Agreement reached on eurozone support scheme

Details revealed of financial facility to help eurozone members at risk of default.

Finance ministers agreed tonight (7 June) on the details of a €440 billion support scheme to help a eurozone country at risk of defaulting on its public debt. 

The deal was hailed by ministers as a breakthrough for economic governance in the eurozone. They said it should reassure the financial markets that eurozone countries are safe from default, and so prevent a repeat of the soaring bond yields experienced over the past two months by Greece, Portugal and Spain.

“There is no uncertainty left about the euro area’s promise to deliver…support to countries facing severe difficulties,” said Olli Rehn, the European commissioner for economic and monetary affairs.

The facility will be a special purpose vehicle (SPV) set up under Luxembourg law. In the event that a government in the eurozone is faced with serious financial difficulties, the SPV will issue its own debt, and use the proceeds to buy that government’s bonds.

The facility’s debt will be guaranteed by the members of the eurozone, as well as by Sweden and Poland, which have volunteered to take part. The guarantees provided by each government will be calculated according to their contributions to the working capital of the European Central Bank. 

Jean-Claude Juncker, the Luxembourg prime minister who chairs meetings of the Eurogroup, the finance ministers of the eurozone, said that the facility would be formally launched once governments representing 90% of the guarantees had completed the necessary internal procedures (such as parliamentary votes) to participate in the SPV. He said that he expected this to happen this month.

Juncker said that a chief executive for the SPV, and a chairman for its board of directors, would be appointed “very shortly”.

The International Monetary Fund will top up money provided from the facility. It will provide an amount roughly equivalent to 50% of what is provided by the SPV.

The facility is part of a broader €750bn financial support mechanism for eurozone countries that was agreed by governments on 10 May.  

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Governments had struggled to agree, in the build-up to today’s meeting, on how they should share liability for the facility’s debt. Germany had wanted each country to be liable for an amount no greater than its share of the guarantees. France, however, argued that a shared liability was needed to secure the highest possible credit rating for the SPV and so reduce its borrowing costs.  

The compromise agreed is that each member state will be liable for an amount equivalent to 120% of their guarantees to the SPV. Rehn and Juncker said they were confident that the arrangement would ensure that the SPV got a triple-A rating.  

The shared liability is likely to lead to speculation that the facility could be a stepping-stone to a ‘eurobond’ scheme in which the eurozone issues common public debt.  

The creation of eurobonds is supported by Juncker, and by Herman Van Rompuy, the president of the European Council, as a means to promote stability in the eurozone. But Germany is fiercely opposed, on the grounds that it would reduce incentives for countries to improve their competitiveness. The German government denies there is any link between eurobonds and the SPV.  

Juncker said last week: “Can the vehicle we are going to put into place on Monday take us to the issuing of eurobonds? If I said ‘yes’, then everything would be done to avoid the creation of this instrument.”

Austerity assessments

Rehn said that the European Commission would give a detailed assessment on 15 June of whether Spain and Portugal have done enough to rein in their budget deficits.

Both countries have been heavily affected by the eurozone debt crisis, and last month announced austerity measures to re-establish confidence in their public finances. He said that the Commission would encourage them to pursue further reforms to their labour markets and pensions systems.   

Juncker said that both countries had agreed to adopt further measures, if needed, to meet their 2011 budgetary targets. 

Eurozone finance ministers will decide in July if additional measures are necessary.