The anticipated agreement on the expansion of the EU’s total available rescue funds should be welcomed, but all indications are that the deal likely to be announced today will be interpreted as a half-hearted approach that reflects compromise more than it does commitment. We’ve long stated that the move was necessary, and the narrowing of peripheral bond spreads on the back of the ECB’s 3Y auctions of funds did nothing to change that view. Indeed, it made the provision of a stronger firewall all that more important, because introducing it at a time of increased stress would have been seen as a reactive, rather than proactive step.
The reasons why today’s deal looks likely to fall short is that it does not fully meet the requirements pushed for by the European Commission and called for by overseas lenders such as the IMF. Combining the European Stability Mechanism (ESM) with the current (temporary) European Financial Stability Fund (EFSF) program serves to increase the availability of funds at the outset, as the ESM will take time to be built up. Still, Germany has chosen to not push for the EUR 940bln. Instead, the remaining EUR 240bln will be allowed to run alongside the ESM and may be lent, in what the FT says (from draft statement,) will be “exceptional circumstances” subject to the unanimous vote of European leaders.
The key question is whether this watered-down approach, if that is what comes from today’s meeting, will be enough to appease those in the international community who think that Europe needs to do more to help itself before it can ask for further support from elsewhere (principally the IMF). At the moment, this is looking doubtful, judging by comments seen in recent days from BRIC countries and others.