THE EU authorities moved to arrest pressure on Spain and Portugal with a pledge to consider the merits of any private sector contribution to future bailouts only on a “case-by-case” basis with no automaticity.
At the end of a weekend of frantic talks on how they might calm rising tension in the markets, euro finance ministers adopted a declaration in which they said burden-sharing arrangements in bailouts after 2013 would be in line with established IMF procedures.
A German push for private sector involvement in bailouts has roiled the euro zone since Chancellor Angela Merkel persuaded French president Nicolas Sarkozy to back her demands last month. The chancellor argues it is unfair for taxpayers to bear the sole burden in bailouts, but investors have taken fright at her demands.
While a declaration read by euro group chief Jean-Claude Juncker sets in train the development of formal rules on bondholder “haircuts”, it marks an effort to take the heat from the proposal as investors question whether Portugal and Spain can survive without emergency support.
Such pressure has put the EU authorities and the two countries on the hind foot as they repeatedly say there is no call for any emergency intervention.
“We have to make decisions which show that in the future, we are capable of resisting where there are shocks and turbulence,” said Belgian finance minister Didier Reynders, whose country holds the EU’s six-month rotating presidency.
By proceeding in this fashion, the euro ministers have also made it clear that the new procedures will not apply to debt currently in issue. This gives additional weight to a similar pledge in Seoul by the ministers of the five largest EU countries: Germany, France, Italy, Spain and Britain.
They also hope to avoid a build-up of pressure on these questions in the run-up to the next European summit in three weeks’ time. The new proposal emerged after intensive discussions involving Dr Merkel, Mr Sarkozy, EU Commission chief José Manuel Barroso, Europe Central Bank (ECB) chief Jean-Claude Trichet and other EU leaders.
Mr Juncker said the permanent bailout system will be known as the European Stability Mechanism (ESM) and it will operate in much the same way as the temporary scheme it replaces, the one from which Ireland is drawing aid.
“Rules will be adapted to provide for a case-by-case participation of private sector creditors, fully consistent with IMF policies,” Mr Juncker said.
“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.”
Citing existing IMF procedures, EU economics commissioner Olli Rehn said “collective action clauses” would apply to any bailouts after 2013. Such policies dictate that the IMF can lend to a country which is making efforts in good faith to reach an agreement with bondholders.
This will apply to euro area sovereign bonds issued after June 2013 and would be embraced in the terms and conditions of issuance.
“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,” Mr Juncker said.
“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.”
The “collective action clause” would enable creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment – including an interest standstill, an extension of the maturity, an interest-rate cut and/or a haircut on the original investment – 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,” Mr Juncker said.