20 MAY 2011
Open Europe Blog
We’ve just got our hands on the draft treaty establishing the European Stability Mechanism
(ESM), which comes into force in 2013 and is the follow up to the original eurozone bailout packages - dubbed
the €750bn bazooka back in 2010.
As expected, the ESM will have an effective lending capacity of €500bn, but to maintain a Triple-A rating it needs to be backed up by €700bn in capital – pretty huge figures. This means that Germany will be on the hook for guaranteeing €190bn! We can’t imagine German taxpayers will be too happy about having that potential liability hanging over their heads for the next 12 years (at which point the fund will be reassessed). Moreover, given the structure of the fund, €80bn in capital must be paid in initially, meaning Germany has to pay in €4.3bn per year for the next five years – this could even increase if someone – yes we’re looking at Greece – puts in an early request for funding.
We were also wondering what would happen if one of the countries – this time we’re looking at all of the PIIGS – was unable to cover its share of the fund. The draft treaty seems slightly contradictory. First it states:
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