Tainted Alpha

Statement by the Eurogroup

The recent events have demonstrated that financial distress in one Member State canrapidly threaten macro-financial stability of the EU as a whole through variouscontagion channels. This is particularly true for the euro area where the economies,and the financial sectors in particular, are closely intertwined.

Throughout the current crisis, euro area Member States have demonstrated theirdetermination to take decisive and coordinated action to safeguard financial stability inthe euro area as a whole, if needed and return growth to a sustainable path. In particular, the European Financial Stability Facility (EFSF) has been set up toprovide for swift and effective liquidity assistance, together with the EuropeanFinancial Stabilisation Mechanism (EFSM) and the International Monetary Fund, andon the basis of stringent programmes of economic and fiscal policy adjustments to beimplemented by the affected Member State and ensuring debt sustainability.

On 28 – 29 October the European Council agreed on the need to set up a permanentcrisis mechanism to safeguard the financial stability of the euro area as a whole.Eurogroup Ministers agreed that this European Stability Mechanism (ESM) will bebased on the European Financial Stability Facility capable of providing financialassistance packages to euro area Member States under strict conditionality functioningaccording to the rules of the current EFSF.

The ESM will complement the new framework of reinforced economic governance,aiming at an effective and rigorous economic surveillance, which will focus onprevention and will substantially reduce the probability of a crisis arising in the future. Rules will be adapted to provide for a case by case participation of private sector creditors, fully consistent with IMF policies. In all cases, in order to protect taxpayers’money, and to send a clear signal to private creditors that their claims are subordinated to those of the official sector, an ESM loan will enjoy preferred creditor status, junioronly to the IMF loan.

Assistance provided to a euro area Member State will be based on a stringent programme of economic and fiscal adjustment and on a rigorous debt sustainabilityanalysis conducted by the European Commission and the IMF, in liaison with the ECB. On this basis, the Eurogroup Ministers will take a unanimous decision on providing assistance.

For countries considered solvent, on the basis of the debt sustainability analysis conducted by the Commission and the IMF, in liaison with the ECB, the private sector creditors would be encouraged to maintain their exposure according to international rules and fully in line with the IMF practices. In the unexpected event that a countrywould appear to be insolvent , the Member State has to negotiate a comprehensive restructuring plan with its private sector creditors, in line with IMF practices with aview to restoring debt sustainability. If debt sustainability can be reached throughthese measures, the ESM may provide liquidity assistance.

In order to facilitate this process, standardized and identical collective action clauses(CACs) will be included, in such a way as to preserve market liquidity, in the termsand conditions of all new euro area government bonds starting in June 2013. ThoseCACs would be consistent with those common under UK and US law after the G10report on CACs, including aggregation clauses allowing all debt securities issued by a Member State to be considered together in negotiations. This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to theterms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut)in the event that the debtor is unable to pay.

Member States will strive to lengthen the maturities of their new bond emissions in themedium-term to avoid refinancing peaks.

The overall effectiveness of this framework will be evaluated in 2016 by the Commission, in liaison with the ECB.

We restate that any private sector involvement based on these terms and conditionswould not be effective before mid-2013.

President of the European Council Herman Van Rompuy has indicated that hisproposal on limited Treaty change to the European Council at its next meeting willreflect today’s decision.

Euro

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