Remember a year ago when eurozone leaders promised to “break the vicious circle” between banks and sovereign governments by allowing the eurozone’s €500bn rescue fund to bailout struggling banks instead of leaving the task to cash-strapped national treasuries?
At the time, financial markets cheered the deal because it appeared countries that were either forced into sovereign bailouts because of their faltering financial sector (like Ireland) or were near the bailout precipice (like Spain) could get significant relief by handing over responsibility for shoring up teetering banks to Brussels instead.
But gradually, as the so-called “direct recapitalisation” programme has been developed, that “break” has come to look less convincing. Indeed, Olli Rehn, the EU’s economic commissioner, now refers to “diluting” the link between banks and sovereigns instead of “breaking”.
The clearest sign that all sorts of sovereign strings will come attached to a direct recap from the €500bn European Stability Mechanism is a draft paper issued by the eurogroup’s secretariat outlining how the “instrument” will work. It was prepared last week ahead of this Thursday’s eurogroup meeting, and we got our hands on it – and posted it here. Read more