The ministers of Economy and Finance of the eurozone (Eurogroup) will try this Monday to reach a definitive agreement to launch the reform of the European Stability Mechanism (ESM) -the rescue fund of the eurozone- and the firewall of the Resolution Fund Banking, which were pending a year ago.

The eurozone countries reached an agreement in principle on both points in December 2019, but Italy’s doubts about the reform then prevented them from giving the green light to sign it and the arrival of the coronavirus pandemic shortly after relegated them to the background.

The objective is that in their telematic meeting all the ministers give the go-ahead to sign the agreement, predictably in January, so that it is later ratified at the national level and the reform of the ESM enters into force in 2021.

This should, in turn, allow the resolution fund firewall to be up and running in January 2022, two years ahead of schedule, according to a senior European official, who was “reasonably optimistic” about the chances of doing so.

The reform of the ESM treaty, established in the wake of the financial crisis to help countries in trouble, plans to give it more power in future bailouts and surveillance of countries, as well as improve the precautionary credit lines it can grant.

It also introduces collective action clauses with simple aggregation clauses (CAC in financial jargon) in sovereign bond issues as of 2022, which in practice makes it easier for creditors to assume write-offs if the debt has to be restructured.

This point stirred the political debate in Italy, where some parties argued that the measure would increase the country’s sovereign debt costs, preventing Rome from supporting the reform in 2019. European sources hope that, a year later, it will be available to do it, reports Efe.

Resolution fund

The second leg of the agreement is the firewall for the Single Bank Resolution Fund (FUR).

The FUR is a “piggy bank” created in 2016 that is fed with contributions from the banks to finance, if necessary, the resolution of troubled European banks, and the firewall would be an extra safety net in case it runs out of money.

The agreement foresees that the ESM will be in charge of providing this firewall in the form of credits and that it can be in place before 2024, the date initially planned, if by the end of 2020 sufficient progress has been made in reducing banking risks.

This is a fundamental condition of the most orthodox countries, such as Germany, the Netherlands or Finland, and the ministers will have on the table a report that accounts for this reduction. Bad loans had fallen to 3% in the eurozone in June 2019 (up from 6% in 2016), according to the European Banking Authority, but the time for the decision comes with the prospect that the pandemic will cause them to rise again.

However, the agreement that the president of the Eurogroup, Paschal Donohoe, wants to close tomorrow will seek, rather than respond to new challenges, to show that Europe is capable of completing the prevention mechanisms on which it has been working for years.

On the other hand, the ministers will discuss with the managing director of the International Monetary Fund, Kristalina Georgieva, the Fund’s report on the economic situation in the eurozone, as well as the latest reports on the supervision of the bailouts to Spain, Portugal, Ireland and Cyprus, although no debate is expected about it.


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