The reform of the European Stability Mechanism (MES) is not the big issue, declared the Prime Minister, Giorgia Meloni. As long as I count for something, Italy will not access the Mes, I can sign it in blood, she added. As far as ratification is concerned, Parliament will eventually discuss it, explained the premier, speaking at Porta a Porta on Thursday 22 December. First however – Meloni said – I want to try to make another reasoning: whether the reform is approved or not, the Mes has never been used by anyone. For two reasons, because the conditionalities are too stringent and because the Mes is a privileged creditor, or when I take the money from the Mes, the first to whom I have to pay it back and this involves a problem with government bonds, raises rates. The question, before entering the debate on ratification, about something that in my opinion remains of little use: can we make it useful?. Italy risks remaining the only one that has not yet ratified the reform of the Mes. After the sentence of the German Constitutional Court, which declared the appeal presented in Germany inadmissiblea by some liberal deputies, in fact even Berlin is preparing to sign.
What is the Month?
The European Stability Mechanism (ESM) was established through an intergovernmental treaty in 2012, replacing the European Stability Fund (EFSF), the so-called State-saving fund and the European Financial Stabilization Mechanism (EFSM) , established in 2010 to address the sovereign debt crisis. Its fundamental function is to grant financial assistance to member countries which – despite having sustainable public debt – have difficulty obtaining financing on the market.
How does it work?
Access to assistance is granted on the basis of strict conditionality in the context of a macroeconomic adjustment program and a public debt sustainability analysis carried out by the Commission together with the International Monetary Fund (IMF) and in consultation with the Bank Central European Union (ECB). The instruments envisaged by the ESM statute are various: economic loans, purchases of government bonds on the primary and secondary market, precautionary credit lines, loans for the indirect recapitalization of banks, direct recapitalizations of banks. Furthermore, during the pandemic, the possibility of accessing the so-called health month was envisaged, for Italy it would be around 37 billion. The ESM is financed by individual Member States with a percentage breakdown that reflects their economic importance. Germany contributes 27.1%, followed by France with 20.3% and Italy with 17.9%. The Mes has a subscribed capital of 704.8 billion and its lending capacity amounts to 500 billion. The country in need of help presents the request to the Board of Governors, made up of finance ministers from the Eurozone. For the go-ahead, a qualified majority of 85% of the subscribed capital is required. The main countries, with shares over 15%, including Italy, have veto rights.
What does the reform foresee?
The reform provides that the ESM assumes the function of backstop (final parachute) of the single bank resolution fund: a 70 billion credit line, to which countries will be able to access if their national funds for bank resolutions are not sufficient. The reform also aims to strengthen the role of the European Stability Mechanism vis-à-vis the EU Commission, in the event of assistance to states in difficulty, and also the instruments at its disposal. The Mes will be able to mediate between states and private investors if the restructuring of a public debt is necessary.
Has the Mes ever been used? From who?
In the past, Greece, Spain and Cyprus have received support from the Mes, but not as regards the credit line for health expenses, which has never been used by anyone yet. Before the birth of the Mes, Portugal, Ireland and Greece had also been helped by the European Financial Stability Fund. Access to ESM financial assistance in the traditional, pre-reform form applied to Greece’s bailout after the debt crisis is offered on the basis of strict political conditionality as part of a macroeconomic adjustment program and a analysis of public debt sustainability carried out by the Commission together with the International Monetary Fund (IMF) and in concert with the European Central Bank (ECB). The so-called Troika is the term used in journalistic jargon to refer to the control of these three institutions.
What are the fears of those who oppose the Mes?
The fears of those who oppose the new credit line made available by the Mes in Italy that joining it presupposes the arrival of the Troika as happened for the rescue of Greece. But the rules of the new Mes are different. For example, the fact that it is available to all countries with previously agreed standardized terms is an important difference compared to what happened then. Regarding the fear that the reform of the Mes could increase the probability of a sovereign default, the Bank of Italy clarifies: Not true. Furthermore, adds Bankitalia, it should in any case be remembered that the probability of a default depends primarily on the economic policies implemented by the countries.
Does the ESM reform provide for automatic debt restructuring?
Some also fear that with the reform of the ESM, in the event of a crisis, Italy could be more easily asked to restructure its debt, as Gianluca Mercuri recalled in the newsletter of the Corriere della Sera The point (click to register here). Which would translate into a loss for Italian families, businesses and banks. But, as Bankitalia has explained several times, the reform does not provide for any automatic mechanism for restructuring sovereign debts. The reform reaffirms that the restructuring of sovereign debt with the involvement of the private sector remains strictly limited to exceptional cases – adds the Bank of Italy. in the light of this confirmed exceptionality, the modification of the collective action clauses (CACs) must be interpreted. Under this amendment, if a country decides to restructure its debt, a single resolution by the holders of government bonds would be sufficient to change the terms and conditions of all bonds, instead of requiring a double resolution.
What will Italy do?
The Prime Minister, Giorgia Meloni, said that Parliament will express itself on the ratification. it is very probable that Italy will sign as Germany will, but that the government will decide to accompany the ratification with a resolution stating that Italy will never resort to the Mes, as in fact already anticipated by the premier. As Mario Monti underlined, in his latest editorial on the Courierallowing a treaty, signed by all governments, to be ratified, does not entail the slightest obligation to make use of the instruments it provides, if a country does not want to.
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