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Sharon Bowles MEP |
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Sharon Bowles MEP |
Lib Dem MEP Sharon Bowles, who chairs the European Parliament's Economic and Monetary Affairs Committee, is calling for countries bailed out by the European rescue schemes to be refunded some of the high interest they have had to pay, once they have managed to pay off all their debts.
Concerned by the high interest rates now being applied on the loan to Ireland under the formalised EU rescue schemes, Ms Bowles argues that her proposal represents more solidarity with neighbouring European countries and a more effective way of dealing with deficits. As with other countries, the UK currently stands to get a large windfall on the interest rate being charged on Ireland's debt repayments.
Sharon Bowles MEP said:
"Fellow EU countries should be acting out of solidarity with their neighbours, not like investment banks. It is fair that a country sponsoring a rescue package should not be out of pocket, and should be guarded against risk, but that does not mean they have to pocket windfalls.
"I propose the profit, or premium, which sponsoring countries currently make out of the high interest rate, and which is higher than the cost to them of providing the loan, should be returned to the borrowing country once they have repaid their debt in full.
"These premiums should be kept in a pool that acts as insurance against default - a bit like a no claims refund.
"The overall health of the EU economy will be much more viable and sustainable if struggling countries get these premiums back, rather than letting better-off countries pocket them.
"Also, markets would respond to the likelihood of the borrowing country winning back the pool. It is far more important that we find tools such as this to build sustainable economies across the EU than risk forcing struggling countries into worse-off positions."
ENDS
Note to Editors:
Ireland faces an average charge of about 5.8 percent for an 85 billion-Euro rescue package offered in November by a group led by the European Union. Ireland's 5.8 percent interest rate is based on planned average loan maturities of 7 1/2 years.
Praise of the proposal:
At the European Commission's opening conference for the European Semester António José Cabral, a senior advisor in European Commission President Barroso's Cabinet, commented that this idea would be perfectly acceptable if it provided an important incentive for Member States to be more fiscally responsible when working towards rebalancing their books. It was also brought up on Wednesday by the German Finance Ministry with members of the Economic and Financial Committee of the EU, and well received.
Former EU Commissioner Mario Monti lent the proposal his support in a hearing on Economic Governance at the European Parliament on Thursday 13th July, stating the proposal was "a product of a brilliant British mind" and he hoped the fact that it was a British idea did not mean continentals would discount it.
How would 'Bowles' Bonds' work?
Significant up front interest is still paid. Therefore, Member States which need to call on the EFSM or EFSF would still face repayment levels that are not a soft option. The up-front interest rate can stay in line with that of the IMF.
Sponsoring Member States (MS) / EU still get their money and costs back. This might vary in detail depending upon whether it is the EU budget, a bilateral loan or the Stability Facility, but the principle is that sponsors are not out of pocket or could have some small profit. The extra interest (currently around 2.5%) that is covering risk is retained centrally as insurance rather than paid out to sponsors, but once the risk has gone (when the loan is repaid) that pool of extra interest is repaid to the borrower.
What happens if there is a default? Then the pool of money is used to cover that default in the same proportions as the sponsors' contributions, so in effect the same as the current system and also covering the seniority position of the IMF.
What are the effects other than cash back? As the pool of money builds up, there is an incentive for the borrowing Member State to keep up with its obligations in order to win the pool. The markets will also respond to the likelihood of the pool being paid out, so depending on the responsibility of the borrower the pool can begin to act like a 'virtual credit'. Hence there is an additional market discipline which can help reduce costs and encourage the borrower to keep up repayments.
Why should sponsoring MS give up their profit? It is not a demonstration of European solidarity for MS to behave like investment banks. High levels of interest risks the borrowing countries not being able to sustain repayments or refinancing as required. This will be detrimental to growth and the EU economy in general. The problems will not have been solved.
Does this meet the proposed Treaty change criteria? Strict conditionality is present because the pool is not refunded until the loan has been paid.
Is this a Eurobond? This is primarily intended as a modification of the EU stabilisation mechanisms. The principles might be extended to a more generalised bond but it would probably need to have a limited issue.
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