The Eurogroup reaches a minimum agreement to reform the eurozone

The ministers of Economy and Finance of the Eurozone (Eurogroup) have reached an agreement to strengthen the Banking Union through an emergency fund to tackle banking crises and to strengthen the competences of the European rescue fund, but which stops the creation of a specific budget for the euro zone and the single deposit guarantee fund (EDIS).

"We got it, after several months of intense negotiations and a long and hard meeting we have achieved a broad plan to strengthen the euro", announced the president of the Eurogroup, Mário Centeno, at a press conference after the debate on the reform of the euro, which has been extended for 18 hours, from 5:00 pm on Monday until shortly before 8:00 am Tuesday.

The heads of economy of the eurozone have agreed, in particular, three documents that Centeno will transfer this afternoon to the president of the European Council, Donald Tusk, so that the heads of State and Government value them at the summit that takes place on Thursday and the Friday of next week.

In particular, the Eurogroup has agreed to extend the powers of the European Stability Mechanism (ESM) in the design, negotiation and supervision of rescues economic and create a safety net ('backstop' for its acronym in English) for the Banking Union that will act as an emergency solution in situations of bank failures, with the aim that it is not necessary to use money from European taxpayers to liquidate a financial entity.

They have also addressed the possibility of creating a specific budget for the eurozone, but the ministers they have not been able to achieve a pact on this issue, mainly because a group led by the Netherlands opposes that it serves to support the stabilization of countries with specific economic problems and limit their future functions to the promotion of convergence and competitiveness.

Nor have they managed to close a roadmap to start the political debates on the single deposit guarantee fund (EDIS), the third pillar of the Banking Union, even though it was part of its mandate. In return, the euro partners will establish a high-level group that will continue the technical work with the aim of preparing a report in June 2019.

The most tangible element of the agreed-upon reform is the creation of the 'firewall' for the Banking Union, a mechanism already agreed on, which had to close its details. It will be an emergency solution for situations in which the resources of the Single Resolution Fund (FUR) are not enough to face a bank failure.

It will be a line of credit with an initial maturity of three years, expandable to two others. It can be used to cover the same uses stipulated by the FUR, including a provision for liquidity, and its size will be aligned with the final objective of this fund (55,000 million euros).

The ESM will be the institution to house this safety net, which will also be fiscally neutral and whose loans must be approved unanimously by the euro partners. The Eurogroup has opened the door to designing an emergency approval process when necessary.

The 'backstop' of the Banking Union will begin to be applied in 2024, although the start date may be advanced provided sufficient progress is made in reducing the risks faced by the European financial sector.

More skills for the rescue fund

On the other hand, the Eurogroup has agreed to strengthen the powers of the European rescue fund, the European Stability Mechanism (ESM) in economic supervision and the design and monitoring of rescues, tasks that will be shared with the European Commission.

The euro countries with difficulties, in addition, may have access to a credit preventive line (PPCL, for its acronym in English) before a possible rescue, which will be subject to an "appropriate level of conditionality."

In particular, in order to have access to these loans, countries will have to comply with European fiscal rules and this aspect will be reviewed at least every six months. In case the rules of the Stability and Growth Pact are breached, access to the ESM funds will be cut and the affected State can claim a reinforced credit line (ECCL) or a full bailout.

In any case, financial assistance will always be granted to countries whose public debt is sustainable and their ability to repay loans is guaranteed, factors that will be examined in a "transparent and predictable" manner.

In this context, the euro partners have shown their intention to introduce collective action clauses (CAC) in public debt issues. These clauses facilitate debt restructuring because they allow a large majority of bondholders to agree to changes in conditions that are applicable to all holders of a security.