposed to finally overcome the debt crisis in this country. The total official financing will amount to an estimated 109 billion euro. The European Financial Stability Facility (EFSF) will be used, but the maturity of the loans will be extended from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. Lending rates will be around 3,5%, close to the costs of borrowing for the EFSF. The maturities of existing loans from the first Greek bailout will be extended. The private sector will contribute with up to 37 billion euro. Financial institutions will be offered a set of optional forms of contribution, including the buy-back of Greek debt, the extension of bond maturities and the rollover of existing debts. Greek banks will be recapitalized “if needed”.

The EFSF and the European Stability Mechanism (ESM) will be allowed to:

  • act on the basis of a precautionary programme;
  • finance recapitalisation of financial institutions through loans to governments including in non programme countries ;
  • intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability.

The EFSF lending rates and maturities for Greece will also be applied for Portugal and Ireland.

So will the new bailout be effective? It’s hard to say. The economic commentators are somewhat sceptical. Felix Salmon notes that this deal is not enough on its own to bring Greece into solvency. He believes that this is not a one-off event and that the same instruments will have to be used for Portugal and/or Ireland.

It’s clear that the deal will alleviate fears for a financial meltdown in the eurozone. However, the deal does not efficiently address the growth problem for Greece (and by extension for Portugal, Ireland, Spain, etc.). The fundamental problem of the eurozone persists. Until we manage macroeconomic imbalances and structural impediments to growth, we will not be able to overcome the reasons for the current debt crisis.

 

 

The Irish Bailout: the Details and the Bigger Picture

The details of the Irish bailout are now set:

EU countries and the International Monetary Fund will provide up to €85bn in total, which may be drawn down over a period of up to 7½ years. About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary. The Irish government itself will contribute €17.5bn towards the bank contingency fund, while the IMF will put €22.5bn towards the overall package. This will also include three bilateral loans from the UK, Sweden and Denmark, with the British contribution being around €3.8bn. Ireland will pay average interest of 5.8 percent on the loans.

More importantly, the Council agreed on speedy introduction of a permanent European Stability Mechanism (ESM). An ESM loan will enjoy preferred creditor status, junior only to the IMF loan. The most important feature are the so-called collective action clauses (CACs). These clauses allow a large majority of bondholders to agree a debt restructuring that is legally binding on all bondholders. CACs are meant to ease the process of debt restructuring. The CACS will be introduced in mid-2013.

The proposal for ESM is supported by the president of the ECB, Jean-Claude Trichet. The president of the European Council, Herman van Rompuy, will present proposals for amendment of the Treaties in December.

There is, however, a problem. The financial markets seem unconvinced. As Eurointelligence notes, the problem is that the market demand for peripheral debt is weak, and from 2013 demand for peripheral bonds may dry up completely due to the bail-in rules. And the 6% interest on bailout loans may be too high for Ireland to stay solvent.

There are some ideas how to handle this. Wolfgang Münchau proposes to separate national debt from financial debt and to turn all outstanding sovereign bonds, existing and new, into a common European treasury bond. He does admit that his proposal is not actually feasible, though.

So a more practical approach is to see whether, after all, the EU rescue system can survive the waves of uncertainty. Spiegel International does just that, and notes that of all the possible next bailouts, one is a no-brainer. If Spain falls, so does the euro.

 

 

New Insights on Possible Treaty Amendments

The idea for an amendment of the founding Treaties in order to accommodate a permanent bail-out mechanism is on the table after the last European Council meeting. Now there are new developments and opinions that touch on this subject.

CEPS has published three reports that contemplate on possible Treaty amendments – a post-mortem on the European Council, an overview of revision procedures under the Lisbon Treaty, and a more specific overview of the practicalities of the Lisbon Treaty revision(s). All documents suggest that a limited revision of the Treaties is achievable. The more specific proposals are:

  • amending art. 122 TFEU, and including a reference to financial stability (plus a permanent European Financial Stability Facility – EFSF, created on an intergovernmental basis), or
  • adding a reference to art. 143 TFEU – the legal basis to extend the existing EU support mechanism to non-euro area member countries in art. 136 TFEU – the special Treaty article for the euro area countries.

The authors note that the viability of both approaches will depend on the interpretation whether such an amendment would affect the no-bailout clause in Art. 125 TFEU, thereby changing the nature of monetary union and creating a fiscal transfer union (in German Transferunion). Additionally, it is arguable whether such an amendment would constitute a change to the “essential scope and objectives” of the EU, thus requiring an ordinary revision procedure.

Meanwhile some Dutch parties are trying to force a preliminary referendum on any pending Lisbon Treaty amendments.

It appears that any proposal for Treaty amendment must be considered very carefully in the light of possible ratification, as well as taking into account the no-bailout clause of art. 125 TFEU. My personal conviction is that any institutionalisation of a permanent bailout mechanism is legally troublesome, and in any case should be subject to ordinary revision procedure. But first of all we need to see the amendments in print before speculating on their legal essence.

The Bailout for Greece: Will It Work?

We now have some details on the bailout package for Greece. The program will be managed jointly by the European Commission, the European Central Bank, and the International Monetary Fund. The program will cover a three-year period. The euro area Member States are ready to contribute up to € 30 billion in the first year to cover financing needs. Financial support for the following years will be decided upon the agreement of the joint program. In order to set incentives for Greece to return to market financing, Euro area Members States loans will be granted on non-concessional interest rates. The pricing formula used by the IMF will be used benchmark for setting Euro area Members States bilateral loan conditions with some correction. The initial price of credit will be around 5% p.a. for a three year fixed-rate loan.

But what will be the effect of this program? One thing is certain: it will alleviate current pressures on the eurozone. But at least two commentators (Wolfgang Münchau and The Pragmatic Capitalist) say that this will only kick the can down the road. Wolfgang Münchau is more specific: he believes that Greece will eventually default. He criticizes the EU for not providing a generalised crisis resolution regime.

Calls for Burden Sharing for Bailouts

Euractiv reports that representatives of Europe’s major banks and financial industry players have issued a joint appeal, calling for progress on supporting transnational financial groups in the event of crisis.

This call is quite well scheduled, since at least one source is saying that the banking crisis in Europe will be much worse than in the United States.

G 20 Summit Agrees on New Financial Regulation

Rather surprisingly, the G 20 Summit in London has succeeded in delivering palpable results.

These include:

• an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy;
• a call for strengthened financial regulation and supervision;
• establishment of a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
• taking action against non-cooperative jurisdictions, including tax havens;
• extending regulatory oversight and registration to all systemically important financial institutions, instruments and markets, as well as systemically important hedge funds, and Credit Rating Agencies.

This is an impressive list. It remains to be seen what will be accomplished.