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Let’s clarify the point immediately. The reform of the ESM that is being voted on in Parliament today has little to do with healthcare loans. In fact, the European Stability Mechanism exists since 2012 and it was thought as instrument to guarantee the financial stability of the euro countries (which really served its purpose is a different fish pot) and this is still your principal function. The possibility of granting credits, to countries that request them, for health interventions is a task attributed to the MEDE only recently due to of the Covid emergency. The reason behind the decision is that the ESM could have been faster in mobilizing funds, with a primed and primed structure behind him.
The reform on which Parliament will express itself does not cover these loans But instead tasks and performance of the Month. It is a reform that has been under discussion for almost three years, long before the outbreak of the pandemic. The project had been temporarily frozen, even at the request of an Italian. So, last November 30 the ministers of economy and finance of the euro area have reached a final agreement on the first phase of the amendment. The word now goes to the parliaments of the different states, for their final approval. unanimity is needed.
What is the month for? The main task is lending money to countries struggling to access financial markets. In essence, the Month assures states the possibility of continuing to finance themselves by paying sustainable interest even when investors would no longer be willing to buy government bonds if not against payment. very high interest. To do this, it intervenes between the State and the markets. Basically, the ESM raises funds directly from the markets and then “Give” the money to the requesting country. Since it has the guarantees of all euro member states (it can reach up to 700,000 million euros), its reliability is greater than that of a single state, especially if it is in difficulties. Therefore, investors are willing to lend their money for a lower interest rate. In short, the function is a bit like a shield.. The problem is that When a town knocks on the door of the Month, it is only accepted if it accepts conditions. Basically, if you lend the money, the fund can speak in the economic policies of the requesting country, demand reforms or spending cuts. The few times it has been used, from Greece, Portugal or Spain, the European Stability Mechanism has not earned a good reputation. Perhaps it was inevitable, but the fact is that these precedents have paid off. its funding is politically “toxic”.
What does this reform foresee and why is it questioned in some of its points? – A first element of novelty is the possibility of mobilizing ESM funds also to support the banking system. In particular to deal with sudden increases in the liquidity needs of one or more banks. When the market conditions worsen a bank may have trouble getting rid of all of them cash you need for normal operation. This does not mean that the bank has gone bankrupt, problems can arise from the fact that at that precise moment it is struggling to sell the assets in its possession and thus find liquid money. But as a financial adage goes …“Liquidity kills fast”, liquidity shortages can kill quickly. The new ESM should be able to intervene quickly to avoid worse problems. Initially, this new feature was supposed to be activated from 2024, but with the latest changes it is decided to fast forward to 2022. It is a step towards the coveted European banking union prior to creation of one-time deposit insurance.
Today, bank deposits are insured up to 100 thousand euros but the banking systems of individual countries are responsible for this protection. The hypothesis is to unify this safety net for account holders across all euro countries. Above all, the condition of 4 countries, one of these, makes this “jump” difficult. it’s italy. Our country has a level of delinquency (that is, bank loans that will no longer be repaid or will only be partially repaid), higher than the limit necessary to create thesingle insurance. Countries in which the credit system is less exposed to risk are understandably reluctant to share risks with states that are at higher risk of bank failure. The truth is that without the reform of the ESM, the single deposit insurance would move further away, which is not convenient for Italy.
Public debts and default, which changes with the reform – Paper issues are more sensitive of the Month in support of the states. The real risk does not appear to be so much the use of the MES as lock to undermine sovereignty of a state imposing its debt restructuring, as some critics fear. Rather, the danger is that the reform you change little or nothing, condemning the month to one substantial uselessness. As we have seen today, the Fund works to help countries in difficulty provided they sign an agreement on an intervention program. In theory, the reform should pay off access to finance is a little easier. A state that has its accounts in good standing could access it without having to previously agree on a recovery plan. A prior assessment of your financial situation would be sufficient. If it is strong enough, the loan would be disbursed even without signing any other agreements. It is a bit contradictory, given that if a country struggles to finance itself in the markets it is precisely because it does not have particularly good accounts. It all depends, of course, on how strict these criteria are. Debts and deficits are unlikely to be assessed as they were before the pandemic. If this were the case, almost all states, Italy first, would be deprived of aid without conditions.
The dilemma of the Cac – There is another element that worries heavily indebted countries like Italy. They are called Cac’s, collective action clauses. When a country decides to default or is forced to do so, the debt restructuring plan next (i.e. measures likeextension of securities maturities, the cut in refunds and / or interest, etc.) must be approved by holders of the securities involved. In the past, one vote was required for each type of title. The CACs provided for in the reform guarantee that just one vote is enough for all titles involved. This facilitates the debt restructuring process and avoids endless court consequences. Why could it be bad?
According to critics, the fact that non-compliance is easier, increases the probability that this option will actually be used. But if the chances of default increase, investors will get higher interest payments to lend your money. These fears are understandable in theory but however, they seem unfounded in practice. Collective action clauses are gradually being introduced into government bonds around the world, with no appreciable impact on the so-called “risk premium”. In fact, the possibility of an orderly procedure in the event of non-compliance ends up making the securities more attractive. The modification of the Cac for government bonds of the euro countries is not strictly linked to the reform of the ESM and would be introduced in any case. Criticisms of the general structure of the reform seem more founded. According to more than one observer, the new MES I would be born old. The pandemic has changed the world and even the slow European Union has accelerated its processes. The launch of programs managed by the EU Commission to raise funds in the markets with a partial distribution of risk among the member layers, such as the Sure program to finance integration funds or the recovery fund itself, make the European Mechanism of Stability is obsolete in its role of intermediary between states and markets in difficulty.
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