Business World

Tuesday 20 February 2018

ECB 'hawk' outlines case for giving banking licence to ESM

Brendan Keenan

Brendan Keenan

PRESSURE eased on Spanish and Italian government bonds after the head of the central bank of Austria said there was a case for giving a banking licence to the proposed European Stability Mechanism (ESM) rescue fund.

Such a licence might allow the ESM to borrow from the European Central Bank's theoretically limitless cheque book and lend the money to troubled banks or governments.

This could allay market concerns that the fund's €500bn reserves would not be enough should Spain or Italy require aid.

"There are pro arguments for this," said Ewald Nowotny, who sits on the ECB Governing Council and is generally seen as a "hawk" on monetary issues.

"There are also other arguments, but I would see this as an ongoing discussion," he said, adding he is "not aware of specific discussions within the ECB at this point".

"The idea of turning the ESM into a bank is a game changer," said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale in Paris.

"The ECB has been against ideas like this. It is probably possible; the question is whether it can get enough political support. It remains a very political question."

A senior ECB source put forward the counter argument yesterday, saying the ESM would have to get its money back.

"Otherwise it would be central bank financing of governments, which is against EU treaties. But asking for repayment of, say, €500bn, would be devastating."

Meanwhile, Europe's main bailout fund, the European Financial Stability Facility (EFSF) said it is not facing an imminent ratings downgrade after Moody's changed its "rating outlook" to negative from stable.

Moody's earlier changed its "outlooks" for Germany, the Netherlands and Luxembourg to negative -- a move dismissed by the German government.

Moody's still considers the EFSF a top "AAA" rated borrower and all three countries are guarantors for the EFSF. Germany on its own effectively stands behind 29pc of the EFSF's borrowings. (Additional reporting by Bloomberg)

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