The EU plans to make private lenders cover the losses of
any future eurozone debt crisis, the BBC has learned.
The decision may significantly raise the future cost of
borrowing for over-indebted eurozone governments.
It is part of a new permanent scheme – to be funded by
eurozone governments, but not the UK – to replace existing bail-out funds that
expire in 2013.
The new mechanism will need a treaty change, which may
lead to ratification problems in the Irish Republic.
The details of the proposed European Stability Mechanism
are included in a draft European Union communique obtained by the BBC.
The changes come too late for the Republic of Ireland,
which was forced by European partners to foot the bill for rescuing its banks
in order to get an 85bn euro bail-out.
In future, Brussels may require a crisis-stricken
eurozone government to force losses on its existing private lenders – including
investors in government bonds – before it would provide a bail-out package.
The creation of the European Stability Mechanism in 2013
will formally collapse one of the founding principles of the single currency,
ie the “no bail-out” clause.
Rescuing ailing economies will now be enshrined in law
through what the draft communique describes as “limited treaty
change”. This change may prove to be a headache for some EU member states,
especially Britain, whose prime minister vowed to call a referendum if any new
powers were to be ceded to Brussels.
It will also be a major issue for the Irish Republic,
whose constitution demands that any EU treaty changes get the blessing of the
entire electorate. Many Irish people are livid at the high rate of interest
(5.83%) demanded from their European partners as part of their 85bn euro
bail-out and may exact bitter revenge in a referendum.
And if a government got into trouble later down the line,
it would be required to default on its other debts, while continuing to make
payments on its rescue loans.
“That won’t please the markets, who thought that
holding government bonds was as safe as cash deposits,” says BBC business
correspondent Joe Lynam.
From June 2013, government bonds will also have to
include “collective action clauses”, which would make it much easier
for an insolvent government to get the consent of its lenders to any future
Together, the changes mean a government’s private-sector
lenders will face a much bigger risk of losing their money.
And this means they are likely to charge the more heavily
indebted eurozone member states a higher interest rate.
The rhetoric in the communique comes in stark contrast to
the actual bail-out of the Irish Republic in November.
In that rescue, Brussels is accused of having insisted
that Dublin honour in full its guarantee of the Irish banks. Many Irish are
angry that this has landed taxpayers with the bill for repaying loans made to
its insolvent banks.
However, with European banks dangerously
undercapitalised, European leaders feared that a default by the Irish banks
could trigger a Europe-wide banking crisis.
Separately, the EU is planning to carry out a new, and
much stricter, set of stress tests on its big banks this year.
The tests will determine how much capital the banks need
to absorb future losses.
The previous stress tests, held over the summer, were
criticised for failing to consider the possibility of a default by a eurozone
The planned Lisbon Treaty amendment is short and
open-ended, leaving European leaders flexibility to structure the new
arrangement however they choose.
It states only that: “The Member States whose
currency is the euro may establish a stability mechanism to safeguard the
stability of the euro area as a whole. The granting of financial assistance
under the mechanism will be made subject to strict conditionality.”
The amendment may also open the way towards a common
eurozone government bond at a later date.
This was a solution to the eurozone debt crisis proposed
by Luxembourg Prime Minister Jean-Claude Juncker and Italian Finance Minister
Giulio Tremonti, but rejected by Germany.
Ratification of the treaty change may prove a challenge
in some countries.
The Irish Republic’s constitution requires a referendum
at a time when the public is angry with Europe over the harsh terms of their
In the UK, the amendment is not expected to trigger a
The draft communique states that EU members outside the
eurozone – such as the UK – may choose to participate in the new bail-out
arrangement “on an ad hoc basis”.
However, right-wing members of his Conservative party may
demand that Prime Minister David Cameron use the opportunity to negotiate UK
opt-outs from existing treaty requirements.
The communique also said that the EU will endorse making
Montenegro an official candidate to join the European Union, meaning the
country can begin formal accession negotiations.