Bundesbank Proposes Reform of European Crisis Response Mechanismby
ESM suggested as the region’s leading fiscal authority
Central bank calls for new bond terms to ease restructuring
Germany’s Bundesbank proposed reforms to streamline Europe’s response to future fiscal crises.
The central bank suggests turning the European Stability Mechanism into the region’s leading fiscal authority with competences encompassing those currently carried out by the European Commission and the European Central Bank. It also wants a change in the terms of new government-debt issues to allow easier restructuring and a maturity extension should the country enter an aid program.
Europe’s fiscal crisis, which almost splintered the single currency, laid bare the shortcomings of a system that leaves key competences with national governments. Greece remains dependent on financial assistance six years after it received its first bailout, and in 2012 underwent the biggest debt restructuring in history.
With consensus lacking for a fiscal and political European union, the region’s economic framework must be strengthened within existing treaties, the Bundesbank said in its monthly bulletin on Monday. “Further reforms should aim at anchoring a stability-oriented fiscal policy in member states, limiting systemic contagion effects as much as possible and strengthening financial stability overall.”
The Frankfurt-based central bank suggested that the ESM, whose competences are currently largely limited to issuing debt to finance loans to euro-area member states, could take the lead in assessing economic prospects, debt sustainability and financial needs of a country asking for a bailout. Those tasks have so far rested with the so-called troika of European Commission, ECB and International Monetary Fund. The ESM would also oversee any aid program and negotiate between the government and creditors if a restructuring is unavoidable.
The Bundesbank also suggested terms for newly issued bonds that would automatically extend their maturities for the duration of an assistance program without triggering a credit event.
Such a change would make it easier to determine whether a country suffers from a short-term liquidity squeeze or a more fundamental debt-sustainability problem, while maintaining the liabilities of investors. At the same time, the firepower of the ESM would be increased -- bailout programs could be smaller in size as aid wouldn’t be used to repay maturing debt.
A one-step majority requirement for collective-action clauses could be another beneficial change, according to the Bundesbank. If a qualified majority of creditors can agree to a binding cross-maturity debt restructuring, it would speed up the process, neutralize incentives for holdouts and reduce the benefits of acquiring blocking minorities, it said.
The Bundesbank reform proposal “doesn’t present an immediate or simple solution for problems related to partly still very high sovereign indebtedness of member states, and difficulties with a potential restructuring would only be reduced step by step in the interim period,” the central bank said. “Governments have to use the time to implement the agreed consolidation measures and make their finances more crisis resistant.”