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Future of ESM fund: last word has not been said

Future of ESM fund: last word has not been said

26.07.2012 9:57

ECB Nowotny admitted in an interview that there are arguments in favour of giving the ESM a banking license, besides other arguments (against it?). “I would see this as an ongoing discussion” adding that he is not aware of specific discussions within the ECB at this point. Granting the ESM a banking license would give it access to the ECB liquidity and greatly increase the fire power of the EMU crisis mechanism. The scale of the ESM fund compared to the size of the debt of countries like Spain and Italy is small and raised fears that the ESM wouldn’t be able to help the countries in case of a loss of confidence. This is currently very much in the picture, as the EMU Summit couldn’t bolster market confidence in a lasting way in countries like Spain and Italy.

ECB Draghi earlier said such a move (granting bank license) amounts to central bank financing of governments, which is prohibited by the EU Treaties. Not everybody shares the view of Mr. Draghi, but at least also the Germans are very hostile to such a backdoor solution for governments. So, Nowotny’s open-ended remarks suggest that the last word has not been said about the banking license for ESM and in case of further pressures, it might be back on the discussion table. It is especially important, as it is extremely unlikely another near term EU  Summit is politically possible. Indeed, the approval of the ESM is blocked in Germany till at least September 12 when the Constitutional Court meets on the case. In this context, the strong run of Italian and Spanish bonds yesterday is understandable.

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