Cause and Effect in European Politics and Law

The Rescue Fund Has Been Optimised, but Hopes Lie with the ECB and the IMF

Ralitsa Kovacheva, December 2, 2011

Eurozone finance ministers have approved the new tools of the eurozone rescue fund EFSF. The first option provides for the fund to issue partial protection certificates to newly issued government bonds in the euro area. The certificate will guarantee 20-30 percent of the bond’s value and after the initial sale it could be traded separately. Its aim is to reduce the cost of financing for the member states and to serve as a preventive tool against more serious difficulties.

The second option to increase the fund's capacity provides for the creation of one or more Co-Investment Funds to buy government bonds, as the countries may use funds for bank recapitalisation. The main problem with this option is finding investors to participate in the Co-Investment Funds. According to Chris Frankel, Deputy CEO of the EFSF, “following extensive discussions with investors covering all types and geographical regions, a number of them have given their positive views and signalled their willingness to participate.” As regards media information about the lack of investor interest, Eurogroup President Jean-Claude Juncker said that the situation with the Fund was not so bad as they described it.

The EFSF will be ready to use new tools from early next year. How much will its financial capacity increase depends on the particular use and combination of both options. At present the capacity of the fund is 440 billion euros. It should provide funding for loans of Ireland and Portugal totalling 43.7 billion euros. The fund is expected to finance the second rescue programme for Greece and the recapitalisation of banks in non-programme countries.

However, a clear sign where help to resolve the crisis was expected from was given by Jean-Claude Juncker. He said that finance ministers have agreed to "rapidly explore an increase in the resources of the IMF through bilateral loans, following the mandate from the G20 Cannes summit, so that the IMF could adequately match the new firepower of the EFSF and co-operate even more closely with it."

"The Europeans want the most an increase of the resources of the IMF but will at best get only lukewarm support from other major powers as long as they are themselves not ready to commit resources directly or through the ECB," Sony Kapoor, director of economic think tank Re-Define commented. This, however, is about to happen, given that some finance ministers gave a clear sign that they expected ultimately a decisive intervention of the ECB, despite Germany's resistance.

In his speech in Berlin on November 28, Polish Foreign Minister Radoslaw Sikorski said bluntly that the ECB should intervene quickly (with German blessing for which Sikorski appealed) provided that the European Council adopted the Commission's proposals for enhanced budgetary discipline in the euro area. Such a statement made Polish Finance Minister Jacek Rostowski too, after the meeting of the Council of EU finance ministers. He stressed that it was very important the leaders to support the proposals because it was needed to ensure that when countries received support, no moral hazard would appear and the result of this support would be commitment to budgetary discipline. However, Poland insists once these proposals are adopted, actions to follow “in an extremely forceful way" to stabilise markets in a decisive manner, Rostowski said, without specifying what kind of action he expected from the ECB.

The Financial Times quoted Belgian Finance Minister Didier Reynders, saying that there were “a number of possibilities on the table”, all of which involved the ECB taking “stronger action”. However, “it is up to the ECB to take its decisions”, Reynders stressed. In a similar vain Jean-Claude Juncker noted: "Everyone knows what needs to be done to ensure financial stability." But he declined to comment on behalf of the ECB, pointing to the sensitivity of the institution in terms of any interference with its independence.

Political pressure will only provoke the ECB to fiercely defend its independence, writes Katinka Barysch with the Centre for European Reform. In her analysis, based on informal discussions with government officials in Berlin, she writes that, although the Germans believe ECB's intervention is wrong and even illegal, it is inevitable. What politicians need to do is leave the ECB to do its job quietly, because “the more political calls there are for ECB intervention, the harder it gets for them to do what needs to be done.”

Against the backdrop of betting whether the euro will survive until the New Year, the issue of bank recapitalisation remained overshadowed. Despite calls the EU to come up with a pan-European measures, at their meeting on November 30 the finance ministers confirmed that the recapitalisation would be done through national schemes. They must meet the European Commission's requirements for the state aid, which were announced on 1 December and will be mandatory from 1 January next year, as Polish Finance Minister Jacek Rostowski explained.

"The failure of the Ecofin to agree to a credible mechanism to support weak banks in troubled economies is a very serious oversight," Sony Kapoor noted. "How useful would bank guarantees from member states be if these member states are themselves shut out of financial markets", the analyst, who is one of 30 members of the European Banking Authority's banking stakeholders group, asked rhetorically.

In recent days six central banks - the US Federal Reserve, the ECB and the central banks of the UK, Switzerland, Canada and Japan launched massive joint actions to ensure sufficient quantity of dollars available to banks at a lower price. "The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," a statement by these banks says.

The New York Times comments that regulators are increasingly concerned about the difficulties companies have to ensure funding through the normal channels because of the debt crisis. Meanwhile, international media reported that major companies were in panic, developing action plans in the event of a euro area break up. Bulgaria also needs to develop alternative scenarios, Ivaylo Kalfin, MEP (Socialist & Democrats), said at the round table on EU's economic governance, organised by euinside.

Against this background, a final countdown goes till the European Council on 8 and 9 December. Until then we will know how France and Germany see the future of the Commission as a whole and the euro area in particular, what changes in the European treaties are envisaged and how the European institutions and countries outside the euro area will react. The final vision of the new architecture of the euro is unlikely to be ready before June next year. Until then there is a lot of time, which obviously somebody has to buy for politicians. It is increasingly clear that the European Central Bank is on the move.