BY: THE ECONOMIST – ECB BAZOOKA
AT two in the morning on May 10th, European Union finance ministers agreed a huge increase in their political will to defend Europe’s single currency, backed by a stunning €750 billion in aid for weak links in the 16 member eurozone. Simultaneously, the European Central Bank took a revolutionary shift away from its inflation-fighting mission, announcing a scheme to buy up government bonds on the financial markets.
That new sense of resolve is good news. The more troubling news is that it took 11 hours of bitter wrangling to get the ministers to that point, and—thanks to continued German anxiety about undermining eurozone discipline by bailing out the profligate—there will be three separate mechanisms to deliver that €750 billion, of such fiendish complexity that EU officials are still not quite sure how it will all work. In a nice irony, the ministers—who have spent weeks denouncing financial markets as wicked speculators—only stopped arguing and agreed a plan in the early hours of this morning because they knew markets were about to open in Asia, well-informed sources say.
Does the good news trump the troubling news? Yes: as long as lingering disagreements and uncertainties do not hold up the rescue plan. Europe is building its own financial bazooka to warn off the markets, to borrow Hank Paulson’s image. If it is ready to fire when needed, then complexity probably does not matter for now.
What has been agreed?
First off, a €60 billion rapid reaction stabilisation fund, controlled by the European Commission, and able to send ready money to eurozone countries that are in a financing crunch. The mechanism is modelled on an existing scheme for non-euro economies, the “balance of payments facility”. The money is borrowed by the commission on the markets, using the EU budget as collateral. Because the EU budget cannot legally go into the red, that means that all 27 EU members are on the hook if money from this €60 billion pot is disbursed and not paid back: to simplify, all members would have to pay extra into the budget to top it up. Britain, for instance, would be on the hook for 12% of any losses: Alistair Darling, still the British chancellor of the exchequer, approved this after consulting his Tory counterpart, George Osborne, by telephone.
Secondly, a “special purpose vehicle” (don’t call it a fund or Eurobonds, or the Germans will be very cross), which will be created in the next few days by an intergovernmental agreement among eurozone members, and which will raise up to €440 billion euro on the markets using a blend of loans and loan guarantees from the 16 members of the single currency club. The European Commission wanted formal control of this warchest, using a clause of the Lisbon Treaty, Article 122 that allows the commission to rush emergency aid to countries hit by natural disasters or exceptional crises beyond their control (Article 122 will be used for the €60 billion pot). …./ more
BY: YAHOO – CNN DROP AP