There are a lot of reasons why attention has turned to the idea of leveraging EFSF via one of a number of possible methods. If this can be done, it takes a big step towards solving both the solvency and liquidity issues plaguing Euro area sovereigns and banks – on the liquidity front, a €2 trillion or €3 trillion fund is big enough to buy up Spanish and Italian bonds for a number of years, while €440 billion is big enough to absorb a lot of the potential losses.
The financial press are abuzz with various mechanisms that could be used to leverage up the EFSF. However, I was surprised today to twice read that Gros and Meyer’s proposal to have EFSF (or some vehicle funded by EFSF) register as a credit institution and borrow from ECB is likely to be illegal.
The Wall Street Journal reports
Klaus Regling, chief executive of the European Financial Stability Facility, told a podium discussion that “there are serious concerns” that such a scheme wouldn’t be allowed under the EU Treaty, which forbids the ECB from financing governments directly.
And at the FT’s Money Supply blog, Ralph Atkins writes
But Jens Weidmann, Germany’s Bundesbank president and ECB governing council member, has already made clear his opposition. Giving the EFSF access to ECB funding, Mr Weidmann argues, would be “monetary financing” – central bank funding of governments – which is banned under European Union treaties …
More crucially, an ECB legal opinion issued in March made clear that the European Stability Mechanism – a permanent fund expected to replace the temporary EFSF from 2013 – would not be allowed access to its liquidity because of the ban on monetary financing. “The ECB recalls that the monetary financing prohibition…is one of the basic pillars of the legal architecture of economic and monetary union,” its lawyers wrote then. I am not a lawyer, but to me that would also rule out giving the EFSF access.
The ECB legal opinion states
Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU is one of the basic pillars of the legal architecture of EMU
Of course, we in Ireland have been here before. Back in 2009, a number of very serious people assured us that nationalising any banks would be inadvisable because the ECB was prohibited under the monetary financing clause from lending to nationalised banks. (That Anglo were at the time borrowing in a big way from the ECB didn’t seem to get in the way of what seemed like a great argument).
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
This is immediately followed by
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.
So while the ECB may recall the monetary financing prohibition, you could argue that they don’t recall it very well. One could quibble that EFSF is not currently not a “publicly owned credit institution” but it’s hardly high octane financial engineering to create a vehicle funded by EFSF that counts as such.