At the Eurogroup next Monday, there will be looks likely to fall on the economy minister, Giancarlo Giorgetti, will bring with it an implicit question about ESM. The failure to ratify the reform of the former state rescue fund, which the Italian parliament decided was unique among 19 countries in agreement, remains a major point of debate in Brussels. In the days ahead of the summit, some are considering the possibility of a European Plan B, but a line filtering out of EU buildings is cautious: “It is absolutely unthinkable” to have an ESM that would be introduced by the 19 other acceding countries from the Reform side that Italy rejected, a senior official saidHandle. With a smaller club, there are “problems going forward”, he explained: “One resolution fund covers the whole banking union and it’s completely unthinkable for a smaller subset of countries to provide support, so I don’t think that will be at the top of the list of options” to deal with with Italy’s refusal to reform the mechanism.
Obtusely connected with the old Mes
by Tito Boeri and Roberto Perotti
What is Mes
The European Stability Mechanism is an organization created in 2012 to support states in financial difficulties. It is an institution born for intergovernmental agreementtherefore, it is not a real European institution.
It is led by a “Board of Governors” in which the finance ministers of the eurozone meet, which decides unanimously or by a qualified majority of 85 percent of the capital in the event of a request for urgent intervention by the European Commission and the ECB to ensure financial stability. It has subscribed capital of 708 billion, of which approximately 125 are guaranteed by Italy (third contributor). The money that Rome actually paid is up to now 14.2 billion.
Wow, what will happen without Italy’s ratification
by Flavio Bini
What did the reform involve?
Since 2017, the revision of its founding treaty has been discussed, and at the end of January 2021, an agreement was reached by all member countries of the eurozone.
Among the main points of the reform is the provision that the ESM will also intervene as stopthe last parachute of the Single Resolution Fund for European banks in difficulty, driven by the banks themselves, not the states, to step in when institutions are in trouble.
Some aspects of intervention with states are also among the points.
In case of problems, there are two lines of intervention. The first (Precautionary Conditioned Credit Line, PCCL) is intended for countries with sound public finances, exposed to temporary shocks, which are required to submit a letter of intent in which the country undertakes to continue to meet the requirements established by the treaty. . The other is instead defined as “emergency” (Extended Conditions Credit Line, ECCL). These countries are asked to sign a memorandum of understanding setting out precise commitments based on the amount of funding. In detail, the Governing Council should mandate the Director General of the ESM and the European Commission to negotiate, together with the ECB, a memorandum of understanding with the member concerned, defining the conditions to be respected.
The reform of the contract also envisages the introduction of collective action clauses by a single majority for new government bonds issued from January 1, 2022. This is an instrument that allows a qualified majority of creditors to request debt restructuring. In other words, with the modification of these clauses, the country’s debt restructuring operation will be simplified.
New powers?
As stated by the Bank of Italy, the revision does not include an automatic mechanism for the restructuring of national debts, but a clarification of the fact that ex-ante checks on the debt sustainability of the country requesting assistance are not automatic in nature (i.e. they are carried out with a “scope of sufficient discretion”). “The overall assessment of the economic situation of countries and their position with regard to the rules of the Stability and Growth Pact and the Macroeconomic Imbalance Procedure remains the sole responsibility of the Commission”.
It then reiterates that private sector involvement in debt restructuring remains strictly limited to exceptional cases.
When asked if the ESM is becoming more important than the European authorities, Bankitalia responds that “the reform does not increase the powers of the ESM, but ensures its active role in crisis management and in the process that leads to the provision of financial assistance.” , as well as during follow-up”.
What risks without reform
As he details Republic, apart from the political effects, the banks are the first orphans of the reform. The option to intervene in banking crises alongside the Single Resolution Fund (SRF) is no longer actually possible. Here is the 80 billion paid by the banks once the bail-in occurs, spreading the first losses to shareholders and private creditors. Without a renewed ESM, only SRF 80 billion is left to bail out the next European bank in crisis, and only once will 7-8% of losses go to stocks and bonds. An offer that is hardly enough to protect oneself from a possible systemic crisis. With obvious possible consequences in contagion between banks and public debts.
The year 2023 marked the end of the transition period, during which the Single Resolution Fund (which is normally fueled by contributions from European banks) was also supported by credit lines from the countries themselves. A kind of additional contribution to the “support” of the fund while waiting for the definitive entry into force of the insurance policy planned as part of the ESM reform. So with the new rejection, countries will have two options: extend this transition period with a new deal, or potentially leave the parachute to European banks “without a parachute”.