Europe Still at Odds Over the Workings of Its Bailout Fund
It has been referred to as “the bazooka” — the 500 billion euro European bailout fund that after much dispute will have its first board meeting on Monday.
Dreamed up two years ago by euro zone ministers and officials as a permanent weapon against any financial problems that might besiege the region, the $650 billion bazooka might eventually be aimed at Spain’s banking crisis. Or it could be wielded to scare off bond market speculators who might otherwise try to drive up the borrowing costs of beleaguered governments in Madrid or other euro zone capitals.
But as with many of the other improvised solutions to the euro zone’s problems, the bailout fund’s reality is less elegant than the theory behind it.
As euro zone finance ministers gather for their monthly meeting on Monday in Luxembourg, there is still considerable disagreement over how the fund — known officially as the European Stability Mechanism — will work and how effective it will be at raising money. There is no certainty, in other words, that the bazooka can be ready to fire in time to help countries like Spain that are already in the throes of crisis.
To begin with, the bazooka is being introduced with most of its financial ammunition not yet loaded. That is because the fund will be the euro zone’s first in which the initial money will be paid in by the 17 members of the European Union that are in the zone, rather than taking the form of government guarantees.
Each euro zone government will contribute start-up money in amounts roughly proportionate to the size of the country’s economy. But once they are all in by 2014, those contributions will total only 80 billion euros. The first installments, totaling 32 billion euros, are due this Thursday.
The bazooka is to achieve its full firepower of 500 billion euros by selling European Stability Mechanism bonds in the open market, with the government contributions serving chiefly as collateral. The 500 billion euros are then supposed to backstop euro zone governments by a variety of means, including providing loans, buying those countries’ bonds or providing precautionary lines of credit.
Euro zone member states have not yet agreed on the circumstances under which the fund will be used directly to prop up a country’s commercial banks — as Spain would like — to avoid piling even more debt onto national balance sheets. And until the fund starts selling bonds, there is no way of telling whether investors will buy them.
“Whether the E.S.M. will soon be in a position to lend to troubled sovereigns depends primarily upon market appetite for the vehicle’s bonds,” said Mujtaba Rahman, an analyst at the Eurasia Group. “This is the biggest unknown.”
Inaugurating the fund is not the only thing the euro zone finance ministers, who constitute the fund’s board of governors, will have on their agenda Monday, when they are expected to name Jean-Claude Juncker, Luxembourg’s prime minister, as chairman. They will also be grappling with other pressing euro zone business.
But it is the success, or its lack, of the rescue fund that could have the most lasting impact on the euro zone.
Markets rallied last month after the Federal Constitutional Court in Karlsruhe, Germany, cleared the way for German participation in the fund by ruling that such involvement would not conflict with national law. But the fact that the matter reached Germany’s highest court indicated the deep dissension in the country about the fund. Many Germans are already wary of paying to prop up countries like Greece and regard the rescue fund as a first step toward the common sharing of debt among euro zone members.
More recently, finance ministers from Germany, Finland and the Netherlands set off new alarms about the fund when they issued a statement proposing that any bank bailouts from it go only toward future problems — not to help clean up current messes. If that proposal gains traction, it could cast doubt on the terms of a bank bailout for Spain, which is expected soon to seek 40 billion euros in rescue loans for its most troubled banks.
“You can’t have these three countries bringing this confusion,” a European diplomat said Friday, speaking on condition of anonymity because talks on how the fund should operate were still going on. The rules “should be settled,” the diplomat said.
But getting any clarity this week seems unlikely.
Using the bazooka to shoot money directly into banks was part of a grand bargain struck in June, when euro area leaders agreed to subject their banks to more robust supervision led by the European Central Bank. Yet that part of the deal now threatens to come apart, too, because France and Germany are deeply divided over how many banks the central bank should oversee.
Even if direct assistance to banks becomes possible in the future and is made the bazooka’s primary function in attacking problems in countries like Spain, Ireland and Cyprus, analysts have cautioned that more money will be needed from the contributing governments.
That would be an unwelcome prospect in fiscally conservative northern countries like Finland, Germany and the Netherlands, where electorates have grown concerned about the cost of bailouts.
Another role for the fund is that of a buyer of government bonds, which would complement the program recently announced by the European Central Bank. The program is aimed at intervening in the bond markets to help hold down a government’s borrowing costs. In turn, that country would need to adhere to strictly monitored budgetary discipline.
At the meeting on Monday, the Spanish finance minister, Luis de Guindos, is expected to discuss additional budget-tightening measures recently announced by his government — which Spanish and some European officials hope can make the country deemed worthy of a bond-buying program. But Prime Minister Mariano Rajoy of Spain is unlikely to make any formal requests for assistance until after regional elections in Galicia, on Oct. 21, to avoid voter hostility associated with international lending programs.