ALLIANCE FO§ DEMOCRACY

How the Euro rescue package works

Last year Greece was granted loans totalling € 110 billion from the other Euro countries. So far, € 53 billion of this total has been paid out. Now the Greeks would like to receive another rescue package in 2012/13, which means that they would get a further € 60 billion.
When this fund was established (European Financial Stability Facility, EFSF), it consisted initially only of guarantee declarations by the (then) 16 Euro countries. Germany guaranteed € 119.4 billion of the € 440 billion. This German contribution was approved by the Bundestag, which has the supreme budget authority. In the case of the current packages, the federal government and the Finance Minister have given their approval, although they lack the parliamentary support required. For this reason, many members of the government faction are demanding a greater say, and want to withdraw their support for the rescue package, particularly in the case of the permanent rescue facility of the ESM (European Stability Mechanism), which is due to be set up from 2013. On 5th July 2011, the federal government must explain itself before the Federal Constitutional Court, and demonstrate to what extent these promises conform to the constitution.

Despite all the discussion about agreement to the rescue package, the question must still be asked of what this rescue package actually is. In simplified terms, the rescue package is a subsidised interest programme, under which (in the case of EFSF guarantees) no money initially changes hands (in this case the taxpayer's money). This happens only if the bankrupt country (Greece, Ireland or Portugal) is actually insolvent. The function of the guarantees is to subsidise the interest on the loans to the countries, which in the event of direct access to the credit markets would have to pay a lot more. In return for the second rescue package, Greece must therefore implement draconian savings measures. Ireland for example received its first payment of € 3.6 billion at an interest rate of 5.9% up to mid-2016. This was significantly less than the 7% or more that Ireland would have had to pay on the open market – a benefit for Ireland, because it earns money from the rate difference. The EFSF however obtained the funds at a rate of only 2.89%. The difference between the 2.89% and 5.9% is pocketed by the EFSF – and therefore the guarantor (such as Germany); the benefit for the guarantor.
In order for the fund to hand out more loans, it has to take out more loans. A rating is carried out so that this can take place at the lowest possible interest rate. This assessment was carried out by three rating agencies (Fitch Ratings, Moody's Investor Service und Standard & Poor's). As rating agencies they assess debtors all over the world according to the default risk. Then they advise the principals or institutions such as pension funds on the question of where they should invest their money, and provide guidelines for the central banks of the countries. The top rating of "AAA" for the rescue fund was only given because the guarantees of the six Euro countries (including Germany, France, Netherlands and Austria) with the best ratings were taken into account. This has to be viewed critically.