EU Bailout Fund May Face Delay

Efforts to set up rescue fund stall on dispute about bondholders' losses.

European efforts to speed the setup of a permanent rescue fund have lost momentum amid a clash between Germany and France over provisions to force bondholders to share losses, three people involved in the negotiations said.

Finance ministers this week failed to bridge divisions over the European Stability Mechanism, lessening the chances of activating its 500 billion-euro ($680 billion) war chest next July, said the people, who declined to be identified because the talks are in progress. Officials had hoped to bring the ESM’s start date forward to mid-2012 from its ultimate deadline of July 2013, the people said.

Germany and the Netherlands are resisting pleas by France, Spain, Portugal and Ireland for the bondholder-loss provisions to be stripped from the ESM treaty, the people said. It’s possible that officials will still beat the 2013 deadline, the officials said.

European officials are scrambling to pull together as much money as they can to show investors they can stamp out the region’s worsening debt crisis. Operating the ESM in combination with the 440 billion-euro temporary fund next year would potentially boost Europe’s anti-crisis resources to 940 billion euros.

“Private sector involvement” was foreseen in a first version of the ESM treaty, signed July 11. Ten days later, euro government leaders negotiated writedowns on Greek debt, declaring that treatment as “exceptional and unique.”

The opponents of bondholder-loss provisions seized on that declaration to press for amendments to the ESM treaty. The July 21 summit also foresaw additional powers for the temporary rescue fund, and for the ESM as well. They include bond purchases and extending emergency credit lines to distressed European nations. As a result of the new powers, the freshly inked ESM treaty had to be rewritten before being sent to national parliaments for ratification.

In parallel, the European Commission and governments including Finland called for the ESM to be set up a year earlier.

The clash at the Nov. 7 meeting of finance ministers also made it impossible to ready the new treaty by Nov. 19, when Spain’s parliament dissolves before elections.

That means the euro zone will miss a self-imposed end-November deadline for signing the new version. The earliest that can now happen is January, one of the people said.

It’s also possible that earnest discussions of the revised version at ministerial level won’t resume until January or February, another said.


Bloomberg News


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