Trichet backs deal on permanent crisis mechanism

EU finance ministers say private investors will not automatically suffer losses where governments are obliged to restructure their debts.

Jean-Claude Trichet, the president of the European Central Bank, has welcomed a deal by finance ministers on setting up a permanent crisis mechanism.

Speaking after a meeting of finance ministers in Brussels, Trichet said that he “enormously appreciated” what he described as “useful clarification” about how a bail-out mechanism might work.

In a bid to calm turmoil on financial markets, the finance ministers of the eurozone agreed a statement saying that private investors would not automatically suffer losses where governments were obliged to restructure their debts. Instead, the involvement of private-sector investors would be assessed on a “case-by-case” basis and in line with the practices of the International Monetary Fund (IMF).

Trichet also welcomed assurances that any decision to provide assistance from the mechanism would be based on the “same kind of assessment of debt sustainability” based on the experience of the IMF.

Bond investors have in recent weeks dumped bonds from the eurozone’s peripheral countries, fearing that they might be forced to take losses on debts that they hold. Germany has stoked those fears by leading calls for bondholders to share losses so that it is not just taxpayers that shoulder the cost of bailing out countries’ debts.

Today, eurozone finance ministers spelled out that changes in the rules would apply only to new debt issued after the middle of 2013. That is when a temporary bail-out mechanism, the European Financial Stability Facility (EFSF), expires and the permanent mechanism is supposed to take over.
 
Olli Rehn, the European commissioner for economic and monetary affairs, said: “Any private-sector involvement will not be effective before mid-2013.”

He added that “standardised and international collective action clauses” would apply only once the new mechanism is created.

A eurozone country likely to default would have to negotiate changes to the terms of payments with all its creditors. These changes would have to be approved by weighted majority.

Rehn said that “financial turbulence” had been caused by confusion related to any possible private-sector involvement. “We wanted to clarify this once and for all,” he said.

The EFSF has €440 billion to help eurozone countries if they get into financial difficulties. Rehn said that even after the loans for Greece and Ireland, the EU had “plenty of firepower left”. 

Didier Reynders, Belgium’s finance minister, who chaired the meeting of EU finance ministers, asked whether the new mechanism would need more than the €440bn, said that the facility was already “a very large instrument”. He said that the permanent mechanism should be “the biggest size possible” in order to be able to respond in the case of a crisis. Reynders made a comparison with the IMF, saying that the IMF’s members had decided to increase its level of funding to deal with crises.

Rehn said there should be a “serious and substantive discussion” on the size of the permanent mechanism, adding that there was still time to take the necessary decisions.