Treaty would maintain €500bn fund level

THE combined capacity of the eurozone’s permanent and temporary bailout funds will remain at €500 billion for now, but will be reviewed in March and may be raised by the permanent fund’s board of governors once it is operational, according to a draft treaty.

The draft treaty setting up the European Stability Mechanism (ESM) will be discussed by eurozone finance ministers on Monday and is likely to be approved by EU leaders at their summit on January 30.

This would allow a quick start to the ratification process in the 17 countries sharing the single currency, so that the ESM can come online in July, as sought by eurozone leaders.

The treaty would come into force once countries representing 90% of the subscribed capital ratified it — a lower threshold than the earlier envisaged 95%.

“The initial maximum lending volume of the ESM is set at €500,000 million, including the outstanding EFSF stability supports,” the draft ESM treaty says.

The EFSF is the European Financial Stability Facility, the temporary €440bn fund lending to Ireland and Portugal and that will handle the second financing package for Greece.

“The adequacy of the consolidated ESM and EFSF maximum lending volume will, however, be reassessed prior to the entry into force of the present treaty,” it says.

“If appropriate, it will be increased by the board of governors of the ESM upon entry into force of the present treaty.”

If the eurozone combined the full lending capacities of all its bailout funds — the EFSF, the European Financial Stability Mechanism and the ESM — it would have €1 trillion.

Opponents of giving the EFSF and ESM more firepower now say that new bids for financial help from Spain or Italy are unlikely since the ECB started offering three-year cheap loans to banks, which banks are using to buy high-yielding Spanish and Italian bonds.

The eurozone may therefore wait to first see whether the world’s 20 biggest economies (G-20) decide in February to boost the crisis-fighting funds of the IMF and what the market mood will be.

Unlike the EFSF, which relies on government guarantees to borrow on the market and lend on to troubled sovereigns, the ESM will be more like a bank with paid-in capital of €80bn and callable capital of €620bn.

The draft treaty said that the €80bn would be paid in five annual installments, but that any eurozone member may choose to pay the money in more quickly if it wanted — an option indicated by Germany.

The draft said all eurozone bonds issued a month after the treaty comes into force would have collective action clauses.

— Reuters