It appears that the world can take its eyes off Bratislava.
Slovakia's largest opposition party, after a bit of parliamentary gamesmanship, cleared the way Wednesday for the country to endorse changes to the €440 billion ($600 billion) euro-zone bailout fund that European political leaders have deemed essential to the bloc's efforts to beat back the sovereign-debt crisis.
Slovakia was the last holdout among the 17 nations that use the euro, and the Slovak agreement will end months of discussion about bolstering the fund. It isn't the end of the story: The crisis has swelled in the meantime, and talks are under way about making the fund bigger yet.
But for now, the ratification in Bratislava of the bailout-fund changes, expected formally as soon as Thursday, brings one quick result: The fund will be increased in size by about €200 billion.
The agreement also gives the euro zone's leaders a variety of new ways to use the fund—though not all will be ready immediately, and there remains fundamental debate about how and when to employ them: To what extent, for instance, should the fund be used to help countries recapitalize their banks?
With Slovakia on board, a new "framework agreement will come into force among euro-zone countries. It dictates how the bailout fund, the European Financial Stability Facility, operates.
The new agreement contains two major changes. First, the EFSF will be able to deploy as much as €440 billion, up from about €250 billion now. Second, the EFSF will be able to buy government bonds in the secondary market and to help countries recapitalize their banks, among other things.
The first of those changes is relatively easy. Once Slovakia has approved the new agreement, the size increase will come into force. The second change may take time: European officials are still working on guidelines laying out exactly how the new powers will be used. Those guidelines must be approved by euro-zone finance ministers.
Among the issues being debated is exactly how secondary-market bond purchases should be structured and, in the case of a government seeking funds for bank recapitalization, what commitments or pledges the government will need to make in return.
Officials hope a deal on the guidelines can be struck during one of a series of high-level meetings taking place over the coming month, as part of a broader crisis package. But Europe has labored in vain for many months through countless false starts to assemble such a "big bang" deal.
The U.S. will use a meeting of Group of 20 finance ministers later this week to press European officials on their latest efforts to assemble that plan. "Europe has the capacity and the resources to resolve this challenge," Lael Brainard, the U.S. Treasury's undersecretary for international affairs, said Wednesday, "but the consequences of delay are growing and the calls for a solution are broadening."
Much of the immediate worry is focused on Greece, which is reeling under a huge debt burden and is persistently unable to meet fiscal goals. Data released Wednesday showed Greece's state budget, which comprises many but not all pieces of government spending and revenue, showed a deficit through September that was 15% wider than the year-earlier period.
Even Ireland, a relatively good performer among bailed-out nations, has an uphill climb. A fiscal advisory panel said Wednesday that the country will need €4 billion in austerity measures next year to hit its deficit target, instead of the planned €3.6 billion.
The EFSF was created in May 2010 after Greece tumbled into an ad hoc bailout. The fund, backed by guarantees totaling €440 billion from euro-zone member governments, was meant to be a giant pot of money, and its mere existence to demonstrate that the currency union had the wherewithal to help troubled members—and a structure in place to react rapidly.
It quickly became clear, however, that the EFSF wouldn't really be able to lend out €440 billion; the fund itself needed to raise money on financial markets, and to persuade investors that it is a sterling credit, the EFSF adopted a variety of strictures that meant its guarantees and its cash on hand would have to well exceed the amount it borrowed. The EFSF's total capacity would thus be around €250 billion.
Markets and policy makers worried that €250 billion wouldn't be enough to rescue Greece, Ireland, Portugal and Spain, if it came to that. In March, euro-zone leaders resolved to increase the capacity to the full €440 billion; it has taken until now to do so. To get there, the EFSF will now be backed by €726 billion in guarantees from euro-zone nations, excluding Greece, Ireland and Portugal, and will lend out up to €440 billion. Slovakia's share of the guarantee is €7.7 billion; Germany's is €211 billion.
This summer, a second problem swiftly became apparent: Investors got frightened of Italian and Spanish bonds. The selling drove prices down and yields up, risking a calamity: If investors simply stopped lending to Spain and Italy, there was nothing the bailout fund, even at €440 billion, could do. Italy's financing needs alone reach around €400 billion a year.
The European Central Bank stepped into the breach, buying Italian and Spanish bonds and propping up prices. That, so far, has forestalled the risk of a sudden stop to financing. But the ECB is keen to offload this responsibility to the bailout fund.
European leaders already are talking about boosting the effective size of the EFSF still further, perhaps to several trillion euros, likely through a leverage or insurance plan. Such options would give it more ammunition and might not require thorny parliamentary ratification.
In Slovakia, ratification of the new EFSF has been deeply controversial. Slovakia, which joined the euro in 2009, is poorer than Greece, Ireland and Portugal, and there is substantial resentment to bailing those nations out.
Slovakia's rickety right-of-center coalition government split on the issue—the leading coalition party was in favor; a junior coalition party opposed. After a failed vote Tuesday, the government fell.
On Wednesday, leaders of pro-EFSF parties in the departing coalition struck a deal with Smer-Social Democracy, the largest opposition party. The deal: The opposition would support the EFSF measures, in exchange for fresh elections.
Smer leader Robert Fico said a bill calling for elections would be submitted Thursday. "As soon as this law is approved, the parliament will start discussing the EFSF, which will be ratified without any problems," he said.
