Markets unconvinced by eurozone’s €500bn

Europe’s permanent rescue fund will have half a trillion euro available to lend. This might seem a bit low, given current discussions about extending the size and mandate of the current (temporary) €500bn rescue system. But officials point out that the current system, comprising the EFSM* (€60bn) and the EFSF** (€440bn), can only lend about €255bn in order to maintain a triple-A rating on its debt; the permanent ESM***, by contrast, will be able to lend the full amount.

Agreement on the sum involved has not reassured markets, however: much is yet to be agreed, and upcoming Finnish elections could threaten unanimity on signing off the changes by March 24-25. That timeline was already tight. Several additional finance minister summits have been mooted or agreed before the end of March to help achieve the aim. Indeed, given that economic co-ordination and budgetary rules are also on the agenda, agreeing the fund’s size was the bare minimum. How the ESM will be funded remains unclear. One hopes agreements went further in private.

Progress was apparently made on competitiveness issues, but key issues such as restructuring and debt buybacks remain unaddressed – or at least unpublished. The March deadline may well be missed for the ESM. If this happens, market unrest might worsen; yields are already at record highs in many countries. If this happens, the EFSF could benefit, as eurozone officials will want to prevent market unrest, and legislating for a temporary facility when facing potential bail-outs must be easier than agreeing details for a permanent mechanism during relative calm. And anyway, it’s a long way to 2013.

* European Financial Stability Facility (till 2013; €440bn; eurozone)
** Europe Financial Stability Mechanism (till 2013; €60bn; EU)
*** European Stability Mechanism (from 2013; €500bn)