ESM is the European Stability Mechanism. In Italy we call it MES, Meccanismo Europeo di Stabilità, but the proper word should be mess. A real mess.
You can think about the ESM as a piggy bank for unfortunate countries, if you believe in fairy tales.
Well, the issue is that ESM provides money to the Eurozone countries when the market refuses to buy their sovereign bonds, that is good.
Unfortunately, loans are conditioned. That it means business is made from the point of view of the lender. If you are asking why ESM should provide money if the market does not, you are asking a good question.
Like any others, ESM too wants is money back with interest. And if your sovereign debt is unsustainable, before they give you a loan, ESM demands the involvement of the private sector. What?! This is an educated way to say that you must default. That is quite bad.
A default on sovereign debt involves the banking system of a country, which usually has most of the sovereign bonds. At this point you can think that you don't give a damn about the whole matter because you have no bonds and hate those damn bankers. But wait a minute, the best is yet to come.
Because you have your money in a bank, if they are in trouble, you are too. Now, in the Eurozone, a government cannot save banks anymore, and a Resolution Committee is now in charge when a bank defaults. Pretty worried?
Resolution means to sell whole of the bank’s assets to repay liabilities. But, because liabilities, in those troubled situations, are often more than assets, someone doesn’t get his money back. That is bad.
Of course, first to lose their money are the owners of the share capital. Second, are the investors who bought debt bonds. They are either institutional investors or retailers.
If it is not enough, customers pay the bill. Deposits over one hundred thousand euros are involved. Under that amount are granted with the Resolution Fund of about sixty billions. Estimated to be one percent of deposits granted. ESM in 2024 will double this Resolution Fund and they believe it will be enough. Yes, they believe. That is worse than bad.
If you are a British reader you may be happy not to be part of this real MES called Eurozone. Sorry, I would say a mess, but is the same
