Sean O'Grady: Is Britain really going to have to pay for the bailout?
Saturday 26 March 2011
The UK will indeed be liable for about £3bn in loan assistance to Portugal if she is bailed out – but there is confusion over why.
Britain is not a party to the eurozone's current bailout fund, the European Financial Stability Facility, which, together with the IMF and with technical back-up from the European Central Bank, is the main director of funds to distressed nations, as was the case with Ireland last year (though not Greece, where the crisis predated its creation).
HM Treasury is, in any case, obliged to provide any funding for eurozone bailouts through its subscription to the IMF, but that is the same situation as applies to any other nation, from Pakistan to Ukraine. The EFSF has €440bn (£387bn) available immediately. The IMF has subscribed another €250bn, and, as with all IMF loans, the UK has a 4.8 per cent share of that – say €12bn.
The bigger confusion arises because the UK does help to support an older and now dwindling fund with a very similar name to the EFSF – the European Financial Stability Mechanism. The EFSM is run by the European Commission, and was originally a European balance of payments mechanism, a sort of mini-IMF. It has been used without much controversy in the past to assist Hungary, Bulgaria and Latvia, all outside the eurozone. When the Greek crisis erupted last May, the bailout mechanism was mobilised, renamed and became the EFSM, and helped fund the bailout to Athens. Its original funding of €60bn has been eroded to €37.5bn and is finite.
Moreover, much financial assistance to the troubled eurozone economies has been provided stealthily by the ECB, either by direct purchases of sovereign debt in secondary markets or accepting them as collateral from private sector national banks. Again, the UK has had no involvement in that.
All of these should be subsumed by the "grand bargain" that will create the European Stability Mechanism from 2013 – with clearer rules on how sovereign debt bondholders will have to take a "haircut". Apart from Portugal, the constitution of this overarching fund is what governments have been debating.
Apart from its international obligations, Britain is also free to offer bilateral assistance at any time to any troubled neighbour, as was the case with Ireland; Spain might too be regarded as systemically important, given the exposure of UK banks and its role as a trading partner, on the grounds of the national interest. George Osborne did, though, promise that the Irish move was sui generis.
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