ANAYSIS:Measures to bolster rescue mechanisms merely equip authorities for the battles ahead
WILL THIS do it? The talks are almost done, but the big question remains as to whether the overhaul of the euro zone bailout scheme enables EU leaders to finally put the sovereign debt emergency behind them.
The simple answer is no, at least not right now. As the euro zone’s third bailout draws ever closer in Portugal, new measures to intensify the fightback merely equip the authorities with more armour for the battles ahead. In time these will fundamentally alter the response to the crisis, but the immediate situation remains highly volatile and prone to shock.
And battles there will be, as grave questions over Ireland’s rescue attest. With Irish bond yields insistently above 10 per cent yesterday, this summit comes only days before the results of fresh stress tests on the State’s crippled banks. Already there is high anxiety that a huge new recapitalisation will be required, with unsustainable consequences for Ireland’s finances.
That helps to explain early entreaties to the European Central Bank (ECB) for additional emergency support and the growing sense in Brussels that it would be unwise to strike a deal on the bailout interest rate before more bank horrors are revealed.
It may suit Taoiseach Enda Kenny better to press now for completion of the interest rate debate before the banking problem magnifies again. But here he runs into the corporate tax question and unwavering Franco-German demands for a substantial quid pro quo in return for a lower interest charge.
Whatever happens on that front, some sources now believe it is an open question as to whether the €85 billion EU-IMF package will have to be enlarged and its four-year maturity extended to provide for the banks.
The existing plan includes €10 billion for an injection – now delayed – into AIB, Bank of Ireland and the EBS. There was a further €25 billion for contingencies. If more than €35 billion is required, as some believe possible, then the parameters of the rescue arrangement would have to be changed.
Unsavoury as all this is, it is as well from Dublin’s perspective to fully confront the bank issue in the Government’s early days in office rather than let it linger. In terms of the wider European debate, however, it is very late in the day.
The Kenny administration came to office with hopes of finding ways to shift some of the burden of the bank rescue to the European Financial Stability Facility (EFSF), the EU’s temporary bailout fund. But the debate on its overhaul is essentially closed now and its mandate remains confined to the issuance of loans to distressed sovereigns.
In question recently was whether the EFSF would be empowered to engage in a form of debt restructuring by buying the bonds of bailout recipient at a discount to their issue value.
That was ruled out, but an agreement on the EFSF’s permanent successor, the European Stability Mechanism (ESM), specifically raises the prospect of debt restructuring after its operations start in mid-2013. Indeed, rescue aid will not be granted if a country whose debts are deemed unsustainable cannot “ensure” adequate private sector involvement.
This serves to bring forward the evil day of sovereign default in the euro zone, something EU leaders have struggled to avoid ever since the eruption of the debt crisis. Some of the current tension on sovereign debt markets is a reflection of concern that existing debt from weak countries like Ireland is now at significantly greater default risk if it falls to be refinanced under the ESM regime.
As Europe delves deeper into the debt morass – with political and financial consequences for all single currency countries – this summit is but a staging post on the long and rocky road to resolution.
