This is a link to an article in today’s Financial Times regarding a European Commission draft proposal which will force euro zone countries to share the cost burden of future bailouts in return for aid from the zone’s €500bn rescue fund.
The plan, circulated among euro zone finance minister officials late last year, calls for struggling countries to either invest in the rescue fund, European Stability Mechanism (ESM), or guarantee the fund against any losses. The proposal calls into question EU leaders’ commitment to “break the vicious circle” between failed banks and their sovereign leaders.
In June, the ESM agreed to directly recapitalise banks in countries such as Ireland and Spain in order to move large amounts of debt resulting from bank bailouts on to the ESM. However, the plan states that the ESM will only pay out once countries that could afford it place their own funds into failing banks first. A country facing insolvency after a bank bailout would also need to guarantee that the ESM would get its money back. Finance ministers have until June to make a final decision while in the interim period, the draft is likely to change