EU finance ministers agree on capital, ESM loan pricing

The euro zone's permanent bailout fund, the European Stability Mechanism, will be backed by paid-in and callable capital and offer loans more cheaply than the temporary facility does now, a euro zone source said.
The ESM, which is to have an effective lending capacity of 500 bln euros, will be backed by 80 bln euros of paid-in capital and 620 bln of callable capital, the source said.
The agreement was reached at an extraordinary meeting of European Union finance ministers on Monday devoted to sorting out remaining technical details of the euro zone's comprehensive response to the sovereign debt crisis.
The comprehensive package is to be approved by EU leaders on March 24-25.
Euro zone leaders asked finance ministers on March 11 to come up with the appropriate mix of paid-in capital, callable capital and guarantees to support the effective lending of the ESM, which the euro zone would like to have a triple-A rating.
The euro zone source said no guarantees would be used.
The ESM, which will start operating from mid-2013, will offer loans at funding costs plus 200 basis points for loans up to three years and plus another 100 basis points for loans longer than three years. There will be no service charge.
The current bailout fund, the European Financial Stability Facility (EFSF), offers loans with a margin of 300 basis points for up to three years and 400 basis points over three years plus a one-off fee of 50 basis points.
Agreement on the ESM capital structure was not straightforward, because of objections of six EU countries to the key used for the capital contributions.
The six countries said the key used for government guarantees which now support EFSF borrowing — the European Central Bank capital key — was unfair, because it favoured richer countries.
The source said euro zone countries therefore backed a proposal from Estonia which based the ESM capital key 75% in a country's Gross National Income (GNI) and 25% in the ECB key.