Why capital markets have no more reservetions about Eurozone

Eurogroup Meeting. Wolfgang Schauble, German Federal Minister for Finance, Jorg Asmoussen, Member of the Executive Board of the European Central Bank and Pierre Moscovici, French Minister of Finance, from left to right. (Eurogroup Photographic Library 08.07.2013).

Eurogroup Meeting. Wolfgang Schauble, German Federal Minister for Finance, Jorg Asmoussen, Member of the Executive Board of the European Central Bank and Pierre Moscovici, French Minister of Finance, in the foreground from left to right. (Eurogroup Photographic Library 08.07.2013).

Borrowing on international markets is not at all a straightforward activity. Things are even more complicated when it comes to long-term debt paper with maturities spanning to decades. This little theory tells a lot about Eurozone’s creditworthiness. As a matter of fact, during the last few weeks the European Financial Stability Facility (EFSF) borrowed from capital markets €8 billion by issuing bonds of 7 and 21 year maturities. EFSF is authorised by Eurozone to issue debt instruments on the market to raise funds needed to provide loans to Eurozone countries in financial difficulties. EFSF issues are backed with guarantees of up to €724bn given in common by euro area Member States. Yesterday the EFSF borrowed €986 million on a 7 year bond.

EFSF is to be replaced in a few weeks by the European Stability Mechanism (ESM) which is an intergovernmental institution inaugurated on 8 October 2012 by its shareholders, the 17 member states of Eurozone. Its mandate is also to preserve financial stability of Europe’s Economic and Monetary Union by providing financial assistance to euro area Member States in difficulty, exactly as the EFSF. The ESM will launch an inaugural long-term bond issue next month. The Mechanism is the full fiduciary of the EFSF. ESM’s long-term funding programme is scheduled to be €9bn in 2013 and €17bn in 2014. Not everybody is happy though with Eurozone’s successes.

From Russia with vengeance

It’s interesting to note that Dimitry Medvedev, currently serving as Russian Prime Minister, after been transferred by Vladimir Putin many times to and from the positions of PM and President, made yesterday a revengeful comment about this 7 year bond issued by EFSF. He said that “during those 7 years Eurozone could disappear”. Of course this is not a financial prediction but rather an off-limits personal comment.

Presumably it comes after the EU – Russia relations have gravely deteriorated lately. The EU is actively encouraging the Kiev government in its quest to strike an Association Agreement with the Union. This prospect has greatly annoyed Moscow. Russia was also surprised by the EU over the Cyprus financial crisis last June. The Eurogroup then decided to actually confiscate almost 80% of the multi-billion deposits from many wealthy Russians kept with the island’s banks.

In Eurozone they trust

Coming back to debt issues by the EFSF/ESM financial tools, the full capital market acceptance of those placements is an infallible witness that the overall creditworthiness of Eurozone is of prime rank. Given that ESM shareholders and guarantors of its debt issues are the 17 Eurozone member states, their mutual responsibility is fully recognised and accepted by investors. This is a plain acknowledgment that Eurozone has definitely overcome any risks of breaking apart. More so, now that Eurozone is guaranteeing Greece’s financial security well after 2014, while the European Central Bank, with its Outright Monetary Transactions (OMT), has reassured the capital markets that Italy and Spain will be able to continue borrowing at sustainable interest rates. OMT is an ECB programme for Eurozone state bond purchases in the secondary markets under certain conditions.

Seen from a clear perspective, the long maturity debt issues by the EFSF/ESM mechanisms are actually a kind of Eurobond issues, purporting mutual financial responsibilities to the 17 Eurozone members. In this framework the 17 Eurozone countries accept in common huge financial liabilities, albeit restricted up to a round sum of €1 trillion. However the mutual financial responsibilities of Eurozone countries are not limited to that. ECB’s OMT programme is another commonly accepted liability. Thankfully the central bank hasn’t spent yet not one euro under this heading. By the time though that the OMT programme was decided by the Governing Council of the central bank, this was not at all certain.

Actually, back in September 2012, when the OMTs were launched, there couldn’t be a reliable estimate of their potential magnitude. Consequently, the 17 countries, including Germany, which accepted this common liability didn’t have a way to know the possible cost of the programme. Still they accepted it. Again these OMTs could end up to something like mutual financial liabilities of all the 17 countries, prudent and imprudent, in deficits or surpluses, all in the same boat.

