Eurozone finance ministers strike deal over bailout fund reform

Eurozone finance ministers have struck an agreement to revamp the bloc’s bailout fund and set up a financial backstop to help ailing lenders in need of cash rescues. 

After nearly a year of stalled negotiations, EU finance ministers at a virtual Eurogroup meeting on Monday reached a political deal to update the European Stability Mechanism (ESM) after it had become bogged down in disputes, including from Italy’s previous populist-led government. 

The deal over the terms of the new ESM treaty — which will need to be ratified by member state’s parliaments — marks the completion of one of the eurozone’s major pieces of unfinished business and paves the way for talks over more contentious parts of the bloc’s banking union like common deposit insurance. 

“This is a crucial stepping stone on our path to strengthen the banking union and is an important complement to our efforts in supporting the economic recovery,” said Paschal Donohoe, chair of the Eurogroup. 

Under the terms of the deal, finance ministers agreed to the creation of a common backstop for the bloc’s Single Resolution Fund to provide extra cash for bank rescues from the ESM should the fund run out of money. The backstop is due to come into force in 2022 — two years earlier than initially planned. 

“The backstop is a last resort. It is a safety net should we ever need it,” said Mr Donohoe. He said the decision to bring it forward was the result of significant progress in reducing non-performing loans in the eurozone’s banking system. 

Officials had grown confident of the chances of an agreement ahead of the meeting once northern countries and Italy had put aside longstanding concerns about parts of the reform package.

Hawkish capitals like Berlin and The Hague have long pushed for a significant reduction in bad loans in southern banking systems as a precondition for activating the SRF backstop. The debate about this risk reduction has been complicated by the additional pressures placed on Europe’s banking system during the pandemic. 

Olaf Scholz, German finance minister, said the agreement would make the eurozone “even more robust against attacks by speculators”.

“A stable banking sector is an important pre-requisite for growth and employment in Europe. We are continuing to reduce the risks on bank balance sheets,” said Mr Scholz. 

Italy had previously resisted part of the ESM reform that would introduce collective action clauses (CACs) designed to make it easier to force holdout bond investors to take losses in a country’s debt restructuring. Italy is among the eurozone’s most indebted economies. The country’s anti-establishment Five Star Movement, which is in coalition with the centre-left, has resisted any idea that Italy could tap the bailout fund. 

Speaking before the Eurogroup, Italian finance minister Roberto Gualtieri said the introduction of these so-called “single-limb” CAC’s did not mean a debt restructuring would be more likely in the eurozone. Mr Gualtieri said his government would back the ESM reform — the terms of which were drafted nearly a year ago — as they did “not in any way affect the use of the ESM”. 

Diplomats hope ratification by national parliaments to bring the new ESM treaty into force will take no longer than a year. The ESM was established in the aftermath of the eurozone debt crisis to pool the common firepower of governments to fund sovereign bailouts.


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