What is this ESM bail-out fund?

national | eu | opinion/analysis Tuesday May 22, 2012 13:01 by O.O'C. - People's Movement post at people dot ie 25 Shanowen Crescent, Santry, Dublin 9 087 2308330

An introduction to the ESM

The European Stability Mechanism is a crisis fund that comes at the price of €11 billion for Ireland, that EU countries will be able to gain access to should they ratify the Fiscal Treaty. But will it be a handy insurance policy for Ireland - or an economic straitjacket?

The European Stability Mechanism (ESM), also known as “the secret treaty”, is part of an overwhelming bunch of initiatives designed by the EU to stabilise the euro.

Essentially, the ESM is a new bail-out fund designed to supply loans to countries in two situations:

(1) where they find themselves in danger of a default, or

(2) where they are found to be in an economic situation that threatens the stability of the euro zone as a whole.

The ESM will be a permanent replacement for an existing temporary fund, the European Financial Stability Fund. The EFSF, which will expire by June 2013, holds €500 billion. The ESM will initially hold €700 billion.

How did it come about?

The ESM is connected to the Fiscal Stablity Treaty, which is the subject of a referendum in Ireland.

Access to the ESM has been made contingent on the ratification of the Fiscal Stability Treaty, thus increasing the pressure on governments to ratify.

But the ESM is a separate entity based on a two-line amendment of the Lisbon Treaty, which was decided by an EU summit on 16 December 2010, and an intergovernmental treaty specifying working mechanism and procedures.

Where does the money come from?

The ESM will build its capital stock from contributions from the euro countries and from capital already invested in the existing EFSF. Ireland is to contribute €11,145,400,000 to the initial capital.

Like other countries in financial troubles, Ireland will have to supply a portion of this amount in cash, whereas triple-A rated countries like Germany can make do with guarantees.

The ESM can decide to increase the total capital stock (or speed up the contributions of the initial capital) if needed. The Irish Government will then be obliged to “meet all capital calls on a timely basis in accordance with the terms set out in this Treaty.” This increase of capital stock can become relevant if a bail-out of one of the euro zone’s larger economies, such as that of Spain or Italy, becomes necessary some day.

Votes

Ireland is to cover 1.59 per cent of all capital stock in the ESM fund, and votes on the ESM board will be distributed in accordance with this percentage.

A “qualified majority” is needed to make most decisions concerning the programmes and management of the fund. Germany, with 27 per cent of the votes, is the only country that can veto these majority decisions by itself.

The decision to initiate a bail-out programme in any of the member-countries will be taken by the ESM’s Board of Governors. The ESM Treaty does not specify the exact conditions under which its programmes will be initiated, leaving room for political decisions.

6 QUESTIONS & ANSWERS

1. Is the ESM the same as the Fiscal Stability Treaty?
2. Will there be a referendum in Ireland on the ESM?
3. How much money will Ireland have to contribute to the fund?
4. Who is in charge of the ESM?
5. What are the conditions of the bail-out programmes?
6. Will Ireland have access to loans if the Fiscal Stability Treaty is not ratified?

1. Is the ESM the same as the Fiscal Stability Treaty?

No, the ESM (European Stability Mechanism) is a separate legal body, with its own separate treaty. All euro countries will become members of the ESM if they ratify the ESM Treaty. To obtain access to the ESM crisis fund a country must also ratify the Fiscal Stability Treaty.

The ESM Treaty is not yet ratified and the rescue fund will only come into existence if at least 90 per cent of the initial paid in capital stock is provided by the member countries.

2. Will there be a referendum in Ireland on the ESM?

No, the Government has no plan to put the ESM Treaty to a referendum. The ESM has, however, been challenged by a member of the Dáil, Thomas Pringle. The outcome of this challenge is not yet known, but one of the demands is that the ESM should be put to a referendum.

3. How much money will Ireland have to contribute to the fund?

Ireland is to provide 1.59 per cent of the initial paid-in capital stock in the ESM fund. The total amount of capital stock will be €700 billion. This includes the €500 billion capital stock of the EFSF that is to be transferred to the ESM.

Ireland will be called upon to supply five payments, each consisting of €237 million, over the first two years after the ESM comes into effect. This amounts to a total of €11,145,000,000. Should the ESM require more money at some point, Ireland is obliged to pay 1.59 per cent of that amount when called upon.

4.Who is in charge of the ESM?

A Board of Governors drawn from each member-country will be in charge of the ESM. Decisions on the basic workings of the ESM, and the decision to make a call for extra capital, will be decided unanimously. Decisions on loans and bail-out programmes will be taken by a qualified majority (80 per cent of the votes).

Votes will be distributed according to the amount of capital stock supplied. Ireland will therefore hold 1.59 per cent of the votes. France will have 20 per cent and Germany 27 per cent.

5. What are the conditions of the bail-out programmes?

In the preamble to the ESM Treaty it is clearly stated that “the granting of any required financial assistance under the mechanism will be made subject to strict conditionality.” The ESM Board of Governors, consisting of representatives from each of the member-countries, will decide in principle whether a loan can be granted.

The exact conditions will then be negotiated in what is called a “memorandum of understanding” drawn up by the European Commission, the European Central Bank, and the International Monetary Fund.

One condition would be the “macro-economic adjustment programme” mentioned in the treaty. It is up to the ESM to specify the exact adjustments needed in the programme countries’ financial policies. Any part of a country’s financial policies can in theory be included in such a programme.

6. Will Ireland have access to loans if the Fiscal Stability Treaty is not ratified?

Ireland’s existing loan or bail-out options are not directly affected by the Fiscal Treaty or the ESM Treaty. Ireland will not have access to loans from the ESM in the event that the Fiscal Stability Treaty is not ratified [however, the ESM itself - which is the heart of the Fiscal Treaty - is subject to veto by Ireland; O.O'C. ]. The International Monetary Fund (IMF) would still accept an application, and the granting of a loan would not be ruled out in case of a second Irish bail-out.