Coming up with a number for the size of the new, enlarged eurozone rescue fund seems to be the favourite parlour game in the run-up to today’s meeting of eurozone finance ministers in Copenhagen.
According to a leaked copy of the draft conclusions obtained by the FT, the ceiling for the next year will be €700bn. But is that, to quote a former US president, fuzzy math? Is it really €940bn…but some leaders are afraid to admit it out of fear of angering their bailout-fatigued national parliaments?
The leaked draft has three elements of a new firewall starting in mid-2012 : €200bn is committed to the ongoing bailouts in Greece, Ireland and Portugal; €240bn of left-over money in the current, temporary rescue fund is frozen in an emergency account; and two-fifths of the new €500bn permanent rescue fund gets capitalised.
The fuzzy math comes in when you try to account for the new permanent rescue fund, called the European Stability Mechanism. An attempt to clarify, plus some excerpts from the draft, after the jump…
The new ESM will eventually have €80bn in paid-in capital, provided by all 17 eurozone countries, giving it a robust base to serve as a firewall to protect core countries from the teetering periphery. But according to the draft, that capital will be paid in five tranches over two years:
The paid-in capital of the ESM will be made available more quickly than initially foreseen in the ESM treaty. Two tranches of capital will be paid in 2012, a first one in July, a second one in October. Another two tranches will be paid in 2013 and a final tranche in the first half of 2014.
Eurozone officials argue that because only two of five tranches are paid over the course of the next year, the ESM capacity will only be two-fifths of its €500bn total from mid-2012 to mid-2013. In that accounting, you get €200bn for the ESM, €200bn for the current bailouts, and the €240bn leftover from the current rescue fund, the European Financial Stability Facility. So it never gets over €640bn over the course of the year.
But while the ESM will only have two-fifths of its capital paid in, some argue that it will still have 100 per cent of its lending capacity, so it should be counted as €500bn. Here’s why: The ESM treaty mandates that if the fund ever slips below a 15 per cent ratio of paid-in capital and outstanding ESM bailout loans, eurozone countries will be forced to increase the ESM capital. As the draft conclusions state:
In line with the ESM treaty, the payment of the capital will be further accelerated if needed to maintain a 15% ratio between the paid-in capital and the outstanding amount of ESM issuances.
So, in effect, if a huge bailout is needed sometime in the next year, the ESM will always be at its full capacity, since countries will be forced to increase its size.
The draft is cleverly silent on what, exactly, the ceiling will be during the next year. It only says that after mid-2013, the ceiling will be €700bn. That’s when the €240bn in frozen EFSF funds is due to expire. But what about before then? Here’s the wording in the draft:
The current overall ceiling for the ESM/EFSF lending will be raised such that the ESM and the EFSF will be able to operate, if needed, as described above, at their full capacity for the period during which the EFSF remains viable, i.e. until mid-2013. As of mid-2013, the maximum lending volume of ESM will be €500bn. In the absence of new EFSF programmes, the combined lending ceiling of the ESM and the EFSF will thus be set at €700bn for the period after mid-2013.
Notice that last sentence: the ceiling is only explicitly mentioned for the post July 2013 period. Before that, it’s left vague. We’ll certainly learn more as the day goes on, because eurozone leaders are expected to come to a conclusion on this by mid-day during their meeting in Copenhagen. So watch this space!