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Friday, March 30, 2012

Europe Increases "Firewall" to € 800 Billion

Austrian Finance Minister Maria Fekter announced on Friday that the permanent euro rescue fund, the European Stability Mechanism (ESM), would be expanded, by considering the around €200 billion in current bailouts as being separate from the €500 billion earmarked for the ESM -- originally, the €500 billion figure was to have included the €200 billion in existing aid. The ESM, which is due to come into operation in mid-2012, will also be boosted by including around €100 billion in bilateral aid that was given to Greece in 2010, as well as aid from other EU funds, bringing the firewall's total capacity to over €800 billion.

Fekter expressed her confidence that Friday's move would be enough to calm the financial markets. "The markets are already signaling relative calm," she said. "That shows that the markets can work with what we have set up here."

The Nuclear Option

On Thursday evening, in the run-up to Friday's summit, German Finance Minister Wolfgang Schäuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the €800 billion capacity was "convincing" and "sufficient."

But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. "The firewall, it's a little like the nuclear option in military planning, it's there for dissuasion, not to be used," Baroin said in a radio interview. He was echoing calls made by the Organization for Economic Cooperation and Development (OECD) earlier in the week to boost the firewall to €1 trillion.

At the beginning of the week, SPIEGEL reported that Merkel and Schäuble had dropped their long-held resistance to allowing both the temporary European Financial Stability Facility (EFSF) and the ESM, which was supposed to replace it, to operate in parallel for a period, thereby expanding the scope of the funds available. Berlin had come under massive international pressure to increase the size of the firewall so that it was large enough to potentially bail out countries such as Spain and Italy.
Meanwhile, the Bundesbank has exercised new authority from the European Central Bank (ECB) to not accept as collateral bank bonds backed by Ireland, Greece and Portugal. (From the Wall Street Journal via the National Review Online).
The decision signals the determination of the Deutsche Bundesbank to limit risks from the nonstandard measures the European Central Bank has taken to combat market stress during the crisis.

More broadly, it reflects concerns that the ECB’s crisis-fighting measures may be encouraging banks to shift debt of dubious value to central-bank balance sheets, ultimately exposing taxpayers to what may wind up being toxic assets.
Humpty Dumpty has already fallen off the wall and shattered. It is only inertia that keeps people from realizing it. I don't think all of the King's horses and all the King's men will be able to put the European Monetary Union back together again.

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