Source: http://online.wsj.com
Slovakia's largest opposition party, after a bit of parliamentary gamesmanship, cleared the way Wednesday for the country to endorse changes to the €440 billion ($600 billion) euro-zone bailout fund that European political leaders have deemed essential to the bloc's efforts to beat back the sovereign-debt crisis.
Slovakia was the last holdout among the 17 nations that use the euro, and the Slovak agreement will end months of discussion about bolstering the fund. It isn't the end of the story: The crisis has swelled in the meantime, and talks are under way about making the fund bigger yet.
But for now, the ratification in Bratislava of the bailout-fund changes, expected formally as soon as Thursday, brings one quick result: The fund will be increased in size by about €200 billion.
The agreement also gives the euro zone's leaders a variety of new ways to use the fund—though not all will be ready immediately, and there remains fundamental debate about how and when to employ them: To what extent, for instance, should the fund be used to help countries recapitalize their banks?
With Slovakia on board, a new "framework agreement will come into force among euro-zone countries. It dictates how the bailout fund, the European Financial Stability Facility, operates.
The new agreement contains two major changes. First, the EFSF will be able to deploy as much as €440 billion, up from about €250 billion now. Second, the EFSF will be able to buy government bonds in the secondary market and to help countries recapitalize their banks, among other things.
The first of those changes is relatively easy. Once Slovakia has approved the new agreement, the size increase will come into force. The second change may take time: European officials are still working on guidelines laying out exactly how the new powers will be used. Those guidelines must be approved by euro-zone finance ministers.
Among the issues being debated is exactly how secondary-market bond purchases should be structured and, in the case of a government seeking funds for bank recapitalization, what commitments or pledges the government will need to make in return.
Officials hope a deal on the guidelines can be struck during one of a series of high-level meetings taking place over the coming month, as part of a broader crisis package. But Europe has labored in vain for many months through countless false starts to assemble such a "big bang" deal.
The U.S. will use a meeting of Group of 20 finance ministers later this week to press European officials on their latest efforts to assemble that plan. "Europe has the capacity and the resources to resolve this challenge," Lael Brainard, the U.S. Treasury's undersecretary for international affairs, said Wednesday, "but the consequences of delay are growing and the calls for a solution are broadening."
Much of the immediate worry is focused on Greece, which is reeling under a huge debt burden and is persistently unable to meet fiscal goals. Data released Wednesday showed Greece's state budget, which comprises many but not all pieces of government spending and revenue, showed a deficit through September that was 15% wider than the year-earlier period.
Even Ireland, a relatively good performer among bailed-out nations, has an uphill climb. A fiscal advisory panel said Wednesday that the country will need €4 billion in austerity measures next year to hit its deficit target, instead of the planned €3.6 billion.
The EFSF was created in May 2010 after Greece tumbled into an ad hoc bailout. The fund, backed by guarantees totaling €440 billion from euro-zone member governments, was meant to be a giant pot of money, and its mere existence to demonstrate that the currency union had the wherewithal to help troubled members—and a structure in place to react rapidly.
It quickly became clear, however, that the EFSF wouldn't really be able to lend out €440 billion; the fund itself needed to raise money on financial markets, and to persuade investors that it is a sterling credit, the EFSF adopted a variety of strictures that meant its guarantees and its cash on hand would have to well exceed the amount it borrowed. The EFSF's total capacity would thus be around €250 billion.
Markets and policy makers worried that €250 billion wouldn't be enough to rescue Greece, Ireland, Portugal and Spain, if it came to that. In March, euro-zone leaders resolved to increase the capacity to the full €440 billion; it has taken until now to do so. To get there, the EFSF will now be backed by €726 billion in guarantees from euro-zone nations, excluding Greece, Ireland and Portugal, and will lend out up to €440 billion. Slovakia's share of the guarantee is €7.7 billion; Germany's is €211 billion.
This summer, a second problem swiftly became apparent: Investors got frightened of Italian and Spanish bonds. The selling drove prices down and yields up, risking a calamity: If investors simply stopped lending to Spain and Italy, there was nothing the bailout fund, even at €440 billion, could do. Italy's financing needs alone reach around €400 billion a year.
The European Central Bank stepped into the breach, buying Italian and Spanish bonds and propping up prices. That, so far, has forestalled the risk of a sudden stop to financing. But the ECB is keen to offload this responsibility to the bailout fund.
European leaders already are talking about boosting the effective size of the EFSF still further, perhaps to several trillion euros, likely through a leverage or insurance plan. Such options would give it more ammunition and might not require thorny parliamentary ratification.
In Slovakia, ratification of the new EFSF has been deeply controversial. Slovakia, which joined the euro in 2009, is poorer than Greece, Ireland and Portugal, and there is substantial resentment to bailing those nations out.
Slovakia's rickety right-of-center coalition government split on the issue—the leading coalition party was in favor; a junior coalition party opposed. After a failed vote Tuesday, the government fell.
On Wednesday, leaders of pro-EFSF parties in the departing coalition struck a deal with Smer-Social Democracy, the largest opposition party. The deal: The opposition would support the EFSF measures, in exchange for fresh elections.
Smer leader Robert Fico said a bill calling for elections would be submitted Thursday. "As soon as this law is approved, the parliament will start discussing the EFSF, which will be ratified without any problems," he said.
Source: http://online.wsj.com
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