The eurozone crisis is over. (You hadn’t heard?) Italy is back from the brink, Greece has its second cheque, Ireland and Portugal are learning to love austerity, Spain keeps adding two and two together and making five, and the European Central Bank has flooded the banking system with more than €1tn of liquidity. Yields on 10-year sovereign bonds have fallen to about 5 per cent for Spain and Italy. Stocks are up 10 per cent since late November. The mood is dangerously smug.
That is the backdrop for attempts to restructure the eurozone’s bailout mechanisms. Policy makers are edging towards combining the two bailout funds they have created – the European Financial Stability Facility and the European Stability Mechanism. It would mean adding the EFSF’s lending commitments of about €180bn (stumped up to bail out Greece, Ireland and Portugal) to the ESM’s €500bn borrowing capacity. So the eurozone would arm itself with about €700bn of firepower to rescue the next country to tumble into default territory.
Eurozone finance ministers are due to meet on Friday to finalise details. Investors may wonder why they are doing so now – but a lull in the crisis is probably as good a time as any (they said last year that they would resolve the firewall issue by the end of March). Signing off on it may not be so simple. Agreement on a final number has proved elusive because it requires answers to the two outstanding questions about the eurozone debt crisis: how much it will cost to resolve it; and how much member states will pay.
Adding the EFSF’s €440bn lending ceiling to the ESM’s would form an institution with nearly €1tn to address future crises. But it would double each country’s financial commitment, which is not feasible politically and could exacerbate the difficulties faced by stressed economies. Putting a ceiling on the bailout fund is psychologically as well as financially important. But policy makers must be careful not to make a bailout the easy option. There is more than enough moral hazard at work already.
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