European markets traded lower as the Slovak Parliament struggled to reach an accord over the expansion of the European Financial Stability Facility (EFSF).
The governing coalition of Slovakia – the only eurozone state yet to ratify strengthening the facility – is still attempting to reach an agreement on the matter.
The EFSF was created by the euro area member states (EAMS) on May 9 last year within the framework of the Ecofin Council.
The facility, as part of its overall rescue package of €750 billion, is able to issue bonds guaranteed by EAMS for up to €440 billion for on-lending to members in difficulty.
This is subject to conditions negotiated with the European Commission in liaison with the European Central Bank and International Monetary Fund, and to be approved by the Eurogroup.
Peter Vanden Houte, chief eurozone economist at ING, told Euromoney on Monday that a delay in the expansion of the EFSF could have serious consequences in the event of a Greek debt restructuring – potentially leading to further contagion of other peripheral members of the eurozone.
“It’s possible that, come December, the talks will be of a Greek restructuring,” he said. “If it comes to that, an expanded EFSF will be necessary to mitigate the possible spread of contagion to the eurozone’s periphery.”
Vanden Houte suggested that discussion in the markets had moved on from the July 21 talks on an expansion of the EFSF and on to the possibilities of leveraging the fund.
A Slovak rejection of the expansion would not only keep the fund at the smaller size, but would also delay any agreement on leveraging options. If markets have been working on the basis of the expanded fund, this could mean a severe blow for market confidence.
A delay would be problematic for Angela Merkel and Nicolas Sarkozy’s stated hopes to have a concrete plan for safeguarding the eurozone in place by the end of the month – a deadline already threatened by a week-long delay in the EU summit on the debt crisis.
Eurozone confidence will not be helped by a statement from outgoing ECB President Jean-Claude Trichet that the eurozone crisis has moved beyond its peripheral members and into some of the larger countries in the currency area.
“The crisis has reached a systemic dimension,” Trichet told legislators in Brussels. “Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.”