After the OMT program of the European Central Bank, thanks to what happened ratification of its statute by Germany, today theEurogroup has kicked off to the new key tool to restore confidence in the euro area markets and thus emerge from the debt crisis: the European Stability Mechanism (ESM).
What is the ESM and what is it for?
How can the ESM act? What are his powers?
The ESM can issue bonds to raise funds needed to finance loans to countries in difficulty. It can intervene in primary and secondary sovereign markets, but acting on the basis of precautionary programmes. Furthermore, the ESM can directly finance the recapitalization of financial institutions, but only when the new European banking supervision system is established.
The lending capacity will reach 500 billion euros in 2014. After adding up the 200 billion unused EFSF, the overall strength of the ESM will be 700 billion, the equivalent of the endowment of the International Monetary Fund. The capital of the ESM will consist of 80 billion of its own funds, which the governments will actually have to disburse: the first 32 billion euros will arrive at the end of October – but they will already have a firepower of 200 billion euros. Another 32 billion will arrive in 2013 and the last 16 billion in 2014. The other 620 billion of capital can be collected "on call" in case of need.
The capital does not correspond to the funds that will be used to provide assistance to countries in crisis: it serves only as a guarantee to absorb any losses resulting from a non-payment by the debtor state.
The ESM will be able to finance itself on the financial markets by selling financial instruments, and with these it will then be able to provide loans to countries in difficulty. All three US rating agencies have awarded the Fund triple A.
How much will it cost in Italy?
Our country contributes about 18% of the total value, third by volume after Germany and France. The 14 billion of equity capital will be paid in three tranches between 2012 and 2014. The rest will be provided in the form of guarantees.
Will there be conditions to access financial assistance?
Yes. The conditions will be discussed on a case-by-case basis. They will tend to involve a combination of spending cuts and tax increases and stimulate economic growth, with structural reforms to the labor market.
Will the ESM be enough to revive the eurozone economy?
If Italy and Spain both needed aid, the ESM alone would probably not be sufficient to finance the needs of both countries (estimates of the potentially necessary aid even reach 670 billion euros). But in this case the new OMT program launched by the European Central Bank would enter the scene, which gives the Frankfurt institute practically unlimited power in the purchase of bonds from countries in difficulty, but only after the latter have accepted an aid program with Esm.
What will happen to the ESFS?
The two mechanisms will not merge. The ESFS, as a transitional mechanism, will continue its loan programs to Greece, Ireland and Greece and will no longer be able to engage in an aid program after July 2013. But it will still exist for many years until its obligations will not be terminated.
