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Relief across Europe at German ESM decision

The Local · 12 Sep 2012, 16:08

Published: 12 Sep 2012 16:08 GMT+02:00

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The ruling helped key parts of the EU debt crisis jigsaw puzzle fall into place after months of unremitting bad news and anguish, potentially anchoring the bloc on a stronger, more united base, said analysts.

However they cautioned it would not be all plain sailing from here – with details needing to be nailed down and much haggling expected as member states make the painful compromises necessary to make the new system work.

The major breakthrough, they said, was that Germany's top court, in a landmark ruling watched around the world, rejected a raft of challenges against German ratification of the European Stability Mechanism (ESM) and the fiscal pact that will put a brake on accumulating more debt.

With the ESM in place and a beefed-up European Central Bank ready to intervene massively on the markets, the EU's crisis fighting machinery is taking shape, sparking a positive response on the markets where borrowing costs for weaker eurozone states continued to fall.

For 10-year benchmark government bonds in Spain, widely touted as the next bailout candidate, the return was around 5.60 percent Wednesday, compared with record unsustainable highs above 7.60 percent in July.

Significantly, Spanish Prime Minister Mariano Rajoy said he would wait and see about asking for a full bailout, after getting EU help for its stricken banks, keeping an eye on the nation's borrowing costs in the meantime.

"I still don't know the conditions nor whether it is necessary for Spain to request it," Rajoy told parliament. "We will see how the risk premium develops and the financing differentials ahead."

Italy also profited, raising funds at such sharply reduced rates to suggest that the tide may have turned after bailouts for Ireland, Portugal and twice for Greece pushed the eurozone to the brink.

Italian Prime Minister Mario Monti described the German court ruling as "excellent news because it removes the last obstacle for the implementation" of the ESM and fiscal pact.

The German court ruling is "another big step towards defusing the euro crisis," said Holger Schmieding of Berenberg Bank.

At the same time, he warned that "the euro crisis is not over yet. It comes in waves. Grave risks are still ahead," among them that twice-bailed out Greece could still leave the eurozone.

"But between them, the German government, the German court and the ECB have over the last six weeks made it even more likely than before that future waves of turmoil will be less vicious than the ones before," he added.

Analysts at Capital Economics were more sceptical.

The court decision and the ECB's expanded role in supporting eurozone states in need "suggests that a substantial firewall is now in place to prevent a Spanish or Italian default," they said in a note.

"But it could be months before this support actually materialises and, even then, (ECB) bond purchases will do no more than buy time," they said.

An early test comes Wednesday as an election in the Netherlands turns on widespread disaffection with the EU and resentment that weaker eurozone states are to get help even thought they flouted the bloc's fiscal rules.

European Commission President Jose Manuel Barroso meanwhile called for the setting up of a single European banking regulator in the shape of the ECB, saying it was an essential response to the crisis and a step to greater union.

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"Securing the stability of the euro is the most urgent challenge," Barroso told the European Parliament, and a new regulatory system was an "absolute priority today because it is the basis for better managing banking crises".

EU leaders agreed the new banking supervisor in June as part of a deal to allow the bloc's rescue funds to directly lend funds to stricken banks instead of passing aid through countries and so adding to their debt problems.

It is a first step towards a banking union and sits alongside moves towards the deeper economic and political integration needed to tame the debt crisis which has brought the eurozone economy to a standstill.

Barroso said the overall objective was to push the EU towards a "federation of nation states" which was required "to win the battle against nationalists, or extreme populists."


The Local (news@thelocal.de)

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Your comments about this article

16:30 September 12, 2012 by Steve1949
All this will accomplish will be making it easier to throw away more money. I wonder who is going to be eating the most of this loss when these bonds being purchased become worthless. Europe was fine before the Euro and will still be fine long after the demise of the Euro. Germany also never learns.
16:36 September 12, 2012 by schneebeck
"and the fiscal pact that will put a brake on accumulating more debt".

I'm not clear on this. When the ESM buys the debt of a country, doesn't the country still have to pay the debt back, only to the ESM instead?

And now, since a country's borrowing rate will be lower, won't they be able to borrow more and accumulate more debt?

Or does the ESM buy the debt and just forgive the debt they bought?

The ESM's supporters gave assurances that the conditions tied to buying a country's debt would be "stringent"? Will those conditions for debt assistance really be stringent or was that just talk to get everybody on board?

Or will those "stringent" conditions for assistance always be relaxed when the countries protest they are heartless and unreasonable?
17:25 September 12, 2012 by luckylongshot
The parasite of too much debt is killing the dog, the court decides to let the parasite grow bigger and we are supposed to feel relieved,,,why???
17:55 September 12, 2012 by sonriete
the quote that stood out in this article was the last one;

"Barroso said the overall objective was to push the EU to a "federation of nation states" which was required "to win the battle against nationalists or extreme populists"

Well, they did try this in 2005, it was called the EU constitution, which was roundly defeated in referendums in core states France and the Netherlands. They then gave it up, knowing they would also lose in Poland, Czech republic and UK.

So now the Brussels mandarins come back for another bite of the apple, this time using least democratic taticts possible.

Who does Barroso represent? Only "committed Europeans"? Does he have obligations to Euro sceptics, after all they did win the popular referendums, did they not?

They remind me more and more of the old Bertolt Brecht poem "the solution" look it up.
18:52 September 12, 2012 by IchBinKönig
So nice to see the news from theLocal perspective. where is the news from wonderful liberated Libya today?
19:01 September 12, 2012 by sonriete
The Solution

After the uprising of the 17th of June

The Secretary of the Writers Union

Had leaflets distributed in the Stalinallee

Stating that the people

Had forfeited the confidence of the government

And could win it back only

By redoubled efforts. Would it not be easier

In that case for the government

To dissolve the people

And elect another?

