By Jan Strupczewski
BRUSSELS (Reuters) – Euro zone officials have two weeks to come up with a way to support the economy during the coronavirus epidemic that satisfies members with completely opposing views: those calling for joint debt issuance and those fiercely against it.
Borrowing on the market by an EU institution to later lend on cheaply to a government is as far as some – like Germany, the Netherlands, Finland or Austria – will go towards a “mutualisation” of debt.
For others, like France, Italy or Spain, which see the pandemic as an opportunity to push forward a long-standing goal of jointly issued debt, it may not go far enough.
EU leaders failed to agree a plan on Thursday but gave themselves two more weeks to work out details.
European Central Bank chief Christine Lagarde urged them to act more decisively to cushion the economic hit of the pandemic, sources said on Friday.
Finance ministers will start debating options next week.
1. BORROWING BY THE EURO ZONE BAILOUT FUND ESM
The European Stability Mechanism (ESM) is owned by euro zone governments, which are jointly responsible for the debt it issues to finance a government. The ESM could extend standby credit lines, worth up to 2% of GDP, to any euro zone country that asks for it.
The snag is that it would entail a debt sustainability assessment of the applicant — something highly-indebted Italy is loathe to submit to — and carry some conditions, even if focused only on the pandemic. Italy and Spain want no conditions.
2. BORROWING BY THE EUROPEAN INVESTMENT BANK
The EIB, the investment bank of the EU, is owned by EU governments. It finances all kinds of projects supported by the 27-nation bloc and could support companies hit by the epidemic. The EIB raises its money by issuing bonds on the market. Thanks to its triple-A rating it gets funding very cheaply.
The bank has already offered to immediately deploy close to 40 billion euros of additional funding to help fight the effects of the coronavirus. It could do much more if EU finance ministers — its owners — agree to increase its capital. This is an option that the EU is considering.
3. BORROWING BY THE EUROPEAN COMMISSION
The European Commission, which also has a triple-A rating, can also borrow on the market. It has done so to raise money for the European Financial Stabilisation Mechanism (EFSM) — an emergency fund created in 2010 when the sovereign debt crisis started to unfold. The 60 billion euros in the EFSM fund at that time was raised against the collateral of the EU’s long-term budget. It was lent on as part of bailouts for Ireland and Portugal.
The Commission could use that mechanism again, if EU governments agree to set aside EU budget guarantees this year and in the EU’s next long-term budget of 2021-2027.
To cover possible needs of non-euro zone countries, the Commission could also use the EU’s Balance of Payments Facility, which was used to help Hungary, Romania and Latvia a decade ago. At that time, the facility had 50 billion euros — again, money borrowed on the market by the Commission and lent on to governments.
4. WHAT WILL BE CHOSEN?
“I would say that nothing is excluded at this stage, which is a useful basis to work on over the next 2 weeks,” one senior euro zone official said, noting EU leaders asked euro zone finance ministers for proposals, in plural.
But several officials dismissed joint debt issuance — understood as euro zone governments coming together to issue bonds — as impractical for the purposes of the pandemic, even if the fierce political divisions were somehow overcome.
They pointed out that not only would euro zone countries have to create a legal basis for such bonds, which would take a long time, the bonds would then have to get credit ratings, and the euro zone would have to go on a roadshow to present them to investors, before anyone decided to invest in them.
“Working on the basis of the existing ESM tools at least has the advantage that it can be done quickly and there is money in the ESM that can be used. Creating something completely new from scratch would take a long time and miss the pandemic goal,” another official said.
(Reporting by Jan Strupczewski; Editing by Toby Chopra)
