PAT MCARDLEon what was agreed, and why - and what could still go wrong
1 What has the EU actually agreed to?
The funding measures consist of three parts, and are additional to those recently put in place for Greece, ie, they are aimed at other countries that might need them, viz, Portugal, Spain, Ireland and possibly Italy.
If the action is successful, they will not be drawn upon.
First, the commission, acting on behalf of the EU and using its own legal entity and creditworthiness, will borrow up to €60 billion on the markets to lend to euro countries in distress.
This mirrors an existing €50 billion facility for non-euro countries and will be executed under a provision in the treaty which allows the EU to grant assistance where a member of the union is seriously threatened by “exceptional occurrences beyond its control”.
If used, the International Monetary Fund (IMF) will be involved so the terms and conditions will be tough.
Second, they are setting up a special purpose vehicle which will last for three years and will have up to €440 billion to loan, guaranteed by “participating member states . . . respecting their national constitutional requirements”.
The UK has already opted out of this and it is likely to be confined to euro members, some of whom may require parliamentary approval.
Third, and this was unexpected, the IMF will contribute at least half as much again or about €250 billion through its “usual facilities in line with the recent European programmes”.
Together, these add up to €750 billion.
To put this in context, the combined funding needs of Portugal, Spain, Ireland and Italy between now and the end of 2011 are about €650 billion. Take out Italy and it would cover the rest until 2013.
The scale is vast and the markets, in turn, reacted favourably.
2 Why have they had to do it?
An inept approach to the Greek situation allowed speculation to mount to the extent that the very existence of the euro was threatened, borrowing costs had escalated and banks with loans to Greece were coming under pressure. A major effort was needed to get ahead of the market and avert another recession.
3 Does the €440bn worth of guarantees amount to the same thing as a euro bond? Is that allowed by EU treaties?
The first €60 billion is definitely a euro bond (ie, borrowing by the European Commission).
This type of thing was already done for Hungary (€6.5 billion), Latvia (€3.1 billion) and Romania (€6 billion), all non-euro countries.
Many believed it was ruled out by the no-bailout clause in the treaty.
However, the “exceptional” provision was always there, although it was never used.
It may well be challenged, but the German constitutional court ruled against objections to the Greek bailout last Saturday.
The €440 billion will likely be similar.
4 Who will be responsible for paying this €440 billion back? Are Irish and other European tax payers on the hook here?
If it is utilised, it will be guaranteed by those participating pro rata to their shares in the ECB.
Our share is 1.1 per cent or €4.8 billion. If it were fully disbursed, not repaid at all by the borrowers and the guarantee called in, we would be on the hook for this amount.
If the EU survives, and this after all, is the object of the exercise, it may never be drawn upon.