A Bailout Bazooka Awaits Its Ammo
By JAME KANTER
October 7, 2012
From The New York Times
Dr. Pinna says…
This article describes the effort by the Northern European countries
to save their Southern neighbors and thereby save the Euro Zone
and the Euro.
Can a half a trillion Euros repay approximately seven trillion Euros?
Can North Europe feed South Europe forever?
Of course the politicians would love a United States of Europe. They
and their children would always have well paying jobs like the politicians
in the USA.
However, reality throughout human and animal history tells us that
big countries like Rome, Great Britain, the USSR, have always failed.
In the animal kingdom, Mastodons and saber tooth tigers are examples
of “Too Big to Survive.”
BRUSSELS — It has been referred to as “the bazooka” — the €500 billion European bailout fund that after much dispute will have its first board meeting on Monday.
Dreamed up two years ago by euro zone ministers and officials as a permanent weapon against any financial problems that might besiege the region, the $650 billion bazooka might eventually be aimed at Spain’s banking crisis, for example. Or it could be wielded to scare off bond-market speculators who might otherwise try to drive up the borrowing costs of beleaguered governments in Madrid or other euro zone capitals.
But as with many of the other improvised solutions to the euro zone’s problems, the bailout fund’s reality is less elegant than the theory behind it.
As euro zone finance ministers gather for their monthly meeting on Monday in Luxembourg, there is still considerable disagreement over how the fund — known officially as the European Stability Mechanism — will work and how effective it will be at raising money. There is no certainty, in other words, that the bazooka can be ready to fire in time to help countries like Spain that are already in the throes of crisis.
To begin with, the bazooka is being rolled out with most of its financial ammunition not yet loaded. That is because the E.S.M. will be the euro zone’s first bailout fund in which the initial money will be paid in by the zone’s 17 member governments, rather than taking the form of government guarantees.
Each euro zone government will contribute start-up money in amounts roughly proportionate to the size of the country’s economy. But those contributions, once they are all in, by 2014, will total only €80 billion. The first installments, totaling €32 billion, are due this Thursday.
The way the bazooka is to achieve its full €500 billion throw-weight is by selling E.S.M. bonds in the open market, with the government contributions serving chiefly as collateral. The €500 billion is then supposed to backstop euro zone governments by a variety of means, including providing loans, buying those countries’ bonds or providing precautionary lines of credit.
Euro zone member states have not yet agreed on the circumstances under which the E.S.M. will be used directly to prop up a country’s commercial banks — as Spain would like, for example — to avoid piling even more debt onto national balance sheets. And until the E.S.M. starts selling bonds, there is no way of telling whether investors buy them.
“Whether the E.S.M. will soon be in a position to lend to troubled sovereigns depends primarily upon market appetite for the vehicle’s bonds,” said Mujtaba Rahman, an analyst at Eurasia Group. “This is the biggest unknown.
“While a lot of innovations have been made to the E.S.M. to make it a robust crisis-fighting instrument, it remains as yet untested.”
Inaugurating the E.S.M. is not the only thing the euro zone finance ministers will have on their agenda Monday. The ministers constitute the E.S.M.’s board of governors, and are expected to name Jean-Claude Juncker, Luxembourg’s prime minister, as chairman of that board, and they will also be grappling with other pressing euro zone business.
But it is the success, or not, of the E.S.M. that could have the most lasting impact on the euro zone.
Markets rallied last month after the Federal Constitutional Court in Karlsruhe, Germany, cleared the way for German participation in the rescue fund by ruling that such involvement would not conflict with national law. But the fact that the matter had reached Germany’s highest court indicated the deep dissension within the country about the E.S.M. Many Germans are already wary of paying to prop up countries like Greece and regard the E.S.M. as a first step toward the common sharing of debt among euro zone members.
More recently, finance ministers from Germany, Finland and the Netherlands triggered new alarms about the E.S.M. when they issued a statement proposing that any bank bailouts from it should go only toward future problems — not to help clean up current messes. If that proposal gained traction, it could cast doubt on the terms of a bank bailout for Spain, which is expected soon to seek €40 billion in rescue loans for its most troubled banks.
“You can’t have these three countries bringing this confusion,” an E.U. diplomat said Friday, speaking on condition of anonymity because sensitive talks on how the fund should operate were still going on. The rules “should be settled,” the diplomat said.
But getting any clarity this week seems unlikely.
Using the bazooka to shoot money directly into banks was part of a grand bargain struck in June, when euro area leaders agreed to subject their banks to more robust supervision led by the European Central Bank. Yet that part of the deal now threatens to unravel, too, because France and Germany are deeply divided over how many banks the E.C.B. should oversee.
Even if direct assistance to banks becomes possible in the future and is made the bazooka’s primary function in attacking problems in countries like Spain, Ireland and Cyprus, analysts have cautioned that even more money will be needed from the contributing governments. That would be an unwelcome prospect in fiscally conservative northern countries like Finland, Germany and the Netherlands, where electorates have grown concerned about the cost of bailouts.
“If the E.S.M. does acquire the possibility to lend to banks directly, its resources will need to increase significantly,” said Mr. Rahman, the Eurasia analyst.
Another role for the E.S.M. is as a buyer of government bonds, which would complement the program recently announced by the E.C.B. The program is aimed at intervening in the bond markets to help hold down a government’s borrowing costs. In turn, that country would need to adhere to strictly monitored budgetary discipline.
At the meeting Monday, the Spanish finance minister, Luis de Guindos, is expected to discuss additional budget-tightening measures recently announced by his government — which Spanish and some European officials hope can make the country deemed worthy of a bond-buying program. But the Prime Minister Mariano Rajoy of Spain is unlikely to make any formal requests for assistance until after the regional elections in Galicia, on Oct. 21, to avoid voter hostility associated with international lending programs.