–Italy Is Lone Holdout Opposing New Rules to Manage Bank Crisis
By Silvia Marchetti
ROME (MaceNews) – Italy’s likely rejection of the European Stability Mechanism reform plan, with its common backstop credit line for failing banks, leaves the Eurozone at risk of financial meltdown if a big bank falters, warned Italian opposition sources.
The ruling coalition has postponed until after the summer break the key ratification vote of the ESM reform in Italy’s parliament to buy time and ease pressure from European peer countries, yet government officials say they will reject “something which may penalize Italy, and which remains very unclear,” as one League source put it.
“There are certain technical aspects of the reform which we have never quite liked, mainly the clauses regarding a forced debt structuring plan, or strict fiscal path, as a prerequisite to accessing the ESM funds in case of need, amounting to EUR 38 billion per EU country,” the League source said.
“The stigma in using those funds was there before, when we could have used the money during the pandemic, and it will not go away with the revamped ESM treaty, actually, it’ll get even more thorny.”
If Italy rejects the ESM treaty this will likely kill the reform, as the new treaty cannot be implemented without consensus from all eurozone states, with Rome the only one left to approve it.
Italian opposition sources from the Democrat Party warned that the approval of the new treaty is paramount. It will give the ESM a crucial new role as a common backstop to the Single Resolution Fund (SRF) to tackle bank crisis management, translating in more money available to reduce future sovereign default risks.
“The backstop prevents one single bank failure from harming a country’s entire financial sector and triggering a potential spillover effect across the eurozone. Right now, it’s European banks stepping in to save other peer lenders in difficulty; with the common backstop, it’s the member states doing so, through a wise burden-sharing approach,” said one Democrat deputy.
The Single Resolution Fund (SRF) is a fund established by the EU for resolving failing banks within the banking union. It is now financed by contributions from the banking sector, but in future, in the event that the SRF is depleted, the ESM can act as a backstop and lend the necessary funds to finance a bank resolution by providing a revolving credit line, explained another Democrat source.
“The current government is failing to understand that the ESM reform will take us a step closer towards completing the eurozone’s much-needed banking union, which will make our monetary union more resilient and stable,” said the source.
Once the ESM’s common backstop is in place, the ESM will be able to provide loans to the SRF up to an amount equal to its target size (with a cap of EUR 68 billion) to finance a bank resolution.
Sources noted that Italy risks being the last founding member of the EU to clear the ESM reform, which needs to be approved by all parliaments across the Eurozone t take effect.
Prime Minister Giorgia Meloni has so far sent out mixed messages, mainly criticizing the ESM reform for introducing a sort of “pre-emptive” debt restructuring for all countries that access funds in case of financial troubles, which in her view would highly penalize debt-ridden Italy, particularly following high pandemic spending in the past few years.
The Eurogroup reached a deal over the reform in 2020, and the implementation of the common backstop is already at least one year behind schedule, as it should have come into force by 2022, complained the Democrat deputy.
The League and Brothers of Italy (Premier Meloni’s party) also want clarity on how the debt sustainability assessment and repayment capacity of countries tapping into the ESM will be jointly conducted by the ESM and the European Central Bank, set to have a major role in a revamped mechanism aimed at better tackling financial crises.
In recent weeks, Meloni has repeatedly called for “greater accountability” from the European Central Bank and openly criticized “unilateral and controversial” decisions to raise interest rates at a difficult time for the euro bloc, as inflation keeps soaring amid a sluggish economic recovery.
“The rightist government already doesn’t trust the ECB, how can it ever trust it as an ESM watchdog?” said the Democrat.