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Euro zone agrees to fine-tune bailout fund amid COVID worries

Jan Strupczewski and Michael Nienaber
·2 min read

By Jan Strupczewski and Michael Nienaber

BRUSSELS/BERLIN, Nov 30 (Reuters) - Euro zone finance ministers agreed on Monday to move ahead with stalled changes to their ESM bailout fund to strengthen the resilience of the common currency area as the COVID-19 pandemic increases risks of future economic trouble.

After almost a year since their agreement "in principle" on widening the responsibilities of the European Stability Mechanism (ESM), ministers from the 19 countries sharing the euro currency gave the deal a final go-ahead for ratification.

The International Monetary Fund warned earlier that governments and the European Central Bank may need to provide more fiscal and monetary support than initially expected because of the second wave of the COVID-19 pandemic.

"The ESM reform strengthens the euro and the entire European banking sector because we are making the euro zone even more robust against attacks by speculators," German Finance Minister Olaf Scholz said after the ministerial meeting.

Changes to the ESM treaty will reduce the risk of investors holding out for a better deal in a sovereign debt restructuring and give the bailout fund room to mediate between the sovereign and investors.

They will also allow the ESM to lend to the euro zone's bank resolution fund to wind down failing banks if, in a banking crisis, the fund runs out of its own money.

Several countries had made their consent to the new role for the bailout fund conditional on a lowering of risks in the euro zone banking system and a report from the European Central Bank showed all risk indicators have improved.

But the pandemic was likely to make things more difficult.

"The COVID crisis is likely to temporarily interrupt or slow down the favourable trends observed over recent years," the euro zone ministers said in a statement.

"This underscores the need to closely monitor developments and address any remaining or emerging vulnerabilities, with a view to maintain financial stability, whilst protecting taxpayers," they said.

Euro zone governments will now sign the ESM treaty changes in January and national parliaments will ratify them in 2021 so that the amended treaty enters into force in 2022.

The reform is one of the measures for deeper economic integration of the euro zone, along with a plan to set up a European Deposit Insurance Scheme (EDIS) that is likely to be further discussed next year. (Reporting by Jan Strupczewski; Editing by Angus MacSwan)