Laughable Text of EU "Memorandum of Understanding"; ESM Not Been Ratified Yet Already Requires Changes; How Much ESM Firepower Is There?
Futures are flying over a "breakthrough" that supposedly will lower borrowing costs for Italy, Spain, and Ireland. The "breakthrough" is a modification to the terms of the ESM to allow "the possibility" to recapitalize banks directly.
Amusingly, the existing ESM agreement has not even been ratified. The agreement is still on hold in Germany (numerous other countries have yet to ratify as well).
Yet the "Memorandum of Understanding" worked out at the summit today appears to require changes to the ESM.
Other ambiguous statement from the eurogroup committee are simply laughable. Here is the complete text. Emphasis added in places.
EURO AREA SUMMIT STATEMENT - 29 June 2012
• We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.
• We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.
• We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.
• We task the Eurogroup to implement these decisions by 9 July 2012.
ESM Under Review by German Constitutional Court
Bear in mind that ESM ratification in Germany has already been delayed subject to Review by German Constitutional Court.
Germany's highest court asked the country's president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.
The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government -- the permanent bailout fund known as the European Stability Mechanism (ESM) -- would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.
More Challenges Coming
The proposed changes will put German taxpayers (eurozone taxpayers in general) at more risk. Thus, it's safe to say that more challenges to the ESM are coming.
However, let's assume for the moment that Finland, Austria, Germany, and the Netherlands accept more taxpayer risk. (Admittedly that's quite an assumption).
Is this a euro-saving breakthrough?
Van Rumpoy Calls Summit a "Breakthrough"
Please consider EU Leaders Ease Debt-Crisis Rules on Spain in Merkel Retreat
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain's blighted banks, European Union President Herman Van Rompuy said. Banks can also be recapitalized directly with European bailout funds rather than being channeled through governments, he said.
Merkel left the summit, which continues at 10 a.m., without addressing specifics of the agreements. She said there were decisions on "future measures within the framework of our methods that we will have through" Europe's two rescue funds. "I think we will have a successful conclusion."
The euro rose to as high as $1.2628, the strongest since June 21. Euro-area finance ministers will enact today's deal at a meeting on July 9, Van Rompuy said, calling the accord a "breakthrough."
Breakthrough? Really? How Much Firepower is Needed?
Bloomberg reports ...
- The EU's two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting its ability to lower the nations' borrowing costs.
- The EU's two rescue mechanisms, the European Financial Stability Facility and the yet-to-start ESM, may have 500 billion euros ($621 billion) available for purchases.
- Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans.
For now, the market is pleased with this non-breakthrough. Let's see how long it lasts. I suspect not long.