Hare Markets vs Tortoise Legislatures, No Matter What European Summits Decide

It's all somewhat worrying when financial items in much of the world's media refer to "ESM bailout funds" as if the European Stability Mechanism were already well established and operating in Luxembourg. Initially hoped to be up and running by July 2012 after a final draft was agreed by Eurozone leaders in Brussels on 02 February 2012, the ratification process, progressing fairly well up to the Netherland's Queen Beatrix granting Royal Assent on 05 July with formal endorsement on 13 July , has stalled for the time being.

This is not too good for country's such as Spain, most eager to see the former but temporary funding programme, the European Financial Stability Facility (EFSF) phased out and its supposed permanent replacement, the ESM in place. Spain has asked for funds from (a future) ESM to re-capitalise its banks which by some estimates at the European Central Bank (ECB) and Germany's Bundesbank, could amount to €100 billion.

The request was made at the European Summit in late June, where, in talks with other European leaders and Finance Ministers, Prime Minister Rajoy and his team agreed to limit the country's deficit to GDP ratio to 6.6 per cent in 2012, reducing to 4.5 per cent in 2013. Spain's National debt to GDP ratio was forecast to be 79.8 per cent for 2012 and 82.3 per cent for 2013 at the same meeting.

To meet these "obligations", the Government of Prime Minister Rajoy passed an austerity package last week totalling €65 billion.

Can Spain meet these commitments? Especially as the country is in recession and is burdened with an unemployment level of almost 25 per cent. With the austerity package working it might but without it unlikely, as Reuters reported from Madrid on 16 July citing the International Monetary Fund (IMF)'s Fiscal Monitor Report expects the deficit to reach seven per cent this year and still be 5.9 per cent in 2013. The Report also expects the National Debt to reach 90.3 per cent and 96.5 per cent of GDP in both respective years.

If Spain does get the billions to re-capitalise its banks direct from the ESM without the funds going through the Spanish Government - a process it wants to backdate to the beginning of the year - it then intends to remove a shed-load of debt off its National Debt figure thereby improving the country's National Debt to GDP ratio. This may well account for the major differences between the IMF Report and the figures issued and estimates provided by the Spanish Government.

Well, what do you know? It's that easy! Unfortunately for Spain's Government, I doubt whether the Markets will be so impressed because, ultimately, the Government has guaranteed the country's banks' liabilities. For about a year now, and especially since it became apparent that Spain might apply for ECB/EFSF funds, be it to shore up sovereign debt or its banks, financial commentators criticized Spain for understating its National Debt citing this reason and presumably the Markets likewise in calculating its bonds rates.

Certainly on 16 July the IMF's Report rocked Spain with the IBEX index falling three per cent, a drop also affecting Bank Santander, down 3.3 per cent and with fears in the Market that Spain may well need a sovereign bailout as well as the €100 billion for its banking sector, Spain's 10-year Government Bonds rose 2.31 per cent higher to close at 6.817 per cent, a rate considered close to unsustainable in the long run.

Progress then in ratifying the Treaty Establishing the (ESM) can't come soon enough for some Member States and whilst the required legislation is proceeding through the likes of Italy's Parliament or awaiting Presidential Assent in Austria, there are legal and constitutional challenges in a couple of countries which need tidying up.

Ostensibly the main issue is a matter of national sovereignty and what the country's written constitution allows when dealing with other nations, whether or not Member States of the European Union and/or Eurozone. Not stated but undoubtedly a factor, is the potential transfer of enormous funds to shore up those countries in particular stress.

Estonia's Supreme Court cleared the way for ratification after serious disputes since that February 2012 initial agreement only last Thursday, 12 July, by the narrowest of margins - 10 Justices in favour, nine against. Understandable considering that Estonia only has 1.3 million people and will need to contribute €1.3 billion, €1,000 per head!

In Ireland, a left-wing Independent MP unsuccessfully challenged the legality of the ESM under both Irish and EU Law and formal ratification should proceed in the very near future.

Taking longer and most importantly - Germany.

Backed by both Houses of the German Parliament and Chancellor Merkel - who warned such action might be taken on more than one occasion - but challenged by the Left Party, the Association of Family Businesses and some economists. The Constitutional Court is expected to give a ruling on 12 September - of course this year!

Not long then, except for Spain.