Early this morning, EU leaders finally reached a difficult agreement on the funding structure of the euro zone’s new permanent bailout facility, which is due to enter into force after 2013, after Germany sought last-minute changes needed to secure political backing in Berlin.
While EU heads of states discussed tensions in Libya over dinner last night, experts loyal to the euro zone’s finance ministries were tucked away in a separate room trying to hammer out last-minute changes to the EU’s permanent bailout facility – the European Stability Mechanism (ESM).
Leaders gave their blessing to a new funding structure for the ESM that will enter into force in 2013 after the 50-strong team of financial experts concluded the changes insisted on by Germany would still guarantee an AAA credit-rating for the facility.
Desperate to show his leadership at a time of economic uncertainty, the president of the European Council, Herman Van Rompuy, demanded that the experts make their decision yesterday night so this morning’s news reports would carry a positive message for financial markets.
The ESM will be the extension of the temporary European Financial Stability Facility (EFSF), currently in place, which has already bailed out Greece and Ireland.
A decision to raise the lending capacity of the short-term EFSF from €250bn to €440bn has been put off until June.
ESM funding structure
It was confirmed after last night’s meeting that the long-term funding facility, the ESM, will in total hold €700 billion to shield eurozone countries from future debt crises. The ESM will comprise €80 billion of capital paid in by member states, of which Germany will bear the greatest share, and €620 billion in callable capital in the form of guarantees.
On Monday, finance ministers from the euro zone had agreed that the upfront capital, which for Germany would be €22bn, would be paid over three tranches annually, but on Wednesday Germany asked to extend the number of tranches to five.
The ESM has become a hard sell for the German leader, Angela Merkel, and in a bid to save face before crucial elections next year, she promised the Bundestag she would try to whittle the payments down at yesterday’s summit (see ‘Background’).
After consultation with their financial experts who were locked in four-hour talks, at 1am leaders decided to concede to German demands and divide the funding of the ESM into five annual payments of €16bn.
Devil is in the detail
The group of financial experts also tried to establish if an extension from three to five payments would jeopardise one of the ESM’s key selling points: that it would not appear on member states’ balance sheets.
Talks reportedly took a turn for the worst when Germany made an unpopular suggestion that non-AAA countries would provide more capital if a bailout exceeded the fund’s capacity, while Germany would simply provide guarantees.
“This is discriminatory,” read an angry note written by an anonymous financial adviser in the room.
According to sources, Italy and Spain kicked up enough of a fuss for this provision to be waylaid in more vague language, stating that more money will be there if needed.
The financial experts were according to sources a hodge-podge of academics and financial advisers from the capitals’ finance ministries. For example, Belgium’s financial expert last night was Hans Gerooms, a lecturer in Gent, and a long-standing financial adviser to Yves Leterme and the European Commission. Germany’s adviser, Nikolaus Meyer Landgut, is a career diplomat who now works for the German permanent representation in Brussels as a financial adviser.
Juncker: The ‘chain-smoking’ Eurogroup chief
Though leaders accepted Merkel’s new election-proof ESM, it was not without some backtalk. The German chancellor had presented leaders with a “Sword of Damocles,” said one diplomat, who spoke of escalating tensions between Germany and its European partners.
“It is not easy for Juncker to hear that three days after talks on the ESM were over, Germany wants to change the agreement,” the diplomat added.
“I don’t blame him for chain-smoking,” a diplomat said. Sources say that the head of the euro group was asked by security to leave the room yesterday for smoking too much.
As expected, leaders yesterday night also gave their final blessing to a host of economic reforms on how they police debt, vet budgets and punish countries with high debts and imbalances, reforming the EU’s Stability and Growth Pact.
They also discussed the so-called “euro plus pact,” a paper with alleged origins in Berlin which outlines specific moves that member states should make to up their competitiveness, like raising retirement ages and linking wage levels to productivity.
Several countries even presented something of a blueprint of how they have or intend to fulfil the goals of the euro plus pact.
Though Portugal was widely tipped to request a bailout yesterday, this did not happen.
Portuguese Prime Minister José Socrates resigned on Wednesday night when the parliament rejected a series of austerity measures for the fourth time in twelve months. Diplomats said Portugal would seek political certainty before it made a request to the EFSF.