More European confusion for the markets
I’ve long argued that the eurocrats have a very poor grasp of market psychology.
And the contribution of Richard Corbett, an adviser to European Council president Herman Van Rompuy, on Newsnight last night reinforced me in this opinion.
Mr Corbett was asked by Jeremy Paxman where the money for the forthcoming Spanish bailout will come from.
His answer, here at about 11.08 minutes in:
“It’s from the EFSF, as it’s called, the European Financial Stabilisation Fund [sic], which was set up a couple of years ago. It’s a tool that didn’t exist before this crisis. Now the European Union, or at least the eurozone, has set up this fund through which it can lend money to countries which need money to gain time.”
Now I pricked up my ears at this, because it was my understanding that no decision has yet been made as to whether the money for Spain will come from the existing and temporary €440bn European Financial Stability Facility (EFSF) or the forthcoming permanent €500bn European Stability Mechanism (ESM).
It’s a question that’s important to investors because loans to a country from the EFSF rank equal with other bond holders in the event of a sovereign restructuring, whereas loans from the ESM will have preferred status under such circumstances.
So if Spanish bond holders have to take a haircut down the line, as Greek bondholders did earlier this year, they suddenly find themselves holding more risk if Spain is bailed out by the ESM, rather than the EFSF. This uncertainty is one of the reason why investors are still furiously selling Spanish debt.
I’ve checked with the European Commission this morning and I’m told that a decision has indeed still not been made about where the Spanish funds will come from, not least because the ESM will not be up and running until next month at the earliest.
So Mr Corbett misspoke – and about an extremely delicate question as far as the financial markets are concerned.
He also seemed confused about another point. Paxman asked Mr Corbett whether Spain, as one of the nations that stands behind the bailout funds, would be effectively bailing out itself. Mr Corbett answered in the affirmative:
“Spain is one of the countries backing the fund, which in this case is lending money back to Spain.”
Yet I’m pretty sure this isn’t right either – or at least it’s still unclear. When previous member states have been bailed out, they have ceased to be guarantors of bailout bonds, and the liability of other eurozone nations has correspondingly risen. This is what happened when Greece, Ireland and Portugal were rescued. There have been rumours that Spain might remain a guarantor, but, again, these are only rumours. And the Commission has confirmed to me that no decision has yet been taken*.
So Mr Corbett went on one of the UK’s premier news programmes last night and managed to mislead the financial markets and the public not once, but twice.
With a European leadership as confused as this, it would be a brave investor who bet on the single currency having much of a future.
*UPDATE I’m informed by the Commission that if the ESM were to be used Spain would remain a contributor since that new pot will be funded by paid-in capital rather than guarantees – there would be no dropping out.Tagged in: european commission, European Financial Stability Facility, Herman Van Rompuy, Richard Corbett
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