Today in the euro zone – a blizzard of bailout numbers

March 30, 2012

Brace yourself for a blizzard of numbers.

EU finance ministers gathered in Copenhagen are poised to decide precisely how much firepower their new rescue fund – to be launched mid-year – will have. A draft communiqué suggests that as of mid-2013, presuming no new bailouts have been required in the interim, the combined lending ceiling of the future ESM and existing EFSF bailout funds will be set at 700 billion euros (500 billion pledged to the ESM plus the roughly 200 billion already committed to Greek, Irish and Portuguese rescue programmes).

Up to mid-2013, if 700 billion proves to be insufficient — i.e. someone else needs bailing out — euro zone leaders will be able to bolster it with the 240 billion euros as yet unused in the EFSF, according to the draft, although German Finance Minister Wolfgang Schaeuble said last night that 800 billion should be the absolute limit.

Sorry, there’s more. Because the ESM will not have its full 500 billion euros capacity on day one – it will build up over time – the real available figure for the next year is more like 640 billion euros.
Confused? You should be.

Nonetheless, this is probably sellable by Angela Merkel to German MPs and her public as not being a real increase at all (which is not that far from the truth) while also  probably being enough for Christine Lagarde to seek greater crisis-fighting funds for the IMF from its non-European members, most of whom have said they would provide nothing until the euro zone shows some serious intent of its own. The IMF spring meeting looms next month.

The big question is, is it enough to keep markets calm? The possibility of drawing on the extra 240 billion over the next year might do the trick but it’s not yet guaranteed that that will be agreed. If the ministers only offer up a 500 billion fund plus the money already committed to bailouts (which really is not new money at all), there could well be a wobble.
The other big setpiece of the day is the Spanish budget, which Rajoy insists will be tough. Markets are watching closely.
Spain reported a budget shortfall of 8.5 percent of GDP in 2011 and faces a target of 3 percent next year. It can ill-afford any slippage; its bond yields have already started rising since Prime Minister Mariano Rajoy rejected the first 2012 target agreed with the European Commission and secured a softer goal. 

Rajoy has promised a tough budget which economists predict will push Spain into a pretty deep recession this year. The government believes 35 billion euros of cuts will allow it to meet its deficit targets but given an economic downturn will cut government revenues, some analysts estimate nearly double that amount will be needed. The outside pressure for reform is unrelenting. Schaeuble said a youth unemployment rate nearing 50 percent was little surprise considering the state of Spanish labour laws.

Ireland appears to have dodged a bullet for now, saying it will issue a 13-year bond to meet a 3.1 billion euros payment to one of its failed banks in the next few days. Dublin has been lobbying its European partners to be allowed to replace 30 billion euros of high-interest IOUs given mainly to the former Anglo Irish Bank with another instrument that would lengthen their maturity and cut their interest rate. It has a long way to go on that score but probably needs agreement if it is to return to bond markets in the next year, which it needs to, to build up funds ahead of the expiry of its EU/IMF bailout.

In the short-term, Anglo Irish will take the bond in lieu of cash, leaving more money in the state pot. Finance Minister Michael Noonan said he wants a wider deal on refinancing the remaining 27 billion euros of IOUs, aiming to issue an even longer-term bond to cover those. The ECB has not agreed to that yet.

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