PARIS (MNI) – Fitch Ratings said Monday that the decision by
Eurozone finance ministers to boost the size of the European Stability
Mechanism to E500 billion from the beginning rather than over several
years was positive for the weaker economies within the single currency
bloc.

The new E500 billion in funding capacity would not be enough to
match the medium-term funding needs of Italy and Spain, but it does
allow the ESM to act as “anchor investor” for new issues and possibly
buy sovereign bonds in the secondary market, Fitch said.

The text of the Fitch statement is below:

“The decision to raise the combined lending ceiling of the European
Stability Mechanism and the European Financial Stability Facility is
positive for vulnerable eurozone sovereigns.

As we have previously said, increasing the size of the eurozone’s
firewall is a necessary step to prevent potential contagion and thereby
to reduce the risk of self-fulfilling liquidity crises. It is in line
with our base case expectation that the eurozone authorities will show
sufficient will to devise, incrementally, an institutional and financial
framework that prevents a eurozone break up. We have characterised this
approach as “muddling through” and execution risk in this complex
project means that partial policy reversals and bouts of market
volatility are likely to recur.

The fresh lending capacity of EUR500bn does not match Italy and
Spain’s medium-term gross funding requirement (in December, we estimated
their combined gross funding need at EUR521.9bn for 2012 alone).
However, it boosts the funds’ capacity to act as an “anchor investor” in
new issues, and potentially to buy bonds in the secondary market to
counter contagion.

This approach would use EFSF/ESM funds to keep issuers in the debt
markets, rather than deploy the funds as an alternative to market
funding, making it unnecessary to build a firewall equivalent to the
entire gross financing requirement of peripheral countries. If
successful, this would help prevent self-fulfilling liquidity crises and
buy sovereigns time to implement austerity and structural reform.

The downside of increased support from official creditors would be
the perceived subordination of private investors. Were the official
sector to become the dominant source of funding for a government, yields
and funding costs could be driven higher as the private sector sought
increased compensation for the higher risk of subordination.

While an expanded firewall should reduce pressure on the European
Central Bank to intervene in sovereign bond markets via its Securities
Markets Programme, the speed and flexibility of ECB interventions mean
it would be positive if the SMP were to remain operational.

The Eurogroup announced an increase in the overall EFSF/ESM lending
ceiling to EUR700bn on Friday, alongside moves to speed up the
availability of the ESM’s paid-in capital, with a further acceleration
possible. A higher lending capacity had been anticipated in the press
and by some market participants, and the new total includes existing
EFSF commitments to programme countries, worth around EUR200bn.
Nevertheless, the ESM/EFSF’s fresh lending capacity has been raised
substantially, to EUR500bn from EUR300bn. This will be achieved
initially by allowing the two programmes to run concurrently from July
this year to the middle of 2013. From then, the ESM’s maximum lending
capacity will be EUR500bn, while the EFSF will not engage in new
programmes, as set out in its original timetable.”

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