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.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

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

Here are six bold ideas to accelerate sustainable energy innovation

UK keeps its Brexit plan secret or there is no strategy at all whatsoever?

On World Day to Combat Desertification, UN shines spotlight on ‘true value’ of land

Eating less beef and more beans would cut deaths by 5-7%

The EU Commission implicates major banks in cartel cases, threatens with devastating fines

Agreement reached on digital copyright rules

5 ways for business leaders to win in the 2020s

‘Complacency’ a factor in stagnating global vaccination rates, warn UN health chiefs

Sustainability is now mission critical for businesses. Here’s why

The US is withdrawing from a 144-year-old treaty. Here’s the context

Parliament seals ban on throwaway plastics by 2021

UN chief ‘deeply alarmed’ over military offensive in south-west Syria

EU Parliament: Follow the fraudulent money and confiscate it

COP21 Breaking News_05 December: Carbon Price Needed for Climate Change Success

5 amazing schools that will make you wish you were young again

Climate change and health: an everyday solution

Golden Pen of Freedom Awarded to Murdered Saudi Journalist Jamal Khashoggi during World News Media Congress 2019

Meet Alice, the battery-powered plane that could herald the age of electric air travel

Europe had a record year for Measles – and it’s partly down to anti-vaccine campaigners

EU Budget 2019 to focus on young people

No hard drivers in sight to remodel the stagnating affairs of the EU

Veteran UN Syria Envoy to step down, pledges to work ‘until the last hour’ for peace

Is the West gradually losing Africa?

Sweden has invented a word to encourage people not to fly. And it’s working

France is about to start giving free breakfasts to disadvantaged schoolchildren

China is the first non-EU country to invest in Europe’s €315 billion Plan

Statistics show the ugly face of youth training schemes

We had the hottest June ever this year – this is what happened around the world

Do the giant banks ‘tell’ Britain to choose a good soft Brexit and ‘remain’ or else…?

UN food agency begins ‘last resort’ partial withdrawal of aid to opposition-held Yemeni capital

As monsoon rains pound Rohingya refugee camps, UN food relief agency steps up aid

Internet of Things: a Force for Good or Evil?

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

A Sting Exclusive: “Infrastructure can lay the groundwork for the Sustainable Development Goals” by Mr Fulai Sheng, UN Environment Senior Economist

China is sending science students to live with rural farmers – and crop yields are skyrocketing

Forget about growth without a level playing field for all SMEs

Here are 10 of Nelson Mandela’s most inspirational quotes

Fake news: What it is, and how to spot it

Finland should do more to improve job prospects of low-skilled youth

2014 budget: The EU may prove unable to agree on own resources

Opening Remarks by H.E. Ambassador Yang Yanyi, Head of the Chinese Mission to the EU at the Chinese Fashion Night

WEF Davos 2016 LIVE: “European unity and cooperation is being called on question”, Vice President Joe Biden criticizes from Davos

Thursday’s Daily Brief: dire living conditions in Idlib, migrants at US southern border, end in sight for trachoma, Human Rights Council

Why South Africa is on a path of economic renewal

Can a Bavarian Oktoberfest beer indulger bring down the Berlin government?

Armenia should take vigorous measures against entrenched corruption

Why CEOs need to become activists in sustainability

Preserving biodiversity vital to reverse tide of climate change, UN stresses on International Day

Chernobyl nuclear disaster-affected areas spring to life, 33 years on

The Dead Sea is drying up, and these two countries have a plan to save it

European Youth Forum @ European Business Summit 2014: European Youth Unemployment

Who is to pay for Trump’s trade war against China?

Is it too soon to hope for a tobacco free Romania?

‘Virtual Biopsy’ device detects skin tumours in 15 minutes

The Schengen area is at a crossroads

The Commission neglects the services sector and favours industry

Yesterday’s “jokes” and sarcasm by Digital Single Market’s Vice President Ansip on EU member states’ right to protect their telco markets

Draghi sees inflationary bubbles

MWC 2016 LIVE: Mobile Connect availability hits 2B

Is Europe misjudging its abilities to endure more austerity and unemployment?

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