The original deal called for an initial cash contribution from Eurozone finance ministers of 40bn Euros in 2013 (when the fund is due to be established), with the rest paid over the subsequent three years. But this was about as popular as alcohol-free lager at the Munich beer festival with Merkel’s coalition partners the Free Democrats. So in a last minute change of plan, the re-worked deal will now call for a mere 16bn Euros a year for five years. The rest of the fund will be made up of 620bn Euros in loan guarantees and callable capital.
Germany’s eleventh-hour change of heart appears to have angered many fellow Euro-ers, even some of its usual allies, not to mention the governments of the more fiscally-challenged Euro countries which fear they may end up footing a larger portion of the overall bill as a result.
Meanwhile in another part of the forest, things are afoot which make all this fuss over a fund which won’t even be up and running for two years look a teensy bit irrelevant. The credit rating of Portuguese sovereign debt has been downgraded by both Fitch’s and Standard & Poors this week. Fitch knocked 2 points off, from A+ to A-, then S&P’s rapidly followed with a withering fall from A- to BBB. That’s the lowest rating given by any of the major agencies.
Coming hot on the heels of the resignation of the Portugese PM Jose Socrates (not quite as wise as his Greek namesake it would seem) on Wednesday, these downgrades make the prospect of Portuguese default a good deal more imminent. In early trading today the yields on 10 year Portuguese bonds shot up 12 basis points to an unsustainable 7.78%. Portugal is due to make debt repayments totalling of 9.5bn Euro in April and June, and whilst its government still protests that it will honour the payments, the markets are now clearly of the opinion that it may not.
In which case another bail out fund of some sort is going to be needed well before 2013, a prospect which has set the old hare about whether the UK will be expected to contribute running again. We’re not in the Euro of course, but we are in the EU, so the arguments look rather different depending which side of the English Channel you’re on. PM Cameron, unsurprisingly, is not saying much on the subject. Although after the austerity budget we’ve just had, the prospect of having to stump up a few billion quid to rescue Portugal would be extremely politically challenging.
To be fair, the ESM was never supposed to tackle such short-term troubles, being more of a long-term structural safety net to try and stop all this from happening again. All the same it should have been in place ever since the introduction of the Euro, the fact that it wasn’t giving quite an insight into the level of hubris involved in the whole single currency project. If it had been, all the pesky special arrangements which have had to be made for Greece and now perhaps Portugal would have been unnecessary, or at any rate much less onerous.