The eurozone wants to better arm itself against future financial crises. After years of preparations, the finance ministers of 19 eurozone countries and other EU countries finally concluded the reform of the ESM umbrella euro on Monday. This includes a new common safety net for dealing with bankrupt banks, which is now due two years earlier than originally planned: 2022 instead of 2024.
The details are technical, but the political significance is clear: In the midst of the Corona crisis, there should be a signal that the countries are holding together in the monetary area. “The reform of the ESM strengthens the euro and the entire European banking sector,” said Federal Finance Minister Olaf Scholz after an agreement on Monday evening. “Because we are making the eurozone even more resilient to speculative attacks.”
What is the reform of the ESM about?
The main task of the European Stability Mechanism (ESM), established in 2012 after the economic and financial crisis, is and continues to be to save euro area countries from bankruptcy in the event of a loan crisis against reform requirements.
The ESM has a registered capital of EUR 705 billion. Of these, 19 euro area countries paid 80.5 billion and provided guarantees for the rest. Germany is there with EUR 21.7 billion paid in and EUR 168.3 billion in available capital. On this basis, the ESM can borrow money on the capital market on very favorable terms and transfer it as loans.
The main goal of the reform is two points: In the event of a crisis, the ESM should be able to more easily open “preventive credit lines” (so-called PCCL) for economically healthy countries. And the ESM is to take over the function of joint “collateral” for the SRF Bank Resolution Fund established in 2014.
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What is the common stop?
The arrest is a quasi-state-guaranteed liquidation of bankrupt banks. In fact, it is to be financed by the SRF resolution fund, which the banks are currently building themselves and which will eventually have more than 55 billion euros. So far, it’s around 47 billion.
If there is not enough money, the ESM may lend money in the future to solve the crisis, which it must repay. The shareholders of the ESM are ultimately behind this insurance policy – ie 19 euro area countries and their taxpayers.
Where is the problem?
The main features of the reform of the ESM were agreed in 2018 and should in fact be completed in December 2019. But Italy took a position. In the Czech Republic, ESM is a sensitive issue. In particular, the right-wing Lega scores points by criticizing the austerity programs required by the ESM in exchange for rescue loans.
Specifically, a year ago, the Italian government expressed concern about one aspect of the reform of the ESM: the participation of creditors as a precondition for ESM assistance. An instrument called the “one-limb collective action clause” is planned. This should make it easier to decide on the deduction or extension of government bonds.
Critics in heavily indebted Italy fear that this innovation could make capital market loans more expensive because investors would be paid for by the risk. However, on Monday, Italian Finance Minister Roberto Gualtieri indicated at a meeting in the Italian parliament that his concerns had been largely allayed. The situation is different than a year ago, Gualtieri said.
What does Germany want?
Germany has supported the reform of the ESM since last year, but has had another painful aspect: reducing risks – especially bad loans – in banks’ balance sheets before introducing joint hedging.
This should start “by 2024 at the latest”, but can be presented once the reform of the ESM is in place and banking risks are reduced. In fact, the latest inventory confirms risk reduction, according to a Eurogroup representative last week. Germany wants reassurance that this will continue. (DPA)