With all the talk of a Greek bailout, and the contested Eurozone budget, a simple fact has been overlooked – the sustainability of the European Stability Mechanism. Given recent dissension from IMF officials and the negative outlook over Europe, could the mechanism built to bring the Eurozone from the brink actually be taking it there instead?
One of the main disagreements hindering a Greek bailout in the near term seems to be taking place between European officials and the International Monetary Fund. At the center of thecontention is last week’s extension that was granted by Eurogroup leaders – allowing Greece a further two years to reduce its debt target. The announcement didn’t sit well with IMF Managing Director Christine Lagarde. And, it hasn’t since forcing Lagarde to leave a scheduled Asian summit to attend this week’s European finance minsters’ meeting.
In the IMF’s defense, the extension only heightens concerns regarding the Greek nation, as the country has already failed to meet deficit targets twice before – even with Greece continuing to struggle with aggressive austerity. These concerns only exacerbate rising disbelief that European troubles won’t soon be over, leading the IMF managing director to consider pulling out of any bailout funding.
At this point, any bailout of the bailout would leave Greece forced to once again tap the ESM for aid, placing further weight on the mechanism than previously estimated, which would likely result in higher costs for the mechanism.
And it’s not like higher yields aren’t considered to be in the ESM’s future.
The mechanism already received a negative outlook by Moody’s Investors Services. Back in the summer, the credit agency issued a warning on ESM bonds, citing a “deterioration in the creditworthiness” of the Eurozone states as the main culprit. The picture grows darker when considering the recent French sovereign downgrade by the same agency last week. This is likely to weigh on the credit rating of the whole mechanism as the French nation backs almost 21% of the whole pool of funds – or about 16 billion euros. The figure is second only to Germany, and is ranked above Italy.
Ultimately, a full fledged downgrade would jeopardize everything that the ESM was built for, by raising yields on ESM issued securities and making it more difficult for the Eurozone to emerge from the already 3-year debacle relatively unharmed.
As a result, Europe may have to contend with the possibility that the ESM will be responsible for placing more unwanted costs on an already burdened economy in the near term. The possibility could consume the single currency and spark further notions of a Grexit or complete dissolution of the Union.