After five months of political haggling, the European Union has finally agreed on the next rescue package for the euro. But the so-called European Stability Mechanism (ESM) is just another debt-issuing vehicle that cannot make up for the fact that all euro zone members are trundling along in an anemic economy that faces more pressure from runaway commodity prices and rising interest rates.
While the ESM agreement talks of a €700 billion fund, it is actually only an empty shell. Strained euro zone nations will only inject €80 billion in five annual tranches, a sign that even Germany is not exactly a strongman among Europe's weak. Germany will inject €22 billion between 2013 and 2017.
Chancellor Angela Merkel Thursday said she would seek to secure an agreement for Germany to spread its contributions to the euro zone's permanent bailout fund over five years instead of the three- to four-year timeline European Union leaders had been discussing, the WSJ reported.
The other €620 billion are only guarantees from the euro countries ... and who believes such promises of battered European politicians anymore?
All together, the ESM is just a dressed-up version of the "temporary" €440 billion European Financial Stability Facility (EFSF), which it will replace in 2013 as a permanent bailout instrument for profligate governments.
Hopes for a cheap way out of the European debt crisis will probably be futile. Only six euro zone countries still brandish a AAA rating (Austria, Finland, France, Germany, Luxembourg, Netherlands). It will be difficult to gain a AAA rating for ESM debt issues as the other euro zone members are basically nothing more than the subprime borrowers were in the U.S. housing bubble.
The rating agencies will want to avoid a repeat of their debacle, when they rated subprime with AAA and started the biggest financial crisis in history.
European Union leaders cut the startup capital for the future euro emergency aid mechanism after German demands to make smaller upfront payments stoked fresh concerns about Europe’s effort to quell the debt crisis.
As speculation swirled that Portugal will be the next victim of the crisis, the leaders bowed to German Chancellor Angela Merkel’s call to pare the fund’s paid-in capital as of 2013 to 16 billion euros (16.18€ billion), less than the 40 billion euros foreseen in a March 21 accord.
“It was a difficult debate with Germany,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after the first session of an EU summit in Brussels early today. “Germany found that in the compromise agreed last Monday it would have to pay in too much. So we had to tackle that issue.”
With Merkel’s party trailing an opposition bloc in the polls before a March 27 regional election, the sparring over the future emergency support system reflected domestic political pressure on leaders in Europe’s wealthier north to limit aid to struggling southern economies.
Merkel’s renegotiation of the three-day-old financing accord punctured the EU’s proclamation of a “comprehensive” anti-crisis strategy, including tougher sanctions on excessive budget deficits and national pledges to increase competitiveness.
German political jitters over propping up debt-swamped states dominated the crisis response last year, with Merkel delaying aid for Greece and calling for bondholder losses that hastened Ireland’s plunge into the fiscal abyss.
Portugal, for example, navigates the next phase of the crisis with the government’s powers in doubt after the defeat of a budget-cutting plan in parliament on March 23 led Prime MinisterJose Socrates to offer to step down.
Downgrades by Fitch Ratings and Standard & Poor’s dealt a further blow yesterday, as EU leaders called on Socrates and the opposition parties to unite behind belt-tightening measures that might spare Portugal from becoming the third euro country to tap emergency aid.
Socrates “made it clear in the most likely case that there will soon be elections in Portugal, he’s sure that whatever will be the next government all the commitments in terms of fiscal targets will be respected,” said European Commission President Jose Barroso, a former Portuguese leader.
Portugal continued to rule out a bailout, which two officials with direct knowledge of the matter said may total between 50 billion euros and 70 billion euros.
The yield on Portugal’s two-year note jumped 10 basis points to 6.71 percent yesterday, and reached 6.89 percent, the highest level since the euro’s debut in 1999. The 10-year yield increased 3 basis points to 7.66 percent, leaving the extra yield over German bonds at 442 basis points.
Portugal’s situation is “precarious,” Belgian Prime Minister Yves Leterme said.
The German move on the emergency fund split the six-country alliance of AAA-rated countries that shoulder the bulk of the rescue costs. Political sensitivity is high in Finland, part of the top-rated club, where polls show a surge in support for an anti-euro party in the run-up to April 17 elections.
Finnish Prime Minister Mari Kiviniemi told Bloomberg Television before the summit that she would oppose a deal that “increases any country’s responsibilities.”