Eurogroup reaches agreement on ESM reform and backstop for Single Resolution Fund

Eurozone finance ministers today reached agreement on the reform of the European Stability Mechanism and the introduction of a safety net in the Single Resolution Fund, measures that will help to mitigate future crises.

"Today, the Eurogroup has agreed to proceed with the reform of the European Stability Mechanism [ESM] and to sign the revised treaty in January 2021 to then complete the ratification process," the informal forum of finance ministers announced in a statement. the euro zone.

In addition, "we agreed to move forward with the entry into force of the common support mechanism for the Single Resolution Fund by the beginning of 2022", which means a two-year anticipation of this safety net (better known as 'backstop') in bank resolutions, decisions that “mark yet another important step towards the completion of the Banking Union”, added the structure.

Speaking at a press conference after today's meeting via videoconference, the president of the Eurogroup, Paschal Donohoe, saluted his predecessor, the Portuguese Mário Centeno, “for the progress made” during his term, which allowed today's agreement.

Paschal Donohoe also pointed out that "the ESM has played a very important role in the last crises", so this reform will "allow to reinforce that role".

The director general of the ESM, Klaus Regling, said he was “satisfied” by the 'green light' given by the Eurogroup and explained that, in practice, this institution created to provide financial assistance to euro countries in crisis will now be able to “lend money to support a bank resolution ”.

"This is very important and, particularly, during the current situation, in which all Member States suffer from the economic consequences of the covid-19 pandemic," added Klaus Regling, also speaking of "an increase in market confidence".

In particular, with the reform agreed today, the ESM will have more power in the design, negotiation and monitoring of financial assistance programs for euro countries.

And, with regard to the Single Resolution Fund, a common rear will be created in the form of the ESM credit line to replace the current direct bank recapitalization instrument.

This change will thus allow the creation of a financial safety net for bank resolutions and will help to protect financial stability in the euro area.

Currently, the ESM can only lend money directly to countries in crisis situations, but with the change of its statutes, in the new treaty, it will be able to provide this support to banking through the Single Resolution Fund.

The Single Resolution Fund is a fund created at the supranational level that can be used to resolve insolvent banks, after other options have been exhausted.

Also speaking at the press conference, European Commissioner for the Economy, Paolo Gentiloni, pointed out that this agreement is "good news for the stability of the eurozone and for European companies and citizens".

"We are not yet in the final process because we still have the signature and ratification of the agreement, but today we have taken important steps," said Paolo Gentiloni.

The agreement has yet to be formalized and ratified so that the new ESM treaty can enter into force in 2021, which, in turn, will allow the Board of Governors to take steps to make the safety net operational in early 2022.

The reform of the ESM treaty, established in the aftermath of the previous financial crisis to help countries in difficulty, envisages giving it more power in future bailouts and country monitoring, as well as in credit lines for prevention.

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