The just breaking news is that the Slovenian has collapsed, possibly preventing it from expanding the EFSF (bailout fund).Does this mean the EFSF is doomed?
According to Bloomberg, there’s still a chance for the government to vote on its expansion on the 27th.
Then there’s another mechanism called enhanced cooperation.
Citi’s Willem Buiter explained it in a recent note that was more aimed at Finland, in light of its demands for collateral.
[E}ven if not all 17 Euro Area member states ratify the enhanced and enlarged EFSF later this year, an enhanced and enlarged EFSF can still be created, if necessary, by the ‘coalition of the willing’ through Enhanced Cooperation. Enhanced Cooperation is an EU procedure where a minimum of nine EU member states are allowed to establish advanced integration or cooperation in an area within EU structures but without the other members being involved. The arrangements cannot violate the Treaty, of course, and they must be open to any EU member wishing to join. Although as of March 2011, Enhanced Cooperation had only been used in the fields of divorce law and patents, but it seems purpose-made for overcoming the problem of a small Euro area member state vetoing EFSF enhancement or enlargement.
This case could soon apply to Finland for the second Greek bail-out package which will be carried out under the umbrella of the EFSF.
The recent decision by Finland to request cash collateral for its share of the guarantees needed to fund the second Greek bailout is clearly a non-starter, because it would undermine the ability of the Euro area member states to provide effective financial support to any other member state.
If the Greek sovereign had cash collateral to post against the guarantees provided by the 14 Euro area member states that are supposed contribute to the second Greek bail-out, it probably wouldn’t have needed the second bail out in the first place. In addition, the Netherlands, Austria, Slovakia and Slovenia have made it clear that if Finland succeeds in getting cash collateral for its contribution to the second Greek bailout, they too will demand such cash collateral. So either Finland will give in and provide its guarantee without cash collateral (but perhaps with a face-saving offer as collateral of something illiquid, impossible to value and of dubious perfectibility as security), or Finland insists on receiving cash collateral, in which case it should be excluded from the club of contributors to the second Greek bailout. This bailout can then proceed without Finland (responsible for about 1.8 per cent of the total guarantee) under Enhanced Cooperation.
(Thanks to Lorcan Roche Kelly for the pointers on the September 27 date and the possibility of enhanced cooperation.)
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