ESM’s dummy guns won’t deter looters


Euroland is now equipped with a formidable € 500 billion gun. But it doesn’t seem ready to fire at those ransacking its property. On the very same day it set up the new rescue fund, ruling members of the club snubbed the proposal to transfer banking legacy liabilities to it.

They undoubtedly fear wiping out the huge pile of bad debts Irish and Spanish entities have cumulated in the past. But what is the purpose of a salvaging mechanism if you are afraid to get it running? After all, the whole scheme was supposed to break the link between financial and sovereign woes.

Such a lukewarm start will fail to placate the markets. Rather it is bound to nurture deep rooted suspicion on the willingness to act. Investors expecting an early intervention to curb risk premium will feel frustrated. A nasty prospect that would most certainly feed into renewed uncertainties and turbulences. They felt already baffled by the ambiguous tactics Madrid is deploying.

Now they have a more substantial matter of concern. Should Germany and its allies drag their feet in implementing the ECB firewall, they are apt putting to test the whole strategy. They will feel tempted to increase pressure on Spain’s sovereigns just to make sure promises are delivered.

Berlin is playing with fire by refusing its green light to early debt intervention waiting till deterioration is well under way. It doesn’t seem to bother on the extra costs a last minute rescue involves. Not to mention the risk of a massive contagion on the Euro putting it under severe strain. A firewall designed to act pre-emptively, thus avoiding the worst from happening, might backfire should it be shelved until a doomsday scenario materializes. An unpalatable outlook much likely to take place sooner than expected.

Madrid and its potential lenders are indulging in a dithering mood that only helps to unsettle markets. No one believes Spain can perform a breakthrough on its own.

As we approach the year closing, the prospect of falling into a substantial budget deviation will induce vast unrest in its sovereign market. Should this happen, the soft landing rescue might end up in a highly damaging crash. Trying to escape conditions in the very short run could lead to stringent requirements in only a few weeks from now. Madrid has a choice to make.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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