Monday, April 15, 2013

Eurozone - Formal decisions from informal Ecofin

At their informal meeting in Dublin, Eurozone finance ministers agreed to extend the maturity of the loans to Portugal and Ireland but showed little progress on fundamental issues.

In the good old days of the EU and the Eurozone, so-called informal Ecofin meetings were really informal. Finance ministers brought their spouses and left their ties at home and combined bigger picture discussions with the pleasure to get to know some interesting places of the hosting country. Informal Ecofin meetings are always organized in the country holding the rotating EU presidency. Last week’s informal Ecofin meeting in Dublin was yet another sign that the good old days are definitely over.

Contrary to earlier traditions, Eurozone finance ministers actually took decisions at their meetings in Dublin. First of all, finance ministers gave their final agreement on the €10bn bailout for Cyprus. The IMF will contribute €1bn, the ESM the rest. Ahead of last week’s meeting, there had been news reports that Cyprus would need an additional €6bn euro, ie a total of €23bn and not the currently decided €17bn. Apparently, the Cypriot president had asked for more support; either as direct aid or support from the EU’s structural funds. However, Eurozone finance ministers denied increasing the bailout package. Furthermore, finance ministers agreed to extend the maturity date of loans to Ireland and Portugal by seven years. The extension would smooth the debt redemption profile of both countries and lower their refinancing needs in the post‐programme period. This decision can be seen as a symbolic gesture to reward the countries, which up to now have been implementing austerity and structural measures without creating troubles with their Eurozone peers.

One of the bigger-picture topics at the informal Ecofin was the discussion on a possible future bank resolution mechanism. This bank resolution mechanism is supposed to be the next cornerstone towards a full banking union. The discussion since the Cypriot bailout with a bail-in has clearly shown that Eurozone countries are pushing hard to have bail-ins as part of a future bank resolution mechanism. The European Commission confirmed its earlier view on the possible sequencing of future bail-ins: first stock holders, then bond holders and eventually even unsecured depositors (above 100.000 euro). If this is not sufficient, a still-to-be-built rescue funds funded by the banking sector should step in, while the ESM could be the final lender of last resort. According to the European Commission, another new institution, a so-called European Resolution Authority should be entitled to intervene as a kind of counterpart to the new single supervisor.

The bank resolution scheme is the next big thing in the total make-over of the Eurozone. However, it is clear that an agreement will not be as easy as on the ECB’s role as bank supervisor. An agreement looks possible on the sequencing of any future bail-ins, even if the role of bank depositors still seems controversial. The establishment of another new institution, however, seems to be more disputed. German finance minister Schäuble said that there was not enough of a basis in the EU Treaties for building a common authority and fund for bank failures. It looks as if many more meetings are needed to get to a final agreement.

Some relief for the crisis-hit countries but slow and cumbersome progress on the fundamental issues. At least in this regard, last week’s informal Ecofin was a bit like in the good old days.

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