Yesterday Minister Noonan signed a treaty committing Ireland to a payment of €254m by January 2013. Here are the details.

[The copy of the ESM Treaty signed in July 2011 is available here)

 

Yesterday whilst bond markets were running around like headless chickens in anticipation of a fissure caused by Italy and Spain, the Eurogroup of EuroZone finance ministers, including our own Minister for Finance, Michael Noonan, were signing a new treaty to create – wait for it, and don’t nod off just yet – the European Stability Mechanism (ESM). “Oh no!”, I hear you say, not ANOTHER feckin’ acronym that’s going to cost us money. You might be at least glad to hear that this new acronym will replace two existing funding schemes, the European Financial Stability Fund (EFSF) and the European Financial Stability Mechanism (EFSM).

Here are the highlights of what Minister Noonan committed you and I to, in Brussels, yesterday

(1) The new fund will become operational in July 2013

(2) The new bailout fund will have a maximum of €500bn available, but that is after the “complete run down of the EFSF” and remember the EFSF has a maximum capacity of €440bn. So in total, we might have a bailout fund worth €940bn, it seems though it is not 100% clear from the treaty itself. The initial paid-in shares will total €80bn, though that will be paid in five annual instalments.

(3) The ESM is only for the euro area. So Britain, Sweden and Denmark won’t benefit. Mind you, neither will they be on the hook for bailouts.

(4) The ESM will operate closely with the IMF and countries seeking a bailout are expected to deal with both.

(5) Now this next bit is important, in October 2010 when Angela Merkel and Nicolas Sarkozy met at Deauville in France, their musing on how the ESM might work spooked markets into thinking that from 2013, Ireland’s creditors would be ranked, with the EU bailout funds ranked senior to “the rest”. And as a result of said musings, it is believed Ireland’s cost of borrowing shot up, because “the rest” thought that in a default they’d get little back fromIreland, with the result thatIrelandneeded a bailout. And now, nine months later, the treaty itself tells us that Ireland’s existing debt will be excluded from any new ranking after the ESM comes into being, and existing EU debt in 2013 will rank equally with other creditors  So Ireland’s lenders last October 2010 needn’t have been spooked after all, because the new ESM wasn’t going to affect lending until 2013.

(6) Voting at the ESM will require an 80% majority, so no vetoes. And voting rights go with contribution to the ESM’s capital. And if likeIrelandat present, you can’t pay your contribution to the ESM’s capital, you won’t get a vote at all.

(7) Contributions to the ESM are supposed have the same national proportions as contributions to the capital of the ECB (shown here at ~1.1%), but the treaty itself shows that Ireland’s contribution is to be 1.59%, or €1.27bn for the initial paid-up capital of €80bn. Luckily we can pay in five annual installments from January 2013. But still, €254m in 2013 is going to be a significant outgoing.

(8) And again, another kick in the goolies for Ireland as the treaty says “an adequate and proportionate form of private-sector involvement shall be sought on a case-by-case basis where financial assistance is received by an ESM Member, in line with IMF practice” Remember IMF practice which apparently called for a 2/3rd haircut on senior bondholders in November 2010, only to be told “nein/non” by the European bailout partners.

(9) A lot of commenters on here have previously asked whether we should be buying our own bonds given the elevated discounts available in the market. Well that suggestion seems to have been taken on board “The Board of Governors may decide, as an exception, to arrange for the purchase of bonds of an ESM Member on the primary market, in accordance with Article 12 and with the objective of maximising the cost efficiency of the financial assistance.”

(10) The ESM loans provided to EuroZone members will be at cost + 2%, but for amounts loaned for longer than 3 years, + 3% on the amount outstanding after 3 years.

Advertisement