European funding confusion

A bit more from last night’s European Fin-Min teleconference:

European Union finance ministers failed to agree Monday to raise the ceiling of funds that can be held at any given time by the euro area’s transitional and permanent rescue funds, an EU official said Monday.

The 27 finance ministers were in a teleconference that lasted some four hours and focused on efforts to raise bilateral loans to the International Monetary Fund, but finalizing the operational details of the European Stability Mechanism, or ESM–the permanent rescue fund–was also on the agenda.

“There is no agreement to raise the joint ceiling for the (European Financial Stability Facility) and the ESM above EUR500 billion,” the EU official told Dow Jones Newswires after the teleconference had concluded late Monday.

There had been hope that the two funds could run alongside each other for a period of time in 2012, and that the EUR500 billion limit of funds would apply only to the ESM, leaving the EFSF–the transitional fund–leeway to hold its own endowments independently of that ceiling.

“The two funds can run alongside one another but the limit won’t be raised,” the official said.

The finance ministers also failed to make a decision on the question of how the ESM voting rules would work. After an EU leaders’ summit on Dec. 9, there had been a move to waive previously held unanimity rules and to allow the ESM to make decisions on the base of an 85% supermajority, affording it the ability to act faster, even if some euro-area countries disagreed.

But the 85% voting rules was blocked Monday by Finland, the EU official said.

Given there is likely to be quite a bit of chatter on the net and in the blogosphere about all things “European stability” over the Christmas and New Year’s break I thought I would post up some relevant documents. I have already seen some misguided comments on other sites and forums about what these agreements actually contain, so I thought it would be a good idea to get the facts so MacroBusiness readers are well informed.

Firstly the latest statements on the IMF loan agreement.

EU Finance Ministers statement on IMF resources

And yes that is the same Spain and Italy that may well turn from donor to recipient over the course of next year.

Secondly is the ESM treaty document which I believe has already been somewhat misrepresented up on ZH.

You may note that although the fin-min meeting could only agree on a 500 billion Euro lending capacity for the combined ESM/EFSF the ESM actually has “technical” capital stock of 700 billion euros. I say “technical” because the fund is supposed to consist of 80 billion euros of paid-in capital, which isn’t actually paid-in at all, and 620 billion Euros of callable shares. Just don’t ask exactly where they are callable from!

European Stability Mechanism Treaty

And last, the latest EFSF legal documentation which, given the mechanism and the outcome of the meeting,  seems a little irrelevant at this point.

EFSF framework agreement

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  1. DE

    Having perused the EFSF Framework Agreement, in my considered opinion it is all but impossible that that arrangement could ever raise anywhere near E450bn. Its an agreement put together by politcians, bureaucrates and lawyers. It will not work for market debt investors, period.

    • Well I woudn’t worry too much Deep T.

      Given that the ESM is capped at 500 bil, which is exactly the same as the latest combined EFSF/ESM cap, and the ESM is being shuffled forward 12 months I think it is quite likely that the ESFS will never really see the light of day in any great capacity. ( as I indicated in the post )

      • Yeh you did say that but I wasted my time reading! But you’ve demonstrated that to understand what’s happening in Europe you’ve gotta look at the detail

      • What is the difference between the two anyway? How do they raise the money? Is it easier to get the 500bil for the ESM? It all seems like just another agreement on a plan. Just like the Greek haircut where negotiations are going nowhere.

          • I know these jokes but what’s the real plan? Is the ESM just a bunch of bonds like the EFSF? What’s the difference between them then and why have both? If they are bonds, how are they not considered euro bonds?

            In this day and age, I don’t get why someone can’t plant a small bug in one of their closed-door meetings and expose them. Surely they talk about how hopeless it is and how they just want to delay things a bit more even though it will screw everyone even more. This can-kicking is frustrating…

  2. If this was easy, and there was sufficient capital available, we would have seen funding guarantees already IMO.

    Many in Europe who are working on solutions are exhausted, and I think we’ll see a few weeks of calm now, and early 2012 big cracks could appear very quickly. It’s close to a point where confidence could be lost in the currency IMO. I expect then the EZ will find a solution, and some states will leave,or be forced to leave for the good of the many.

    I believe a solution must be found, and the bond market will not be interested in a constant flow of badly thought out funds/mechanisms going into 2012. If there isn’t a clear plan, and the ability to deliver on it, 2012 could be very volatile for all.

    Thanks DE for putting this post together as it’s good to have these documents together like this.

  3. DE FYI if you’ve not seen this one:

    “It has become commonplace to assert that current-account imbalances were a key factor in stoking subprime lending in the US. This column says the ‘global banking glut’, i.e. the rise in cross-border lending, may have been more culpable for the crisis than the ‘global savings glut’. As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies.”

  4. Ironically the majority vote would allow the big participants such as Germany and France to rule how to use the ESM funds. The smaller countries would have the pleasure of paying up without having a say, which could present quite a dilemma if for example France was in financial trouble requesting funding at some point.

    Stupid is not he who asks but he who pays. ( An old Finnish saying)