Stranger and stranger grows the EU's bailout fund By Jeremy Warner
Anyone wanting to know just how daft and self defeating the EU’s latest utterences on the Permanent Crisis Resolution Mechanism (the structure through which sovereign bailouts would be conducted) really are, should take a look at the note just published by Marco Annunziata, chief economist at UniCredit Group. I’ve got no link for this, so I’ll quote his digest in full:
“The Eurozone’s credibility deficit is getting larger by the day. The most recent antics on the Sovereign Debt Restructuring Mechanism are a breath-taking mixture of suicidal irresponsibility and farcical incoherence, and risk inflicting lasting damage to the recovery prospects of the most troubled peripheral countries and to the credibility of the eurozone’s economic governance framework.
“Germany had seemed determined to have agreement on a SDRM. But now from Soul, EU finance ministers tell us that that any SDRM would only apply to new debt issued after the mechanism has been approved and put in place, that is 2013 at the earliest. Debt currently outstanding, and any debt issued over at least the next two years, would therefore be safe. But this commitment is time-inconsistent, and therefore not fully credible. If by 2013 countries like Greece, Ireland and Portugal are still in a shaky position, with weak fiscal accounts and weak growth, any new debt issued with SDRM clauses will carry exorbitant yields, inconsistent with debt sustainability.
“The EU would then have to choose between a full-fledged, open-ended bailout, and reneging on the promise that existing debt would not be restructured. Will German voters then accept higher taxes to save their profligate neighbors? Perhaps, but we can hardly take it for granted. The apparent time inconsistency of the Seoul promise implies that we might get the worst of both worlds: spreads will not come in significantly, as investors will doubt that existing debt is really safe, while high-debt countries will still hope that they will be helped and not left to the cruel mercy of the markets. We will get instability and bailouts rather than discipline.”
Germany thought it was making matters better by stressing that “haircuts” for private bondholders would apply only after the mechanism comes into force in 2013 and wouldn’t apply to any outstanding debt. This is what European finance ministers had to say about it all in a statement issued from the G20 in Seoul earlier today:
“At its meeting on the 29 Oct 2010 the European Council discussed the future arrangements for ensuring economic and financial stability in the European Union.
“Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any programme under current instruments.
‘Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements.
“The EFSF is already established and it’s activation does not require private sector involvement. We note that the role of the private sector in the future mechanism could include a range of different possibilities such as a voluntary commitment of institutional investors to maintain exposures, a commitment of private lenders to roll over existing debts or the inclusion of collective action clauses on future bond emissions of euro area member states”.
But as Mr Annunziata points out, unless countries such as Ireland, Greece, and Portugal, have by then got their finances back in order, which doesn’t seem likely, the yields demanded on new debt will be so high as to require a restructuring of existing debt anyway. Either that, or the rest of the eurozone would have to give an open ended guarantee.
This crisis is set to run and run.
P.S. Some understandable confusion of terminology is setting in here. The European Financial Stability Fund (EFSF) mentioned by the finance ministers is the existing €750bn fund set up last May to help countries with difficulty repaying their debts. The Permanent Crisis Resolution Mechanism (PCRM) is what they propose should replace it in 2013. I’m assuming that Mr Annunziata’s Sovereign Debt Restructuring Mechanism is the same thing. All clear now?
