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Inauguration of the ESM: What is it all about?

On the very first day of its official launch, Moody’s spoiled the inauguration party of the European InStability Mechanism party by branding it with a negative outlook. So what it the ESM all about? Let’s take a closer look to its mechanics. As part of its synthetic structure all 17 member countries have to fund €80 bil. of paid- in capital, which will serve as fist loss backstop for the remainder of the €620 bil. callable capital. (What is more interesting is that ESM shareholders shall be obliged to pay on demand such capital within 7 days, but let’s focus on the first phase of funding). The payment schedule of that capital (instead of five equal pro rate annual payments) now comprises 3 payments of 40%, 40% and 20% each that will have to be paid in within 15 days of the ESM inauguration, i.e. yesterday. In plain English, October 23 is the deadline by which cash-strapped Spain, Greece and Italy has to pay-in the first 40% of its contributions. What happens (at least on paper) if a member is unable to pay-in. For as long as such failure continues, the member country shall be unable to exercise any of its voting right. So in that scenario (which is not far-fetched at all) the viable AAA-rated countries, (i.e. Germany to mention one) will have to fit the bill again.

Dafni Serdari
Market Analyst
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