New eurozone mechanism implicates private investors
(BRUSSELS) - A new eurozone facility to take effect in mid-2013 would for the first time engage private investors in the rescue of countries in financial jeopardy, but only on a case-by-case basis.
Eurozone finance ministers on Sunday, in addition to backing a rescue for Ireland, agreed on the operation of the facility, to be known as the European Stability Mechanism (ESM) and which would replace the 440-billion-euro European Financial Stability Facility established (EFSF) last May.
The ESM, as is true for the current arrangement, allows for financial assistance to countries on condition that they adopt budgetary measures drafted by the European Commission and the International Monetary Fund.
But unlike the existing arrangement, private creditors that have loaned money to governments -- banks and investment funds -- may be required to contribute to the rescue.
The engagement of private investors, however, would not be automatic, as Germany had initially wanted, but would be determined on a case-by-case basis.
Private investor contributions would depend on the seriousness of the crisis, as measured by the European Commission and the IMF in conjunction with the European Central Bank.
The commission, the IMF and the ECB would determine if the country concerned merely faced a cash shortage or was in fact facing insolvency.
In the case of a liquidity squeeze private creditors would simply be encouraged to hold on to their investment.
But if a government were deemed to be insolvent European aid would come with an obligation not only to implement budget reforms but to restructure the debt.
The government concerned would then negotiate with its private creditors. Debt payments could be rescheduled, interest rates lowered or the amounts to be repaid reduced.
Starting in June 2013, special clauses stipulating the procedure will be attached to eurozone government bonds.
Private holders of such securities would commit themselves to accepting a decision taken by a majority of them to alter repayment terms.
Text and Picture Copyright 2010 AFP. All other Copyright 2010 EUbusiness Ltd. All rights reserved. This material is intended solely for personal use. Any other reproduction, publication or redistribution of this material without the written agreement of the copyright owner is strictly forbidden and any breach of copyright will be considered actionable.