ESM: Not Another Bailout Fund?!

Valentine’s Day is all about spreading love… and that’s exactly what we saw from the euro zone finance ministers that day! On February 14, euro zone finance hotshots opened their hearts and agreed to establish a permanent bailout fund with a lending capacity of 500 billion EUR.

The fund, dubbed the European Stability Mechanism (ESM), is just one of the many parts of the extensive program European leaders are hoping to piece together by March 2011 to combat the debt woes that have been plaguing the region. Euro zone countries will likely end up pooling together their own money to put up the permanent bailout fund, but they may receive up to 250 billion EUR in contributions from the International Monetary Fund if it decides to pitch in.

Wait a second… Another bailout fund? Whatever happened to the European Financial Stability Facility (EFSF)?? Fret not, you little worrywart! The EFSF is still in place. But unlike the planned ESM, the EFSF isn’t a permanent fixture. As a matter of fact, it’s due to expire in 2013, right before the ESM is scheduled to take effect. Furthermore, the EFSF is much smaller than the ESM, and can only effectively lend out 250 billion EUR of its 440 billion EUR.

But it seems like the finance ministers were too busy writing love notes to each other, because other than the size of the fund, they weren’t able to agree on anything else. Heck, they didn’t even say where exactly they’ll be getting the 500 billion EUR or if they would extend the EFSF!

The head honcho of the euro zone finance ministers, Jean-Claude Juncker, said that they all have to be on board in every aspect of the plan. If even one finance minister doesn’t go with the flow, then no agreement will be considered at all.

This may be easier said than done as a lot of the members still remain in opposition to proposals of extensive financial reform which are mostly suggested by Germany and France.

Just like hardcore Beliebers dissing Esperanza Spalding for snatching the Grammy’s Best New Artist award from Justin Bieber, naysayers were quick to point out several shortcomings of the ESM.

Many are unconvinced that the ESM is the solution to euro zone’s deficit woes, and that debt restructuring or default would still be necessary. Plus, the fact that bond yields of Portugal are hitting all-time highs indicates that investors are losing confidence in the financial prospects of the region.

Then again, there’s plenty of room for the European finance moguls to iron out the details of the permanent bailout fund and possibly reassure market participants that this debt situation can be contained. European leaders are set to meet on March 11 to discuss the “pact of competitiveness” proposed by Germany and France and again on March 24 to finalize the concrete reforms to be implemented.

The ESM, along with the other economic reforms in the works, is definitely a step in the right direction when it comes to working for financial stability in the euro zone – if its leaders come to an agreement, that is. In the meantime, I’ll keep you posted on updates regarding these programs so I suggest you add us up on Facebook or follow us on Twitter to stay in the loop!