The European Stabilization Mechanism

The European Stabilization Mechanism

Click here for the full Note and disclosures.

• The EU/ECB introduced various facilities to help stabilize sovereign debt markets. These include:

• 1) €60bn extended balance-of-payments facility

• 2) €440bn SPV guaranteed by 16 EMU states

• 3) Potential IMF funding worth up to half the amount drawn on the SPV, or a maximum of €220bn, and

• 4) ECB purchases of sovereign debt in the secondary market, along with additional liquidity provisions

• In proposing the SPV, the EU is attempting to create a separate legal entity backed by the 16 EMU member states,…

• …distinct from the existing BoP facility which is backed by all 27 member states of the EU

• Although a number of significant issues remain unresolved around the SPV structure, we believe these will eventually be resolved helping stabilize risky markets

• Before the SPV can be funded, it will need to go through parliamentary approval in each of the 16 EMU countries; we expect this to happen relatively quickly. The Bundestag (German lower house), for example, is expected to start debate on funding the SPV on Wednesday, 19 May; we believe the bill will pass within two weeks

• During the Greek bailout, the EC had made it clear that while no euro zone country can be forced to lend to Greece, no country can block others from lending either; we expect the same for the SPV

• A risk to the SPV is a constitutional challenge to the SPV debt guarantee in Germany. Were this to happen, we believe that the guarantee on the SPV could be structured in a way that meets the requirements of German law

• We believe the EMU would need to provide €15-20bn of capital to the SPV in order to secure a AAA rating

• Hypothetical IMF funding of up to €220bn will be available to EU countries…

• …which, when combined with funding available from the SPV, should be sufficient to cover the funding needs of many peripheral European countries through 2012

ENDS

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