Tuesday, September 11 16:35:00
EU finance ministers will have their first chance to discuss the ECB's new bond-buying programme and the outcome of a German court ruling on the euro zone's permanent bailout fund when they meet in Cyprus on Friday.
While no decisions will be taken at the informal meeting, it is a critical opportunity for ministers to assess where efforts stand in tackling the debt crisis after a summer break and the ECB's potentially game-changing decision last week to stand ready to lower sovereign borrowing costs.
They will also discuss Spain and whether it will make a formal request for assistance beyond aid for its banks, Cyprus's need for help, and how Greece, Portugal and Ireland are faring in meeting their bailout obligations. Proposals for a euro zone banking union are also on the agenda.
"It's been a long time since the ministers last met," said a euro zone official preparing the two-day meeting, which will be followed by a formal, decision-making gathering in Luxembourg on Oct. 8-9. "They will have to run through all the countries in distress and make a situation analysis."
Perhaps the most important development since the ministers last met in July was ECB President Mario Draghi's announcement on Sept. 6 that the central bank will be prepared to buy the bonds of distressed euro zone countries as long as they request the assistance and then stick to strict conditions.
The intention is to buy bonds of less than three-years maturity in the secondary market, while the euro zone's bailout fund could at the same time buy longer-dated bonds at auction. Draghi's promise has already had a dramatic impact on the yields of Spanish and Italian government bonds, pushing down their cost of funding, even though no action has yet been taken. Portugal and Ireland have also benefited.
But that does little to resolve the broader economic and financial issues facing Spain and others. The euro zone has already set aside 100 billion euros to help Spain recapitalise its banks, and the country may need more aid beyond that.
Madrid is reluctant to ask for help, wary of a political backlash at home. But given its dire need to lower its borrowing costs, it may have no choice other than to ask for help and sign up to the conditions imposed.
"Would you bet that Spain will not ask for help by the end of the year?" a second euro zone official asked. "It can be a month from now, it can be at the European Council on Oct. 18 in Brussels, but it's like Christmas - sooner or later it comes."
Officials say Spain has not yet made up its mind when or even whether to request help. But officials also say figures have been discussed, even if there has been nothing concrete. A third euro zone official said Spain would have liked to apply for euro zone help on the primary market together with Italy, which is also under market pressure, to dilute the negative impression of having mismanaged its public finances.
Italy was not ready for such a step yet, one of the officials said, even if others believe that if Spanish primary market support goes smoothly and produces good results, Italy might feel encouraged to follow suit.
The ministers will discuss Ireland's long-standing plea to ease the burden on its public finances of some 31 billion euros in promissory notes issued to save two banks from bankruptcy.
Interest payments on the notes are weighing heavily on the budget of Ireland, which is otherwise a euro zone showcase of a country sticking to agreed reforms and recovering.
To help Spain, which has to bail out its banking sector, euro zone leaders in June raised the prospect of the permanent bailout fund directly recapitalising banks, once the ECB becomes a pan-euro zone bank supervisor, possibly in 2013.
The leaders also held out a vague promise to Ireland to address the issue of the promissory notes.
For the ESM to help Irish banks directly, however, the permanent fund would need to be up and running, with a go-ahead from the German constitutional court expected on Sept. 12. The senior euro zone official said the ESM was likely to be operational in October, and euro zone ministers will discuss in Cyprus when and how much capital they should pay into the fund and what margin it should charge on its loans.
Most countries want the ESM to lend to distressed sovereigns without charging a penalty margin, as the temporary fund EFSF does now. But a small hardline group of northern European states believes some margin is necessary to avoid moral hazard.
The ministers will also discuss the European Commission's proposal for a banking union under which the ECB would have supervisory powers, with discussions focused on the scope of the ECB's responsibilities. (C ) Reuters