ESM en route
January 24, 2012
Eurozone finance ministers reached agreement on the single currency area's latest rescue fund early on Tuesday after overnight talks in Brussels.
The 500 billion euro ($650 billion) European Stability Mechanism (ESM) will come into force on July 1, one year earlier than initially planned.
"We were in the position to agree upon a text on a revised ESM pact," the head of the Eurogroup panel of eurozone finance ministers, Jean-Claude Juncker, said. "The ESM will now come into force earlier, in July 2012 instead of July 2013."
Juncker also said that ministers agreed to let the ESM buy bonds of distressed eurozone governments, help with bank recapitalizations and give "precautionary" loans to countries not yet in need of full-blown international assistance.
IMF Managing Director Christine Lagarde, visiting Chancellor Angela Merkel in Berlin on Monday, had advocated that the ESM be bolstered in size, possibly by incorporating funds from its predecessor, the currently-active European Financial Stability Facility (EFSF). This suggestion was not taken on board in Brussels.
"We will reassess the efficacy of the overall lending ceiling of … 500 billion euros in March," Juncker said, referring to a timetable agreed upon by eurozone leaders in December.
Germany has been one of the strongest opponents to the idea of combining the roughly 250 billion euros of pledged credit remaining in the EFSF with the new ESM rescue fund.
Talks on forgiving Greek debt
Ten hours of overnight talks did not suffice, however, to forge an agreement with private sector investors on the matter of Greek debt. Private bondholders have been asked to write down roughly 100 billion euros currently owed by Greece, and are seeking favorable future interest rates in return. Eurozone politicians are keen to secure the consent of private lenders so that the debt swap cannot be construed as a disorderly Greek default on its debts.
Juncker said after the talks that future interest rates on the longer-term swapped Greek bonds would have to average "clearly below four percent," apparently siding with the Greek government's stance that the interest should be between 3.5 and four percent.
Private lenders argue that the minimum repayment rate should be four percent, and so far, there is no sign that they are about to budge from this position. Speaking to reporters in Zurich on Tuesday, the head of the Institute of International Finance (IIF), Charles Dallara, who is representing the private lenders in the talks, also stressed that there was a clear limit to how much Greek debt they were prepared to write off.
Fifty percent "is the maximum loss that private creditors could suffer on a voluntary basis," Dallara said.
At the same time though, he expressed the hope that a deal could still be reached.
"It's important that all parties work recognize how much we have at stake and work together and cooperate to find a solution," Dallara said.
German Finance Minister Wolfgang Schäuble though, dismissed the idea that four percent was the IIF's final offer.
"That happens in every bazaar. You do not need to be impressed by that. At least I am not," Schäuble said.
A Greek finance ministry official told the dpa news agency after the talks that Athens would submit its final offer to its lenders by February 13. European officials had earlier hoped that the deal would be finalized in time for EU's special debt crisis summit in Brussels on January 30.
The private sector write-off is one of the EU's preconditions for Greece's second set of emergency loans worth 130 billion euros - credit that the country needs to avoid default.
Author: Mark Hallam, Chuck Penfold (AFP, AP, dpa, Reuters)
Editor: Andrew Bowen