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Euro zone mulls 2% of GDP credit from bailout fund to fight coronavirus

Euro zone finance ministers broadly backed on Tuesday an idea that governments might apply for a precautionary credit line worth some 2% of their GDP from their ESM bailout fund to help them fight the economic impact of the coronavirus epidemic.

But the final decision on the use of money from the European Stabilisation Fund (ESM), which has 410 billion euros (376.2 billion pounds) of unused lending capacity, is to be taken only by EU leaders at their tele-summit on Thursday.

The ministers agreed that the ESM credit, called the Enhanced Conditions Credit Line (ECCL), would be available to all euro zone countries, even though not all countries would have to apply for it, or draw from it.

Getting such a credit line would entitle governments to potentially unlimited European Central Bank bond buying, if the ECB were to decide it is needed.

“There is broad support to consider a pandemic crisis support safeguard based on an existing ESM precautionary instrument, such as the Enhanced Conditions Credit Line (ECCL),” the chairman of euro zone finance ministers Mario Centeno said.

“The size of the available instrument could be in the range of 2% of members? GDP, as a benchmark,” he said, adding that while there was broad support among members around these features, more work was needed on details.

“The aim is to prepare for the meeting of the leaders on Thursday where decisions are expected,” he said.

Euro zone officials are worried that as the pandemic spreads and the euro zone sinks into a deep recession this year, financial markets could start demanding a high price for lending to governments, putting some of the most highly indebted countries like Italy under a lot of strain.

Having an ESM credit line, would help governments keep sovereign bond yields at manageable levels when they finance themselves on the market, because investors would know governments have a cheap financing alternative.

EURO ZONE FAULT LINES

One of the difficulties in agreeing the use of the standby credit option is the conditions attached to it – any country applying would face a debt sustainability analysis by the European Commission.

Italy, which has a public debt of 137% of GDP that is only likely to grow given the country is likely to get into a recession this year, is unhappy about EU institutions scrutinising its debt.

The ECCL would also have to entail other conditions, some of which could be politically problematic. To make them more palatable, Centeno said the conditions would, in the short term, be focused on the coronavirus response.

Yet, Italy, Greece and Spain insist the credit line from the ESM should be without any conditions, while Germany, Finland, the Netherlands or Austria, say money cannot be lent with no strings attached.

Officials also note that the urgency of a decision has been diminished by the ECB’s own coronavirus emergency bond-buying programme worth 750 billion euros and the fact that all euro zone governments can still borrow very cheaply on the market.
Source: Reuters (By Jan Strupczewski)

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