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Germans Tout Bailout Safeguards With ESM Audit Board Seat

Germany’s top auditor will have a say on oversight and decision-making at Europe’s permanent rescue fund, developments that the Finance Ministry in Berlin said offer added protection to taxpayers when the backstop comes online next month.

Draft bylaws for the fund, known as the European Stability Mechanism, include a formula for which nations will serve on its audit board, according to a copy prepared for German lawmakers and obtained by Bloomberg News. The oversight board will examine the fund’s performance, risk management and compliance, and will have full access to all ESM documents and reports, the draft shows.

Germany’s Finance Ministry said in a letter accompanying the draft that the proposed rules ensure Germany’s court of auditors will take part. “In the negotiations, the government laid the groundwork for the Federal Court of Auditors to be able to have a seat on the Audit Committee from the moment the ESM is set up,” the ministry said.

The audit move underscores government efforts to reassure voters one year out from federal elections that Chancellor Angela Merkel’s euro rescue efforts won’t squander public money. It follows a decision by Germany’s top constitutional court this month not to block the fund’s launch, a verdict that fueled domestic criticism of Merkel’s crisis response.

Earning Profits

The 500 billion-euro ($647 billion) ESM has the potential to earn profits on paid-in capital, setting it apart from its predecessor, the European Financial Stability Facility, which relied on government guarantees. The new fund’s powers -- ranging from bond-market interventions and credit lines to direct loans to governments and the ability to recapitalize banks -- echo the EFSF’s.

Most of the EFSF’s instruments will transfer to the new fund after its Oct. 8 launch. Two leveraging tools, created last year and so far never requested or used, will not be available until more technical details are worked out.

The ESM will need to rotate its external auditors every six years, according to the draft bylaws, which need to be approved by finance ministers. Firms hired for audit services won’t be allowed to provide non-audit-related consulting services, the drafts show.

The regulations on outside firms are in line with proposals from European Union Financial Services Commissioner Michel Barnier, who has been trying to enact audit rules across the 27-nation EU since November 2011. Those proposals have languished amid controversy on whether mandatory rotation would hurt credibility of EU markets.

The Luxembourg-based ESM will be managed by Klaus Regling, a former German Finance Ministry and European Commission official who also heads the temporary fund.

The ESM’s board of auditors will include “two members nominated by the supreme audit institutions of two ESM members, one from the group of half of the ESM members holding the highest number of shares of the ESM and the other from the group of remaining ESM members, according to a rotation system following the English alphabetical order of the names of the ESM members in each group,” according to Article 24 of the draft bylaws.

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