This is the real reason why today there is not the slightest reserve about the decisiveness of Eurozone to stay one piece and its 17 member states to face together whatever challenge lies ahead. They have already proved that.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

A multipolar world brings back the national champions

Latest Eurobarometer survey (July-August): Economic situation is EU citizens’ top concern in light of the coronavirus pandemic

Commission announces actions to make Europe’s raw materials supply more secure and sustainable

ECB to support only banks not Peoples

Transition between education and employment: how the internship culture is threatening the foundations of our education

The European Sting @ the European Business Summit 2014 – Where European Business and Politics shape the future

€2 billion to fast forward the creation of the European Innovation Council

Financiers can turn the world into a dirty and dangerous place

UN chief hopeful for Libya, after Quartet meeting in Tunis

Final vote on European Solidarity Corps

Global South cooperation ‘vital’ to climate change fight, development, Guterres tells historic Buenos Aires summit

Two peacekeepers killed in an attack against UN convoy in Mali

‘Endemic’ sexual violence surging in South Sudan: UN human rights office

This Indian school accepts plastic waste instead of fees

Insurer CEOs Reveal Marketing Strategies that Communicate the True Value of Insurance Products & Services to the Customer

After globalization what? Europe’s long, straining shake-up post Davos wreckage

Large parts of the world are growing more fragile. Here are 5 steps to reverse course

More answers from Facebook ahead of Parliament hearing today

Digital business is Europe’s best hope to get back to growth

Children in crisis-torn eastern Ukraine ‘too terrified to learn’ amid spike in attacks on schools

I went blind at age 5, but managed to stay in education. We must ensure 93 million children with disabilities get the same chance

Brexit: reciprocal visa-free access for EU and UK nationals

In 1975 NASA envisioned future life in space would look like this

Climate Change : An Already Health Emergency

China Unlimited Special Report: The trip to China

Commission publishes EU Code of Conduct on countering illegal hate speech online continues to deliver results

UN rights chief calls for release of hundreds abducted and abused in South Sudan

Peace in the Gulf ‘at a critical juncture’ says DiCarlo, urging continuation of Iran nuclear deal

European Vocational Skills Week: ‘VET for Green and Digital Transitions’

Commission to decide on bank resolution issues

Conditions deteriorating alarmingly in Yemen, warns senior UN official

Federalist EU ‘naively’ believes Washington shares her TTIP high fever

Lessons in disaster relief from the world’s most cyclone-battered state

Violence against women a ‘mark of shame’ on our societies, says UN chief on World Day

Global economy faces gravest threat since the crisis as coronavirus spreads

COVID-19 has ushered in the age of the ‘intangible company’. Here are 4 ways it will change business

Vaccination challenges for middle and low-income countries

Youth not prioritised in new Commission

Two refugees explain what COVID-19 means in their precarious world

Team Europe contributes €500 million to COVAX initiative to provide one billion COVID-19 vaccine doses for low and middle income countries

EU-Ukraine Free Trade Agreement sees the light as Moscow’s reaction once more looms

FROM THE FIELD: Photos highlight agony of West African civil wars

90% of plastic polluting our oceans comes from just 10 rivers

Estonia is making public transport free

These are the world’s best universities by subject

COVID-19: Commission creates first ever rescEU stockpile of medical equipment

Can we create an empathic alternative to the capitalist system?

Gender Equality Index 2019: Still far from the finish line

5 things you may not know about Dubai

In this Tokyo cafe, the waiters are robots operated remotely by people with disabilities

What does leadership mean in an age of perpetual change?

Economy and living standards of Gaza ‘eviscerated’ by crippling blockade – UN trade and development report

EU Copyright Directive: Will US tech giants comply or ditch the EU market?

Thousands of health professionals call on world leaders to prioritize a greener future, post-pandemic

Tobacco-free public space – how is the European law executed in my country?

Turning waste into wealth: World Habitat Day focus on cleaning up cities

EU Budgets: Europe hoping for Xmas gifts

These are the world’s most competitive economies

What lies ahead for the Korean Peninsula?

6th Edition of India m2m + iot Forum to open its door on 14th January, in association with The European Sting

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s