Europe’s rescue fund faces political demands that risk hobbling its response to emergencies as the 17 euro-area governments prepare to ratify its overhaul.
The fund, known as European Financial Stability Facility, would have to wait for a request from a debt-hit government before buying its bonds in the secondary market, its new statute shows. The extra step, along with German lawmakers’ demand for control, may make it less responsive than the European Central Bank, which has bought 115.5 billion euros ($167 billion) of bonds in the past 16 months to calm markets.
“What’s clear is that even if the EFSF is ostensibly equipped to react swiftly in an emergency, it will be much less dynamic than the ECB,” said Daniela Schwarzer, senior analyst at the Berlin-based German Institute for International Politics and Security. “Faced with an emergency I would be inclined to put my money on the bank taking the reins of rescue action -- as it has done and is doing.”
The retooled rescue fund, the product of a July 21 emergency summit, came as euro-area leaders approved a second Greek bailout, trying to arrest a debt crisis that has spiralled from a 2009 fiscal headache in Athens to a global economic risk.
The 48-page revision to the EFSF statutes, dated Aug. 26, gives legal form to the summit decision to enable the fund to buy bonds trading on the market, offer precautionary credits and lend money to recapitalize banks. The need for governments to seek a bond-buying effort wasn’t part of the summit statement.
‘Acting With Unanimity’
Euro-area finance ministers “acting with unanimity” would set guidelines for the pricing and terms of bond purchases as well as “monitoring of compliance with policy conditionality,” according to the draft obtained by Bloomberg News.
Internal divisions didn’t prevent the ECB from restarting bond purchases last month, buoying Italian and Spanish markets. The show of force helped send their 10-year debt yields down more than 100 basis points from euro-era records.
The overhauled fund will wield 440 billion euros. European officials such as European Commission President Jose Barroso have said more may be needed to extend the aid umbrella from Greece, Ireland and Portugal to large countries such as Italy and Spain.
“The market will very quickly perceive and focus on the limited dimensions of the European Financial Stability Facility,” said James Nixon, chief European economist at Societe Generale in London. “Simply far too much is being asked of it. It was never dimensioned for the tasks that are now being laid at its door.”
Final approval of the overhaul may founder on Finland’s demand for collateral from Greece. Finland’s talks with Greece triggered calls for similar treatment from nations including Austria and the Netherlands, threatening to delay or scupper the second Greek bailout.
“The final construct just looks so far away now, it’s eroding the fund’s effectiveness when it finally gets up and running,” said Julian Callow, chief European economist at Barclays Capital in London. “The political squabbling is doing it a great disservice.”
Lawmakers in Germany, which shoulders the biggest crisis-management burden, are seeking to keep the fund on an even tighter leash, insisting that the parliament dictate the German stance on future loans and bond acquisitions.
Chancellor Angela Merkel’s Cabinet cleared the way for ratification of the reinforced fund yesterday after offering assurances of an enhanced oversight role for the parliament.
Merkel’s Cabinet failed to hash out the Bundestag’s precise powers, leaving that debate to fester until the Sept. 29 ratification vote. The political mood may be swayed by regional elections on Sept. 4 and 18 and a Sept. 7 German high-court ruling on the constitutionality of the euro rescues.
Finance Minister Wolfgang Schaeuble warned lawmakers against wielding their influence to undermine the fund’s effectiveness, saying has “just one request” to those pressing for a say on future bailouts.
“It has to be done in such a way that this financial agency can carry out its stabilizing function for the financial markets and the euro,” Schaeuble said in an interview with ARD television last night.
Giving lawmakers in Berlin more control over the EFSF represents a political price of Merkel’s July decision in Brussels to abandon her opposition to expanding the fund’s powers. ECB President Jean-Claude Trichet and Barroso are among officials across Europe who had pressed Merkel for months to allow an expanded EFSF role.
Germany should have sweeping control over the operations of the enhanced EFSF, according to a working paper that coalition lawmakers will consider today. The demands include a parliamentary veto right over new applications for aid by euro region states, the right to approve the fund’s buying of bonds and making loans to help ailing banks, as well the right to approve changes to existing loan conditions.
If accepted by the coalition parties, the proposals will be incorporated into a national EFSF bill that will be pushed through parliament in Berlin by the end of the month.
All euro countries have to approve the upgraded EFSF, with contentious votes also looming in countries such as Finland, Austria, the Netherlands and Slovakia.
Bonds bought by the fund “can either be held to maturity or sold in accordance with the applicable guidelines,” according to the draft. Those guidelines -- including how to finance and execute the purchases -- will be spelled out at a later date by the finance ministers.