Bailout fund operational next month


The euro zone's permanent bailout fund will be up and running at the end of next month, the chairman of the Eurogroup of finance ministers said today, two days after Germany's top court gave it the go-ahead.

Eurogroup president Jean-Claude Juncker told reporters that member states would pay €32 billion into the European Stability Mechanism (ESM) in two tranches by the end of October, effectively giving it an initial lending capacity of roughly €200 billion.

Over three years, the ESM lending power will grow to reach full capacity of €500 billion, although euro zone countries can, if needed, pay in the capital earlier.

For one year it will run in parallel to the temporary European Financial Stability Facility (EFSF), but any new bailout cases are to be handled by the ESM.

Both funds can offer precautionary credit lines, buy bonds at primary auctions and on the secondary market, alone or in co-investment funds with other investors, offer partial insurance on euro zone bonds and offer full bailout programmes that keep a sovereign off the market for a number of years.

The ESM's board of directors will first meet on the sidelines of the next Eurogroup meeting in Luxembourg on October 8th.

Financial markets calmed this week, partly because Germany's constitutional court cleared the way to set up the ESM, only insisting that parliament be informed sufficiently and have a veto right over any increase in Berlin's contribution.

Mr Juncker said the verdict was not an obstacle for the ESM.

"We all agreed that no provision of the treaty may be interpreted as leading to higher payment obligations for ESM members without prior agreements of their representatives," Mr Juncker told reporters after a Eurogroup meeting.

The group of ministers would issue a statement on how those conditions could be met in the coming days.

The ESM was supposed to come into effect in July as the euro zone's firewall to stop the three-year-old debt crisis from spreading.

Only ratification from Germany, which funds more than a quarter of the ESM, was still pending until the court ruling.

Germany's head of state yesterday signed the treaty but ratification will not be complete until the government meets the conditions set by the top court.

However, finance ministers reached no agreement on the costs at which the European Stability Mechanism (ESM) would make loans, an EU diplomat said.

Unlike the EFSF, which now lends to countries without charging any penalty margin, the ESM may charge one.

Some northern states, such as the Netherlands and Germany, want such a margin to avoid moral hazard, while others, like Italy, insist distressed states should not be punished further.