The ESM, European Stability Mechanism, can become Spain’s largest Christmas gift if the European Union ratifies the direct recapitalization responsibility in December of this year.
When Mr. Mariano Rajoy, Spanish Prime Minister, announced early yesterday that he would not ask for a bailout from the European Central Bank, many economists and analysts viewed such strong stance as defiant in light of Spain’s persistent budget problems and high unemployment.
Mr. Rajoy’s bet however may be a very calculated move when we consider the soon to be availability of direct recapitalization through the ESM that will become a game-changer in how the Eurozone deals with fiscal and financial instability going forward.
At the next E.U. summit, scheduled for mid-December this year, the members will most probably vote in favor of giving the power to the ESM to directly recapitalize weak banks of countries that continue to struggle financially.
Such authority changes the way in which receiving countries account for the financial bailout funds on their balance sheet and how much of their fiscal and budget sovereignty they will have to give up.
Under the current rule, bailout countries such as Greece and Ireland have to disclose all details of their annual budget, the implementation plan of imposed austerity packages and their adherence to mandated debt/GDP ratios.
In case of non-adherence, the ESM and/or the Troika, European Central Bank, International Monetary Fund and European Union, may refuse to release the next tranche of any previously committed bailout plan.
If the ESM receives direct bank recapitalization powers in December 2012, then starting in early 2013 financially troubled members can apply for capital injections in their banking sector directly therefore bypassing full national budget disclosures and any or all imposed sanctions for non-adherence.
The bailout funds will then only be carried and visible on the balance sheet of the banks in question and will not dilute the countries budget deficit or debt/GDP ratios.
The only dispute that may stand in the way of granting the ESM such extended powers of direct capitalization is the German proposal which would exclude any country that currently receives financial bailout funds and which would prohibit the ESM from capitalizing members retroactively.
Should the German proposal be accepted and ratified, then Greece and Ireland would automatically be excluded from the plan.
The new and improved ESM would be an early Christmas gift for Mr. Rajoy and his country but would also be a windfall for Italy.
Mr. Mario Monti, Italian Prime Minister, joined Mr. Rajoy yesterday in support of rejecting the proposed ECB bailout for both countries, a proposal that was previously offered by Mr. Mario Draghi, ECB President, this past September.
Christmas may come early for two struggling members but that doesn’t mean all will be well in the 2013 Eurozone, especially in Greece.
Written by Nick Doms © 2012, all rights reserved.