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 Milestones

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

In wake of ‘collapsed’ agreement, new wave of violence threatens millions in Syria’s Idlib

MEPs call for more sanctions against Belarus following ‘Ryanair hijacking’

The British are the most positive in Europe on the benefits of immigration

Refugee crisis update: EU lacks solidarity as migration figures drop

Why is scientific collaboration key? 4 experts explain

Phone lines open between Ethiopia and Eritrea, and people are calling strangers

A skills gap is jeopardizing efforts to end energy poverty

Health & Sustainable Development Goals: it’s about doing what we can

Amid ongoing fighting in northeast Syria, hundreds cross Iraqi border in search of safety

Promoting Equality for Women in the Healthcare Industry : A Physician’s Reflection on His Experiences as a Medical Student

These are the world’s best countries to retire in, as of 2019

A Sting Exclusive: “Entrepreneurship in the Coronavirus (COVID-19) era” written by the Vice-President of Junior Enterprises Europe

From the Field: Women push for peace

Banking on sustainability – what’s next?

Stakeholder Capitalism: over 50 companies adopt ESG reporting metrics

The United Kingdom’s decision to leave the European Union will impact young people’s future the most

Poland: €676 million worth of EU investments in better rails and roads

COVID-19: A time screaming for positivity

German heavy artillery against Brussels and Paris

A busy year in the UN Security Council: more openness, diversity mark 2019

Border management: Commission welcomes political agreement towards making European Travel Information and Authorisation System operational

Mexico must increase foreign bribery enforcement: full implementation of anti-corruption reforms could help

CHALLENGING THE ZEITGEIST OF DIGITAL – Change making projects innovate mobile support for refugees, inclusive environments, early breast cancer detection and more

These are the world’s most fragile states in 2019

How youth and technology can drive Africa’s COVID-19 response

Iraq: UN demining agency rejects desecration accusations, involving historic Mosul churches

Do not jeopardise future-oriented EU programmes, say EP’s budget negotiators

Judges urge Security Council to serve interests of all UN Member States

Strengthening the rule of law through increased awareness, an annual monitoring cycle and more effective enforcement

From farms to supermarkets: MEPs approve new EU rules against unfair trading

Decarbonizing shipping – why now is the time to act

Scale of displacement across Myanmar ‘very difficult to gauge’, says UN refugee agency

EU disburses €460 million in Macro-Financial Assistance to Tunisia, Kosovo, Montenegro and North Macedonia

Recession: the best argument for growth

A new catastrophic phase in the Syrian carnage

The Cold War had an unintended side effect: It created a European wildlife paradise

Aung San Suu Kyi suspended from the Sakharov Prize Community

Libya: ‘Substantial civilian casualties’ in Derna, UN humanitarian chief ‘deeply concerned’

Why Eurozone’s problems may end in a few months

UN envoy ‘encouraged’ by latest talks on avoiding ‘worst-case scenario’ in Syria’s Idlib

Migration: EU helps channel humanitarian support to migrants in Lithuania

Crime and drugs in West and Central Africa: Security Council highlights ‘new alarming trends’

Digital privacy comes at a price. Here’s how to protect it

Connecting Europe Express reaches final destination after 20,000km journey

A Sting Exclusive: “China is Making Good Stories not Bad Ones”, Ambassador Yang highlights from Brussels

The EU Parliament unanimously rejects Commission’s ideas about ‘seeds’

Erasmus+: over €28 billion to support mobility and learning for all, across the European Union and beyond

Where are the charities in the great Artificial Intelligence debate?

This project is using AI and drones to track and protect great white sharks

EU-China relations under investigation?

Why we need to redefine trust for the Fourth Industrial Revolution

The European Parliament hemicycle in Strasbourg (Copyright: European Union, 2017 / Source: EC - Audiovisual Service / Photo: Mauro Bottaro)

EU Parliament sends controversial copyright law reform back to discussion

UNESCO experts ready to assist reconstruction of iconic Notre Dame, following devastating blaze

Backed by UN, Asia-Pacific countries to advance space technology for ‘development transformation’

Is Germany closer to Russia than the West? Nord Stream II and Iran count more

Education should be like everything else. An on-demand service

EU steps up aid for Lebanon – European Commissioner for Crisis Management in Beirut

Commission takes further action to ensure professionals can fully benefit from the Single Market

We must work together to build a new world order. This is how we can do it

Artificial Intelligence: These 3 charts show what people really think

More Stings?

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

%d bloggers like this: