Get ready for an evolving Euro term that you will hear much about in upcoming days, months and years. Media releases now refer to the Eurogroup, which is composed of the 17 Euro Zone nations and the European Union’s 27 nations minus the UK. In efforts to enact a feasible bailout plan for the Eurogroup, member nations will engage in a teleconference on Monday.
Eurogroup President Jean-Claude Juncker’s office announced the critical teleconference will include discussions about the 550 billion euro European Stability Mechanism (ESM), which was formerly called the European Financial Stability Fund (EFSF).
One of the proposals that seems to have traction is a measure changing the firing mechanism for relief funds through a revised voting plan that would only require a majority vote. This change would prohibit one or two smaller countries from blocking the release of funds.
Finland objects to this change because approval of the revision would require a two-thirds majority in the Finnish Parliament. This approval is not achievable.
The Eurogroup will discuss with the IMF increasing the IMF crisis financing by 150 billion euros. The Eurogroup will contribute 100 billion euros and IMF contributors will kick in another 50 billion euros. This plan must be complete by December 19th.
Fitch Doubtful
The Eurogroup has acknowledged that a solution to the crisis must be a multi-faceted bunch of remedies. This will include austerity cuts for all nations, increased revenue and GDP growth. The formula looks good on paper but at least one of the big-three credit rating services has registered serious doubts.
Fitch’s concerns have foundation. The concerns might have best been described by Italy’s Deputy Finance Minister, Vittorio Grilli, who said, “We all know that Europe has not been able to convince markets that its governance set-up and its measures against the crisis were enough. More integration and more effective instruments are needed. We are not there.”
On December 9, Eurogroup nations agreed to add legislation that every required each member nation have a balanced or surplus budget. Failure to do so would invoke immediate corrective measures. The hole is too deep now and cannot get deeper.
This provision is designed to would limit government borrowing and reduce Eurogroup debt. This legislation could not occur until at least a year. The Eurogroup is busily trying to ease investor concerns.
Fitch points out that the Eurogroup does not have funding to bailout Italy and/or Spain. Investors are already nervous with Greek debt headed to a settlement of 50%. Investors are advised that Greece is a stand-alone situation.
To calm investors, Euro Zone members have proposed that the funds in the ESM be ready for activation by July, 2012. On Monday, the Eurogroup will discuss language to be included in the final draft of their mission statement.
Germany’s approval is contingent on contributions from other EU members.
Like all other summits, the Brussels summit appeared to have a unified game plan. As has happened after virtually every other summit, when the nations returned home, things began to unravel. This scenario was repeated after the Brussels summit two weeks ago. Markets responded on news a viable plan was in play. As the details were revealed, the markets have all suffered substantial hits.
Were it not for encouraging news from the U.S., the global markets may well have been in freefall. Demand for Eurogroup nation bonds has slowed dramatically. Many of the world’s biggest investors have stopped investing this year.
The one possible agency that could stem the tide is the ECB. However, the ECB feels it is constitutionally limited in its ability to provide necessary bailout funds.
Fitch consistently has said that six Eurogroup nations are in serious jeopardy of further downgrades. Italy and Spain are the most vulnerable.