For the first time this year, Brussels is awash with the opulent optimists of Europe as the finance ministers meet to decide how much of the EUR500bn ESM funds can be funneled direct to their banks and bypass the greedy governments. The problem, of course, as Bloomberg notes, is that with officials declaring the worst of the region’s three-year market emergency over, finance ministers are debating whether the ESM should take over earlier bank bailouts that were routed through governments and what to do with so-called legacy assets.
The issue is that the actual amount of ESM funds available for direct aid to banks may be less than 100 billion euros because the fund needs to fulfill its main mission of lending to governments that lose market access.
However, at the core is an uncomfortable reality that all is not well, one Brussels-based think-tank noted: "It’s really about signaling, the only thing that really has an impact on markets is when the word unlimited is uttered by somebody in charge, so in the end it’s not a question of how high the big number should be." The dilemma is Draghi's 'unlimited' promise, which has now been adopted by the Fed and the BoJ, has been hailed as the "breakthrough in tackling the causes of the euro-zone crises" but has instead unraveled into a combination of "complacency and political resistance" from creditor countries.
Retroactive assistance remains a political hot-potato but, as we noted yesterday, it would appear Cyprus will be garnering attention (though not yet - as they prefer to wait until after the Feb elections) as once again beggars may become choosers.
European finance ministers gathering for the first time this year begin the long march to enacting policies they promised to subdue the debt crisis, beginning with how to channel firewall funds directly to banks.
With officials declaring the worst of the region’s three- year market emergency over, finance ministers are debating whether the ESM should take over earlier bank bailouts that were routed through governments and what to do with so-called legacy assets. A European Union aide who briefed reporters defined those as loans already on a bank’s balance sheet that could cause problems in the future.
“It’s really about signaling,” said Nicolas Veron, senior economist at the Brussels-based Bruegel research group. “The only thing that really has an impact on markets is when the word unlimited is uttered by somebody in charge, so in the end it’s not a question of how high the big number should be.”
The actual amount of ESM funds available for direct aid to banks may be less than 100 billion euros because the fund needs to fulfill its main mission of lending to governments that lose market access, Veron said. Bank aid may also require additional set-asides for the ESM to maintain a high credit rating.
Borrowing costs in bailed-out and debt-laden euro nations have plummeted since the European Central Bank pledged to commit to backing their bond markets. Spain’s 10-year yield has declined more than 200 basis points. The cost of insuring Ireland against default has dropped 84 percent since July 2011.
Creditor nations such as Germany, the Netherlands and Finland have sought to limit the ESM’s availability to nations struggling to shore up their financial sectors. Finnish Prime Minister Jyrki Katainen said last week that bank shareholders and bondholders should bear the brunt of future rescues, bringing in taxpayer money to clean up troubled financial businesses only as a last resort.
Ministers also face whether to convert past bank bailouts such as those they routed through the Spanish, Irish and Greek governments. Delays risk spooking markets, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
“What was hailed as a breakthrough in tackling one of the principal causes of the euro-zone crisis has steadily unraveled due to a combination of complacency and political resistance on the part of creditor countries,” Spiro said by e-mail today.
EU leaders dangled the prospect of direct bailouts as a way to assure investors that they’d protect the euro from an onslaught of banking problems that threatened to overwhelm individual nations. Since then, they’ve relied on announcements from the ECB to keep markets calm.
For countries like Spain, Ireland and Cyprus, which is seeking aid and hasn’t yet reached agreement with international authorities, access to direct bank aid via the fund will be a trickier matter.
Retroactive assistance is a political question, an EU official told reporters in Brussels on Jan. 18.