Europe signs new bailout rules

The new deal means Europe's bailout fund will give cash directly to banks - meaning otherwise financially sound governments won't be saddled with debt.

by Emma Haslett
Last Updated: 28 Jun 2013
It’s been a busy few days for European politicians, what with all the hours spent agonising over what exactly constitutes ‘smart-casual’, so they don’t look too stuffy next to Dave and Jeffrey at the G8.

With all that over and done with, they’ve got back to business, signing a deal which will enable the European Stability Mechanism, Europe’s €500bn bailout fund, to pump cash straight into struggling banks – rather than making governments apply for the funding first.

It’ll make a world of difference to struggling economies. At the moment, when a bank is in trouble, its government applies for bailout money and thus becomes the one saddled with enormous debts. Under the new rules, governments will have to put some of their own cash in – but not nearly as much. And the ESM’s contribution will mean they’re not the ones left in debt.

The four-page agreement signed late last night says that before banks qualify for the ESM’s cash, they must meet the minimum capital requirement of a 4.5% tier one common equity ratio (the amount of capital they hold versus the amount they’ve lent out).

If they don’t, their government has to give them enough cash to make up the amount, after which the ESM will top it up. If they do, countries will have to put in 20% of the cash needed to recapitalise, while the ESM will put in the rest – although in ‘exceptional circumstances’ these rules can be flexible. This has been put in at the behest of Angela Merkel, who isn’t particularly comfortable with any of this.

The only fly in the ointment is that leaders haven’t yet agreed whether it can be applied retroactively to governments that have already received funding through the ESM. For countries like Spain and Portugal, who have been bailed out, any chance to shift burdens off their balance sheet and onto the ESM’s will be seized upon with glee.

Talking of government borrowing, the Office for National Statistics has published figures about the UK’s debts. Deep breath time: at the end of May this year, net public sector debt – ie. how much the country owes – had risen to £1.19tr, up from £1.1tr a year before. That’s 75.2% of GDP, up from 71.1% in May 2012. Which is a lot.

It follows, then, that borrowing has risen too – although by a less eye-popping £0.3bn in the year to the end of May, to £118.5bn. That’s stripping out factors like the Royal Mail pension fund and transfers from the Bank of England, though. The real figure is likely to be much higher.

Despite that, though, stock markets have stabilised after the Federal Reserve, the US’ central bank, hinted that it would begin cutting back on quantitative easing in the not-too-distant future. Mid-morning, the FTSE 100 was up 1.2%, or 77 points, to 6,235.

Expect more similar episodes before QE is withdrawn entirely. The Fed has dubbed the process ‘tapering’ – but then it always has been a master of euphemism. Europe could do with a bit more of that. We’ve had the European Financial Stability Facility. How about the European Central Euphemism Mechanism?

Find this article useful?

Get more great articles like this in your inbox every lunchtime

There's opportunity in this recession

A Schumpeterian view of closing businesses.

Is it okay to spy on my staff if I think they're slacking ...

Everything you wanted to know about employee surveillance but were afraid to ask.

The psychology of remote working

In depth: The lockdown has proven that we can make working from home work, but...

A simple cure for impostor syndrome

Opinion: It's time to stop hero-worshipping and start figuring out what greatness looks like to...

I was hired to fix Uber’s toxic culture - and I did. Here’s ...

Harvard’s Frances Frei reveals how you know when your values have gone rotten, and what...

Social responsibility may no longer be a choice

Editorial: Having securitised businesses’ loans and paid their wage bills, it’s not inconceivable the government...