Exclusive to all newspapers, EFSF/ESM bond-buying | FT Alphaville

Exclusive to all newspapers, EFSF/ESM bond-buying

Reporter: Um, I’ve filed some copy from Los Cabos

Panicked Night News Editor: Well, what’s the news!?!?!


Angela Merkel is poised to allow the eurozone’s €750bn bailout fund to buy up the bonds of crisis-hit governments in a desperate effort to drive down borrowing costs for Spain and Italy and prevent the single currency from imploding.

G20 officials believe an announcement could be made by the leaders of the eurozone in the next few days, but stressed they remained unclear as to timing and precise content…

Goodness. They should maybe write this idea down somewhere.

Oh. They did. (ESM Treaty still not ratified, incidentally)

You could say this is the problem with eurozone tardiness on doing what they’ve already committed to…

Somewhat more equivocal reporting from the FT on Tuesday, and interesting on how bond-buying came back on the agenda:

According to officials briefed on G20 discussions, Mario Monti, the Italian prime minister, raised the possibility of using the EFSF to purchase peripheral bonds on the open market during a formal session on Monday night, where German chancellor Angela Merkel had been non-committal.

However, officials said Ms Merkel had subsequent conversations on the sidelines of the summit which led interlocutors to believe “she may be willing to do more”, said one European official. The official cautioned, however, that Ms Merkel had not yet committed to any course of action.

Germany’s acceptance of the draft, committing the eurozone to take steps to ensure “sustainable borrowing costs”, suggests it has accepted the principle of action, G20 sources said.

A senior German official said nothing had been decided.

At least it’s all written down if they do decide!

Update: In fairness… though Germany already allows bond-buying by either the EFSF or the ESM, it might be news if it announced at the G20 that it would support activating the measures.

Let’s take the existing (ahem) guidelines for the EFSF intervention on the secondary market as the most relevant way bond-buying could be carried out, given the ESM ratification issues):

Conditionality for secondary market intervention relates to the issue of what are the financial market conditions under which the tool should be applied to ensure its effective use. The Heads of State and Government indicated that it should be done on the basis of ECB analysis and following a decision by mutual agreement from Member States.

The procedure is initiated by a request from a Member State to the President of the Eurogroup for access to the Secondary Market Purchase Programme.

So every eurozone government has to agree to do it, and activation follows the government whose bonds are in trouble making a request. The request involves a quid pro quo of a country agreeing to monitoring of economic reforms:

Countries benefiting from such interventions outside a macro-economic adjustment programme would have to comply with ex-ante eligibility conditions as defined in the context of the European fiscal and macro-economic surveillance framework and take corrective action.

Technically this memorandum of understanding could be signed quickly under the guidelines. How the recipient government would welcome conditionality – let’s say after the government in question already made a song and dance of not having to be humilated in accepting eurozone loans – is another matter.