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The permanent euro bailout fund finally goes into operation--sort of
10/08/2012 10:19 pm EST
You’re pardoned if 1) you thought this had happened months ago, and 2) you find the firepower behind the ESM rather anticlimactic.
The fund was originally scheduled to go into operation in July. But like just about every solution offered during the euro debt crisis, it took longer to get the European Stability Mechanism into operation than anybody expected. Not least, the ESM had to survive a challenge in the German constitutional court.
That pattern continued today. Although finance ministers from 17 countries declared the fund operational today, they also noted that Spain, the country in the front lines of the debt crisis at the moment, had not asked to tap the fund and hadn’t announced any schedule for doing so. Decisions have also been postponed recently on an aid program for Cyprus, which seems to prefer getting its money from another source (Russia, perhaps), and, of course, the Troika of the International Monetary Fund, the European Commission, and the European Central Bank is still locked in discussions with the Greek government designed to deliver deeper spending cuts before the release of the next bundle of rescue cash to Greece.
And, as has been typical during the crisis, there’s some question about the math surrounding the ESM. When Klaus Regling, the managing director of the ESM, declared the fund fully operational today, he tagged its capacity at 200 billion euros. Press stories after the ESM’s first meeting, however, went with the 500 billion euro figure that represents the ESM’s theoretical total capacity. The ESM will replace the temporary European Financial Stability Facility, which has spent 192 billion euros of its 440 billion euro capacity on loan programs to Ireland, Portugal, and Greece. The two funds are to run in tandem, whatever that turns out of mean, until 2014, when the ESM will stand alone.
Reconciling these numbers isn’t easy but it is important. By 2014 the ESM will be backed by 700 billion euros of paid-in capital, which will give it, by 2014 (assuming that all countries put their money in the pot on schedule), a lending capacity of 500 billion—hence the headline number today about the ESM’s capacity. But right now that capacity is mostly theoretical, relying on the remaining capacity of the current European Financial Stability Facility and 80 billion euros of capital that is to be paid in over the next two years. The other 620 billion euros of capital will be paid in as needed.
The other important—and anticlimactic—point to today’s announcement is that, in theory, the ESM will be able to buy government bonds in the primary and secondary markets, which the European Central Bank has said is a necessary step before it would intervene to buy bonds on the secondary market. But the ESM will only be able to recapitalize banks directly once the EuroZone countries have agreed on a plan for a unified banking supervisor under the auspices of the European Central Bank. Direct recapitalization of banks is needed to break the vicious cycle that requires governments to fund their national banks by selling debt to those banks, which then requires those banks to raise more capital if the value of that government debt declines.
The ESM’s first move will be to fund the bailout of Spain’s banking sector agreed by Eurozone countries back in July. The EuroZone approved lending as much as 100 billion euros for that purpose.
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