Downgrade of EU's bailout fund prompts yet more confusion
EUROPEAN DIARY:Does the rating loss for the EFSF mean a reduction in its lending power? Don’t expect the same answer from Brussels and Frankfurt
DOES ANYONE really know what is going on? In Frankfurt the other day, European Central Bank president Mario Draghi reported tentative signs of stabilisation in the euro zone.
That was one week ago exactly. By Monday night in Strasbourg, Draghi was decidedly more downcast, saying the situation was “very grave” as the crisis worsened.
On days like these, as the slow- grinding political machine rises from its new year slumber, Europe appears as an escaping prisoner caught in searchlights. Every move is amplified, every step fraught with tension and danger. Freedom seems far, far away and problems are piling up.
Standard & Poor’s came in for a predictable kicking from the usual quarters when it downgraded France, Austria and seven other euro countries on Friday and went on to downgrade the European Financial Stability Facility rescue fund.
Its chief complaint is that the halting political response to the crisis is insufficient to fully tackle the systemic weaknesses in the euro zone. European Union leaders deny that is so, but the S&P intervention led to a sudden outbreak of gloom over the EFSF’s firepower.
Again, contradiction and confusion are everywhere.
All weekend, people who should know these things said the S&P manoeuvre could curtail the EFSF lending capacity by as much as €180 billion, something which might have profound implications for the campaign to save the currency.
Yet by Monday, even as the EFSF lost its own triple-A rating, the tone in some quarters was more upbeat.
Both the EFSF chief, Klaus Regling, and euro group president Jean-Claude Juncker, issued statements saying the decision would not reduce the EFSF’s €440 billion lending capacity .
In Strasbourg, however, Draghi said the decision “has a consequence” and added that the EFSF might have to lend less or receive new contributions from the four remaining triple-A countries.
So who is right? It is difficult not to see the Regling-Juncker argument as a political convenience, with Draghi’s concern rooted more in the brute reality of the battle.
Why else would he have changed his tune between Thursday and Monday?
Once Italy or Spain don’t need aid from the EFSF, the fund has just about enough money to get by. With Germany refusing to accept any increase in its EFSF guarantees, no one wants another fruitless debate on EFSF firepower.
The upshot, therefore, is that there will be no change for as long as the authorities can get away without making any change.
Debt crisis warriors take heart from the fact that France and the EFSF still enjoy top ratings from S&P’s rivals, Moody’s and Fitch.
They also note that the European Stability Mechanism permanent rescue fund is due to come into force in June, with more firepower and stronger foundations.
The big question now is whether Europe can keep going until then, with a scheduled review of the firewall in March supposed to provide some comfort.
Against that runs the ever- present risk of a default in Greece. In addition, the ESM debate is still not fully settled.
For example, Finland continues to oppose the push by Germany and France to ensure decisions to deploy the fund are taken by qualified majority vote instead of unanimity.
The Finns have form here. For many months last year they delayed talks on the second Greek rescue over their demand for collateral from Athens.
Then there is uncertainty over a ban on ESM aid for countries which do not ratify the new fiscal treaty.
At Germany’s insistence, this has been agreed in principle. Still at issue, however, is the precise definition of the clause in question and whether there will be any wriggle room.
This is one of several questions still to be resolved, the most pressing for Ireland being the German push for the new “golden rule” on debt and deficits to be inserted in constitutions rather than in legislation. To say that this represents a major headache for Taoiseach Enda Kenny is to state the obvious.
No matter how this plays out in the coming days, the entire treaty process is viewed with deep scepticism by many in Brussels.
The debate is seen as a distraction from the real business of fighting back the flames in the here and now, although people whose wages happen to come from Berlin see matters otherwise.
Yes, the new pact holds out the prospect of a super-efficient impeccably behaved euro zone eventually emerging from the debacle, but hardly anyone reckons the treaty itself will prise Europe from the crevice.
That is wishful thinking – and the history of the crisis shows that wishful thinking in this business makes things only worse.
Many in Europe would like to believe that the adoption of the treaty will eventually lead Germany to accept euro bonds, but no one seems to know if that will be so.
It’s hardly a way to run a currency used by 320 million people.