Thought May 11, 2020 / 11:09 am UTC

Eurogroup Makes Some Progress on ESM’s Pandemic Loans

By Giacomo Pallaro

On May 8, having acknowledged the ongoing work in the Council on the SURE proposal and the European Investment Bank on a pan-European guarantee fund for SMEs, the Eurogroup agreed on the features and standardized terms of the European Stability Mechanism’s (ESM) Pandemic Crisis Support. Yet, some questions remain unanswered.

The Eurogroup agreed that the ESM’s Pandemic Crisis Support instrument will be available to all Eurozone Member States for amounts of 2% of their respective end-2019 GDP. This will be the benchmark, to support domestic financing of direct and indirect healthcare, cure- and prevention-related costs due to the COVID-19 crisis. There are no other requirements to use the facility. 

Yet, it remains unclear what the “indirect” are healthcare expenditures: do they include the financing of furlough schemes, which are necessary as workers are asked to stay at home during lockdowns to reduce the infection rate? Once again, progress was made on procedures, terms and conditions, but the Finance Ministers procrastinated on the most politically-challenging aspects of the instrument.

Anyway, “after accelerated procedures to grant Pandemic Response Support, the facility will be available, on a precautionary basis, for the member state concerned for a period of 12 months, which can be extended twice, by six months. Disbursements would then be available on request.” The maximum average maturity of the loan would be 10 years and the cost would be very low, especially for high debt countries, and the instrument will be available until end-2022, though this end date could be adjusted. 

The European Commission’s monitoring and surveillance should be commensurate with the challenge posed by the pandemic, so it will not be as invasive as seen in other ESM interventions, for example Greece. The ESM will also implement its Early Warning System to ensure timely repayment of the Pandemic Crisis Support.

The next step is the formal confirmation of the Eurogroup’s agreement in the ESM Board of Governors (composed of the same members as the Eurogroup), which could happen as early as May 15, subject to completion of national procedures. The aim is for the broader EU response package to be operational by June 1.

It remains unclear how the fixed income market would react to Eurozone countries applying for the Pandemic Crisis Support, which would be senior compared to the outstanding debt. Bond yields could rise amid fears of a future debt restructuring but turning down a cheap source of finance could also be seen negatively as it would aggravate the need for short-term market finance.

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I, Giacomo Pallaro, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.