The European Stability Mechanism is on track to become operational in October and intends to work directly with Spanish banks in the “near future,” said Klaus Regling, who heads the euro area’s bailout funds.
“The ESM will become operational most likely in October,” Regling said yesterday at a conference in Alpbach, Austria.
The bailout funds have the ability to recapitalize banks, “which we intend to do on Spain in the near future,” Regling said. He said the temporary European Financial Stability Facility and the ESM can use the same set of instruments.
The 500-billion euro ($1.28 billion) ESM is the permanent successor to the EFSF, the 440 billion-euro mechanism that has backed bailouts for Greece, Ireland and Portugal. The ESM was due to become operational in July and is on hold while Germany and other countries work through the ratification process.
Spain is in the early stages of a bank-bailout package of up to 100 billion euros that will be drawn from the bailout funds. To start, the euro area has authorized up to 30 billion euros in emergency funds from the EFSF, which Spain could access if needed. Once the Spanish government completes a review of its banks, it will be able to access EFSF or ESM funds to recapitalize its financial system.
Direct bank bailouts are on hold until the euro area can integrate its banking-industry oversight. European leaders in June decided to create a common bank supervisor and beef up the European Central Bank’s oversight role to pave the way for direct bank bailouts from the firewall funds. Proposals are due on Sept. 12, with an aim of wrapping up negotiations by the end of this year and enabling direct bailouts next year.
Countries receiving aid benefit from lower borrowing costs when they agree to the conditions necessary to tap the bailout facilities, Regling said. “We provide loans at our own funding costs,” he said. “On average we only need to charge 1 percent to the borrowing countries.”
He also said giving a banking license to the ESM or the EFSF wouldn’t increase lending capacities.
“The lending capacity of the EFSF is fixed and the lending capacity of the ESM is fixed,” Regling said. “Those who advocate a banking license for these institutions want to make the refinancing easier, but it would not lead to more lending capacity. That’s just a wrong assessment.”
Regling said that while the topic of granting the ESM a banking license had been discussed, “the conclusion was not to do it.”
-- With assistance from Jonathan Stearns in Brussels. Editors: Patrick Henry, Jones Hayden
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