The news today out of Ireland, the EU, and the IMF, was not shock and awe.The bailout of Ireland, for one thing, was somewhat modest in scope, and though the 85 billion EUR number was expected, the fact that nearly 17 billion EUR would come form the country’s own cash pile (including its pension) was not necessarily expected.
Meanwhile, the EU European Stability Mechanism is not going to get anyone all that excited, in part because it makes explicit references to future bondholder haircuts (that won’t apply right now to Ireland, as several people made abundantly clear during today’s press conference-palooza).
FT Alphaville has the whole announcement (below) from the Eurorgroup. All that being said, straight up shock & awe (big numbers without details) hasn’t done much in the past. What Europe needs is real, consistent mechanisms, so maybe this is progress. Whether markets will appreciate the progress is another story entirely.
The recent events have demonstrated that financial distress in one Member State can rapidly threaten macro-financial stability of the EU as a whole through variouscontagion channels. This is particularly true for the euro area where the economies, and the financial sectors in particular, are closely intertwined.
Throughout the current crisis, euro area Member States have demonstrated their determination to take decisive and coordinated action to safeguard financial stability in the euro area as a whole, if needed and return growth to a sustainable path.
In particular, the European Financial Stability Facility (EFSF) has been set up to provide for swift and effective liquidity assistance, together with the European Financial Stabilisation Mechanism (EFSM) and the International Monetary Fund, and on the basis of stringent programmes of economic and fiscal policy adjustments to be implemented by the affected Member State and ensuring debt sustainability.
On 28 – 29 October the European Council agreed on the need to set up a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole. Eurogroup Ministers agreed that this European Stability Mechanism (ESM) will be based on the European Financial Stability Facility capable of providing financial assistance packages to euro area Member States under strict conditionality functioning according to the rules of the current EFSF.
The ESM will complement the new framework of reinforced economic governance, aiming at an effective and rigorous economic surveillance, which will focus on prevention and will substantially reduce the probability of a crisis arising in the future.
Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers’ money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junior only to the IMF loan.
Assistance provided to a euro area Member State will be based on a stringent programme of economic and fiscal adjustment and on a rigorous debt sustainability analysis conducted by the European Commission and the IMF, in liaison with the ECB.
On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.
For countries considered solvent, on the basis of the debt sustainability analysis conducted by the Commission and the IMF, in liaison with the ECB, the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a country would appear to be insolvent , the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with a view to restoring debt sustainability. If debt sustainability can be reached through these measures, the ESM may provide liquidity assistance.
In order to facilitate this process, standardized and identical collective action clauses (CACs) will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro area government bonds starting in June 2013. Those CACs would be consistent with those common under UK and US law after the G10 report on CACs, including aggregation clauses allowing all debt securities issued by a Member State to be considered together in negotiations. This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut)in the event that the debtor is unable to pay.
Member States will strive to lengthen the maturities of their new bond emissions in the medium-term to avoid refinancing peaks.
The overall effectiveness of this framework will be evaluated in 2016 by the Commission, in liaison with the ECB.
We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013.
President of the European Council Herman Van Rompuy has indicated that his proposal on limited Treaty change to the European Council at its next meeting will reflect today’s decision.
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