Cyber Monday Deal: Up to 60% off InvestingProCLAIM SALE

PREVIEW-Euro zone ministers set detail of new rescue fund

Published 03/13/2011, 03:11 PM
Updated 03/13/2011, 03:12 PM
GC
-

* Safety net to prevent new debt crisis

* Pressure seen easing on Greek, Portuguese, Irish bonds

By Jan Strupczewski

BRUSSELS, March 13 (Reuters) - Euro zone finance ministers will discuss the details on Monday of how to strengthen Europe's financial safety net, after their leaders decided on Friday the emergency fund should have more firepower and flexibility.

The ministers will mainly be putting the finishing touches to a comprehensive package of measures already outlined on March 11, aimed at ending the year-old sovereign debt crisis and preventing a new one from happening.

The measures agreed by the leaders still need formal approval at the next EU summit on March 24-25 but seem to address most of the market's concerns.

"In our judgment the overall impact on EMU (euro zone) sovereign risk premia should be, at the margin, positive," Goldman Sachs investment bank said in a research note.

IHS Global Insight chief euro zone economist Howard Archer said market pressure on Greek, Portuguese and Irish bonds was likely to ease for now.

The leaders agreed on Friday that the effective lending capacity of the euro zone rescue fund, the European Financial Stability Facility (EFSF), should be raised from the current 250 billion euros to the nominal value of 440 billion euros.

The effective capacity of the EFSF is now lower than the nominal value, because not all euro zone countries issuing guarantees have the triple A rating that the fund wants.

Euro zone ministers will discuss on Monday how to achieve the higher lending capacity, but a euro zone source involved in the discussions said the likely solution was that all euro zone countries would raise their guarantees for EFSF borrowing.

These guarantees, on a pro rata basis, now stand at 120 percent of a country's share in the capital of the European Central Bank.

The ministers will also have to decide how to implement other changes to the fund agreed by the leaders -- allowing the EFSF to buy bonds of distressed sovereigns at primary bond auctions and lowering the interest rate charged for the loans.

The ministers will be joined later in the day by finance ministers from the 10 European Union countries that do not use the euro and together they will discuss the technical aspects of setting up the successor to the EFSF, the European Stability Mechanism, which will become operational in mid-2013.

Euro zone leaders would like the ministers to decide on the appropriate mix of paid-in capital, callable capital and guarantees that will back the ESM's 500 billion euro effective lending capacity, and on the timetable for paying it.

The ESM will provide financial help to euro zone countries that are solvent but have liquidity problems, after a unanimous decision by euro zone countries and on the basis of a debt sustainability assessment by the European Commission, the IMF and the ECB.

Like the EFSF, the ESM will be able to intervene in the primary bond market and the price of its loans will be in line with IMF pricing principles.

But if the IMF and the Commission decide a country's debt is unsustainable, the government will have to negotiate a debt restructuring deal with its creditors.

To facilitate that, all bonds issued in the euro zone from mid-2013 will carry collective action clauses that prevent minority bond holders from blocking a restructuring deal for the majority.

EU finance ministers will end their day with a discussion on tougher EU budget rules and a mechanism to monitor and correct macro-economic imbalances in the single currency area. (Reporting by Jan Strupczewski, editing by Tim Pearce)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.