An informal summit of EU leaders in Brussels today ended without a bang and without much progress.
Three important points from the meeting:
- French President Nicolas Sarkozy rejected a proposal by German Chancellor Angela Merkel that would strip Greece of control over its budget as a condition for receiving the next round of bailout funds. According to the Economist, Merkel conceded this point. (For now.)
- According to RANSquawk, Sarkozy told reporters that the terms of the credit swap deal in Greece weren’t even discussed at the summit. Negotiations about that deal drag on in Athens.
- Support for a treaty to speed up implementation of the European Stability Mechanism to July 2012—the permanent, €500 billion ($660 billion) successor to the temporary European bailout fund already in place (the EFSF)—has decreased from 26 eurozone nations to 25, as the Czech Republic says it won’t sign the new treaty. That document also appears to encompass the fiscal compact EU leaders proposed in December, and will be signed in March.
Investors have long waxed sceptical about the true effect of the ESM. But in case you’ve forgotten, TF Market Advisors’ Peter Tchir clarifies four fallacies about the bailout fund in a note today:
1) it can do more than the EFSF can – while that was true in August 2010 or whenever these were first announced, it is hardly true now. EFSF has been granted virtually all the same sort of risk taking (money giving) powers that the ESM has.
2) The ESM is “paid in capital” – yes, but minimal. Unless new documents come out the ESM was going to have actual capital of less than 10% and was going to rely on the guarantees and support of the members to issue debt in the market. Capital calls on the members by ESM seem slightly easier to make than under EFSF but the difference is only at the margin.
3) it could be 750 billion or a trillion. Since the very first EFSF announcement the headline number has been a bogus attempt to make things sound better than they are. Will there be “stepping out” members to reduce the amount? Will they try for a AA rating and thus be able to issue more debt in theory (while less clear in practice)? Will debt strapped nations pull back from funding this? Is it 100% voting so Finland would be happy? Taking any EU headline number and dividing by 2 is a good starting point – remember the EFSF is already using up lines and who knows what else will be promised.
4). The ESM can be leveraged by the ECB? Sure but as far as I can tell the ECB has been pretty good at finding loopholes to provide money to unworthy credit institutions for a while. The questions are the same as leveraging EFSF. Will outside investors lend to a leveraged ESM? If the ECB lends to the ESM so it can leverage up and buy sovereign debt (including the bonds issued to make the capital contributions) what will have been done? As circular as it is, maybe that works or maybe that will be the ponzi that breaks the camel’s back.