Malta is expected to take a position in favour of the transformation of the European stability facility into a permanent institution on the lines of a European monetary fund at next week’s meeting of EU finance ministers.
The situation is precarious on a day-to-day basis and the international situation does not allow us to delay decisions
Finance Minister Tonio Fenech said if the €400 billion European Financial Stability Facility was slated to increase, Malta will propose bringing forward the decision to set up a European Stability Mechanism to lower the exposures of member states.
On July 11, the 17 eurozone finance ministers signed the treaty establishing the ESM, which will take on the tasks fulfilled by the financial stability facility. The ESM is due to start operating in July 2013.
Malta already guarantees around €400 million in the stability facility and could see this amount increase exponentially if the fund increases to €2 trillion or €3 trillion as international observers have suggested may be on the cards.
Speaking during a visit to aviation company Medavia, Mr Fenech reserved judgment on the proposed increase in the fund, which does not yet have the official stamp on it, insisting he preferred to see it in writing at next week’s meeting.
“Under the European Stability Mechanism, which will work like a financial institution, the exposure on individual member states will be much less even though countries will still have to pay up some of the share capital,” he said.
The EFSF is being used to bail out Greece, Portugal and Ireland but it will not be able to cover the exposures of much larger economies like Spain and Italy if they go under. Analysts have argued for a much larger fund.
“The money being mentioned is not a small amount and we will have to make our own analysis on the contribution Malta will be expected to make when the proposal comes on the table,” Mr Fenech said.
He insisted the situation in the eurozone was “very serious” and the bloc had to have the mechanisms in place to remove the instability because the longer it lasted the bigger the risk of recession.
“The situation is precarious on a day-to-day basis and the international situation does not allow us to delay decisions,” Mr Fenech said, admitting the discussion was complex and difficult.
Mr Fenech said any solution to stabilise the situation in Greece and avoid contagion must also be sensitive to the impact on financial institutions that in the past loaned money to Greece.
Another proposal has been for Greece to default on at least half of its debt to allow the country breathing space without having to impose more austerity measures that have stifled economic growth.
This means Greek sovereign bond holders will receive half of what they are owed with German and French banks being the most exposed.
“From the analysis we have of our banks, although there is an element of exposure, it is not big, especially when compared to that of other countries,” Mr Fenech said.
Funds from the stability facility may be used to recapitalise European banks, especially if the fund increases to €3 trillion. The move will help shore up banks in the wake of a probable Greek default.
The news had some economists questioning the soundness of any move that pumps more money into banks rather than job creation.
But Central Bank governor Josef Bonnici said safeguarding financial stability in the eurozone was crucial for the economy to function properly and maintain job and income stability.
“Financial stability is a necessary condition for investment to take place and jobs to be created,” Dr Bonnici said.
The EFSF has the mandate, he added, to safeguard financial stability in the euro area by raising funds in capital markets to finance loans for eurozone member states.