Eurogroup outlines permanent crisis mechanism in line with objectives propose...
In connection with the meetings held in Brussels on Sunday 28 November, the Eurogroup also convened to address the matter of financial markets stability and a permanent crisis mechanism for the euro area. Mr Jyrki Katainen, Minister of Finance, represented Finland at the meeting.
The Eurogroup reached a common understanding on the key elements for a permanent crisis mechanism to be introduced after summer 2013. The line adopted by the Eurogroup can be said to be a significant policy decision from the viewpoint of the future of the whole of the EU, as it clarifies the responsibility of each Member State for the consequences of their economic policies and the role of the private sector in participating in the burden sharing of possible financial markets crises.
The following points are highlighted in the statement issued by the Eurogroup on a permanent crisis mechanism:
* Reinforced economic coordination is a priority: rigorous economic surveillance will substantially reduce the probability of a crisis arising in the future.* Introducing a European Stability Mechanism (ESM) to replace the existing temporary crisis management mechanisms. The ESM may provide liquidity assistance mainly as short-term aid for a euro area Member State that has requested assistance.
* Case by case participation of private sector creditors and fully consistent with IMF policies. In all cases the interest of the Member States? taxpayers will be secured.
* An ESM loan will enjoy preferred creditor status relative to all other loans apart from the IMF loan, a fixed condition of which is that they have absolute priority. At the EU level, the principle of preferred creditor status for loans granted by the euro area is a new one and one which corresponds fully with Finland?s position and objectives.
* As under current practice, loan-based assistance would be provided to a euro area Member State only based on strict conditionality and a stringent programme of adjustment, which would be conducted in collaboration with the European Commission and the IMF, in liaison with the ECB. This means that the participation of the IMF would, in line with Finland?s viewpoint, become an obligatory part of all crisis management procedures in the euro area, thus clarifying the role of the IMF.
* Introducing Collective Action Clauses (CACs) in the terms and conditions of all new euro area government bonds starting in June 2013, to enable the creditors to pass a majority decision agreeing a legally binding change to the terms of payment instead of requiring unanimity. This is directly in line with the views expressed by Finland in October 2010.
* The CACs enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut) in the event that the debtor is unable to pay.
After the meeting, Minister of Finance Jyrki Katainen expressed satisfaction with the content of the Eurogroup statement. ?The Eurogroup statement will pave the way for a crisis management mechanism that corresponds almost fully with the aims and conditions expressed by Finland for some time now. Since we are dealing with a very difficult matter that divides the Member States, we can be very satisfied with the decision reached today. It is not often that Finland has been able to make a mark as prominently as now in an issue that is crucial to the whole of the EU.?
?We brought the collective action clauses into the political debate, where the aim was to find ways to strengthen the involvement of the private sector creditors in future crises. The collective action clauses are also a way to encourage Member States to keep their economy in good shape, because it has a direct effect on debt management expenses. IMF participation, too, which is now taken for granted, was originally a red cloth to many?, Katainen observed after the meeting.
The main purpose of the procedure adopted is to prevent moral hazard in the operations of investors and debtor States alike. The risk of moral hazard is substantially reduced where a country in crisis is conscious that Member States will advance credit only on the basis of stringent programmes of economic and fiscal policy adjustments, and those investing in government bonds are aware that investment losses are not merely a theoretical possibility.
The December European Council plans to reach agreement on the main elements for a permanent crisis mechanism and the possibility of a limited Treaty change that may be required.
Inquiries: Mr Martti Hetemäki, Permanent Under-Secretary, tel. 358 160 33017 and Mr Martti Salmi, Senior Adviser, tel. 358 400 510 304.