Germany’s central bank laid out detailed proposals on Monday to place more of the costs of future eurozone debt crises on struggling governments and their creditors, rather than on taxpayers in other member states.
The proposals, outlined in the Bundesbank’s monthly report, envisage handing new powers to the bloc’s ?500 billion ($551.52 billion) bailout fund, the European Stability Mechanism, and changing the terms of government bond contracts.
The German central bank said it is concerned that the ad hoc arrangements established to fight the bloc’s recent debt crisis aren’t enough to eradicate risks to financial stability.
Eurozone countries including Ireland, Greece and Portugal sought help from other member states and their taxpayers in recent years to refinance government debt or bail out their banks. As the debt crisis spread, national governments created a range of new tools and institutions to fight it, including the Luxembourg-based ESM and, later, a single eurozone banking supervisor housed within the European Central Bank.
The Bundesbank argues that the bloc’s ability to handle future debt crises needs to be strengthened further, even in the absence of any agreement to move toward a full-blown fiscal or political union in the euro area.
It proposed that the ESM be given new powers to coordinate any future debt crises to accelerate any debt restructuring and make the process more transparent. It also suggested that the ESM be given powers to oversee government budgets and enforce the bloc’s fiscal rules, which are currently exercised by the European Commission in Brussels.
The German central bank also reiterated earlier proposals to insert clauses into eurozone government bond contracts that automatically extend their maturities by up to three years if a government seeks assistance from the ESM. That would boost the firepower of the ESM, since it wouldn’t need to pay off existing bondholders, and ensure investors bore more of the costs, the Bundesbank argued. It proposed that a qualified majority of all bondholders should be allowed to approve a debt restructuring, rather than a majority of the holders of each bond issue.
The extent of political support for such changes is unclear. Most or all eurozone countries would need to give their approval, which seems unlikely given the reforms could lead to higher borrowing costs for peripheral governments, as creditors took into account the increased risk of the investment.
But the Bundesbank argues that the final impact on government bond yields is “unclear” because its proposals would accelerate any restructuring process and create clarity for investors.