As expected, following yesterday’s approval by the German parliament, eurozone finance ministers have approved the €100 billion bailout of Spain’s troubled banks through the European Financial Stability Fund (EFSF). Under the terms of the agreement, the EFSF will raise €30 billion in a reserve fund from which the banks will be able to draw funds once they have had restructuring plans approved.

Like every other attempt to deal with the eurozone’s financial crisis, this bailout is also a stop-gap measure. What eurozone leaders agreed to in late June was a fund from which banks could draw directly without requiring the sovereign to guarantee the loans. Such a program would be administered through the still-to-be-created European Stability Mechanism (ESM).

The catch is that Germany continues to insist that sovereign governments retain liability for losses in any recapitalization scheme. German finance minister Wolfgang Schäuble believes that the ESM can work if a way can be found to keep the guarantees off the sovereign’s balance sheet.

The Wall Street Journal reported yesterday that the eurozone’s statistical agency, Eurostat, doubts whether such a solution is possible:

Such aid wouldn’t add to government debt “provided that the government concerned would not incur any direct or indirect obligations towards the ESM as regards the recapitalisation operation. i.e. there would be no possible involvement of government in the recovery of any claim held by the ESM on the banks.”

It does not seem possible to square Schäuble’s demand with Eurostat’s interpretation. Add to the mix that Germany’s Constitutional Court has raised the issue of whether the country’s constitution would allow it to participate in the ESM at all, and skepticism appears to be well-placed about the eurozone’s latest plan to bring the continent’s financial system under control.

Paul Ausick

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