ESM & Unlimited ECB Bond Buying – Bazooka Fully Loaded

Category: ECB-European Central Bank | Eurozone
September 12, 2012 | Comments Off |
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ESM & ECB Bond Buying

ESM & Unlimited ECB Bond Buying – Bazooka Fully Loaded

ESM verdict boosted global stocks and the Euro currency as investors breathed a sigh of relief that the Eurozone’s rescue fund for nations in crisis could soon take effect after months of delay. The euro hit a four-month high against the dollar following the ruling, and German bond futures fell to their lowest level since July. A week ago, the European Central Bank announced that it was prepared to buy “unlimited” bonds from stricken Eurozone members to reduce their borrowing costs. But its plan depended on the ESM going through. The long sought-after Eurozone Bazooka has been delivered within a span of a week; with the Eurozone finally receiving conditional but unlimited ECB bond purchases and the ESM. German Foreign Minister Guido Westerwelle called the ruling “a smart move” and Economy Minister Philipp Roesler said it was “a good day for Europe”. “With this clear decision from the Constitutional Court, we came an important step closer to the goal of keeping the euro stable,” Roesler said, reported Reuters.

Germany’s constitutional court ruled today (rejecting bids to halt) that the ESM – European Stability Mechanism treaty is in line with the German constitution, clearing the way for Berlin to ratify the Eurozone’s new 500 billion- euro ($644 billion) and permanent rescue fund under certain conditions on its use. Germany’s constitutional court insisted the German parliament have veto powers over any future increases in the size of the fund. The Federal Constitutional Court in Karlsruhe today dismissed motions filed by groups including a conservative lawmaker and an opposition political party that sought to block the fund, known as the European Stability Mechanism, and a deficit-control treaty championed by Chancellor Angela Merkel. The court stipulated that a cap of about 190 billion euros be set on German liabilities before ESM ratification, unless parliament decides to back extra funds.

ESM underlines Germany‘s commitment to deeper European integration:

Legal experts said the court’s decision underlined Germany’s commitment to deeper European integration despite the misgivings of the plaintiffs. They had sought to block the introduction of the ESM on the grounds that parliament’s sovereign power over budget matters was being eroded. The judges said that Germany must state when ratifying that it won’t be felt bound by the treaty unless these reservations are efficiently met. Much in the crisis hinges on the permanent ESM, which is designed to go into operation as the temporary European Financial Stability Facility is phased out through next year. The bailout fund would work in tandem with the ECB in buying bonds to lower yields for states such as Spain and Italy. The court also ruled that a clause in the ESM treaty which seeks to keep decisions of the fund confidential “must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat (upper house)”, meaning both chambers would have the right to be consulted on the ESM’s activities.

Germany is the only country in the 17-nation Eurozone that has yet to ratify the European Stability Mechanism (ESM), which is meant to erect a 700 billion - euro firewall against the spread of the three-year-old sovereign debt crisis. Jean-Claude Juncker, who heads the group of Eurozone finance ministers, said the board of governors of the ESM would meet for the first time on October 8, a sign of optimism that the fund will be operational next month.

Europe Moves Closer To Banking Union:

ECB to police banks, closer fiscal integration designed to end years of financial and economic turmoil in the Eurozone. European Commission President Jose Manuel Barroso outlined the proposal in his annual “state of the union” address, laying out a path to further economic and fiscal integration to underpin the future of the euro currency. “The crisis has shown that while banks became transnational, rules and oversight remained national,” Barroso told members of the European Parliament. “We need to move to common supervisory decisions, namely within the Euro area.” The single supervisory mechanism proposed today will create a reinforced architecture; with a core role for the European Central Bank. It will be supervision for all Euro area banks. The proposed banking reforms, which need to be approved by European Union member states, aim to break the link between heavily indebted countries and their struggling banks, tackling a core element of the debt crisis that has afflicted Europe since early 2010. A banking union foresees three steps: the ECB gets the power to monitor all Eurozone banks and others in the wider EU that agrees to the oversight; the establishment of a fund to close troubled banks; and a fully fledged scheme to protect citizens’ deposits across the Eurozone.

Establishing a common framework for dealing with problem banks would mark a departure from the previously haphazard approach taken by the Eurozone’s 17 members that has frustrated investors and helped drive up borrowing costs for weaker states. Handing powers of supervision to the ECB also unlocks the possibility of direct aid to banks from the Eurozone’s permanent rescue scheme, the European Stability Mechanism (ESM), although it is not clear when Spain and others would benefit. Under the terms of the proposal, the ECB would be at the head of the current fragmented system of national regulators, with the power to police, penalise and even close banks across the Eurozone. The ECB would also gain powers to monitor banks’ liquidity closely and require them to keep more capital to protect themselves against future losses. Germany, the Eurozone’s economic heavyweight, is opposed to allowing the ECB supervise all Eurozone lenders. Berlin says the central bank will be overstretched if it has to monitor all 6,000 Eurozone banks. Although Britain, outside the Eurozone, will not join the scheme, many international banks in London have operations in the Eurozone that will be affected by the ECB’s new supervisory reach.


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