Bertolt Brecht
22:05 September 12, 2012 by smart2012
When "non populistic" people get involved, the good decisions for Germany and Europe are made: well done judges :)
01:40 September 13, 2012 by sonriete

I am glad for you that you are happy on this day when things went the way you wished.

While I don't agree with your sentiment, I do agree with your analysis that decision making is drifting further and further from the popular will, or "populism" if you will, I am not as pleased to see it.

When you have an ECB where one country contributes 27% of the actual money but is only granted one vote out of 17, is there any wonder the others will out vote the paymaster 16 to 1 and spend the major providers money on themselves?

There are different ways to manage affairs, for instance the IMF where voting corresponds to contributions.
08:30 September 13, 2012 by ChrisRea
@ schneebeck

The fiscal pact does not refer to borrowing of countries. It is a commitment from each signatory that they will not exceed a 0.5% from GDP deficit and, if they have more that 60% of GDP debt, they reduce it at 5% per year.

The connection with ESM is that only the countries that signed and implemented the fiscal pact will have the right to borrow money from ESM.
11:00 September 13, 2012 by jg.
The plan was that the ESM would be able raise additional funds in the markets (maybe up to 10 times the initial country contributions) - but the markets now know that the ESM only has a maximum of 500 billion and would not be able to finance any more debt.

Additionally, the court has made it clear that Eurobonds and other schemes to allow the ECB to re-finance sovereign debts are prohibited by treaty and therefore, by the German constitution.

The court decision allows the EC, Merkel, Draghi, etc. to save face but has actually reigned in their plans significantly. The effects of the constraints probably won't be seen until next year.

Italy contribution to the ESM will be 125 billion and Spain 83 billion - given that both countries are already up to their eyeballs in debt, where are they expected to find this money? It is a rhetorical question - they will have to borrow it from the markets at a few percent higher than the ESM will lend it back to them => the ESM is a Ponzi scheme. The only people who are going to benefit from the ESM are the banks.
11:32 September 13, 2012 by schneebeck
@Chris Rea #9

OK, the fiscal pact is their agreement, and the ESM is the bailout fund. Thanks.

The part about buying up unlimited debt so countries don't pay high interest rates is some other kind of debt assistance, with "conditions".

But, if they agree to a debt ceiling of 0.5%, how does a country jump from that to a 60% of GDP debt? What if a country is holding at a 50% of GDP debt but all the other countries are respecting the 0.5% limit?

Obviously, I'll have to read up on it. Pretty confusing.

Borrowing money is a whole bunch more trouble than just the interest costs. It leads to parliaments haggling in endless gridlock about what programs should be cut, there's countries haggling endlessly about bailouts for other countries, there's strikes and more strikes over cuts, and the people of different countries get all upset at each other.

These are all big costs to borrowing too and could all be nothing if they didn't borrow the money in the first place.

But, that's how politicians get elected. The one that offers the most programs and pork for everybody wins.
12:31 September 13, 2012 by ChrisRea
@ schneebeck #11

"But, if they agree to a debt ceiling of 0.5%, how does a country jump from that to a 60% of GDP debt? What if a country is holding at a 50% of GDP debt but all the other countries are respecting the 0.5% limit?"

Couple of countries, including Germany, are already above the 60% of GDP. The idea is to reduce it and Germany is going that way by collecting larger amount of taxes (for example, December 2011 was 4.1% more than December 2010). The moment its debt will decrease below 60% of GDP or it is reducing it yearly by 5%, it will be able to access the ESM (provided that it respects also the deficit limit).

So yes, you are right, borrowing brings trouble. That is why the fiscal pact will allow only countries with a healthy budgeting to borrow from ESM.
13:52 September 13, 2012 by sonriete
Virtually all of the countries in the euro zone are way above the 60% of GDP limit and nearly all of them have seen the number going up since the fiscal pact was signed.

Greece is at 165%

Ireland is at 108%

Italy is at 120%

Even France is at 86%
17:37 September 13, 2012 by schneebeck
@ Chris Rea #12

Thanx. You put that pretty clearly for me.

Isn't Germany already requiring healthy budgeting practices to borrow money? But the borrowing countries can't comply right now? Or are these austerity measures being required something else?

In good economic times, a govt. could borrow from other sources I'd think, and then they wouldn't need to hold their debt limit above 0.5% of GDP. Are their other checks and mechanisms in the fiscal pact to discourage borrowing at higher levels?

I have heard the argument lately that "budget requirements" don't work in a recession because revenues are limited but the economy has to be stimulated. So those "budget requirements/austerity measures" ought not to be required as they are unreasonable in times of recession.

Do you see that argument being used to circumvent the fiscal pact and still have access ESM funds.

In an economic peak, with revenues high, budgets will become as big as they can. Then recession hits and everyone cries bloody murder when their "entitlements" have to shrink. Then whoever the opposition is, gets elected by railing against budget requirements. (anywhere in politics, not just Greece)

But still, they've probably learned something since the last fiscal pact most of the EU countries ignored.

In the U.S., their "fiscal pact" is a debt ceiling. Which they always reach and then vote to raise it. They do this in the name of keeping the government from shutting down and in the name of stimulating the economy. They say there is no choice in the matter, it must be done.

If the fiscal pact works, maybe U.S. politicians could learn from it? Ya think?
21:11 September 13, 2012 by sonriete
I'm afraid that the more likely outcome is that the European politicians will learn from the Americans.

The ruling from Karlsruhe did not forbid more funding for ESM, it only required Bundestag approval to raise the limit, just like the American congress must approve debt ceiling limits.

When they want to borrow more and the funding limit is coming close the pressure becomes stronger and then the hold outs give in.

Look how many times Germany gave way on her "red lines" just this year alone.
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