Fenech proposes, Gonzi and RCC dispose

During Tuesday’s debate in parliament on the ESM, after an exposition by the Prime Minister of the outcome of the latest EU summit, the Minister of Finance, Tonio Fenech, was quoted by the Times of Malta of 4th July 2012 saying that “It was the EFSF that had no seniority and was only on a par with other creditors; the permanent structure gave the ESM seniority. This was important and Malta would not budge from this concept.”

Thus, according to the Minister of Finance any lending made by the ESM would enjoy seniority in creditor status compared to other creditors, unlike the EFSF, and that this was a position on which Malta would absolutely not make any concessions.

It is ironic that Minister Fenech made this declaration in parliament when a few minutes earlier the prime minister had explained what was agreed in the EU summit and in the Eurogroup heads of state or government meeting. This is because the official Euro Area Summit statement, dated 29 June 2012 states, “We reaffirm that the financial assistance (to Spain) will be provided by the EFSF until the ESM becomes available, and that it will be then transferred to the ESM, without gaining seniority status.”

Furthermore, in his contribution to the Financial Times of July 3rd 2012, respected economist Martin Wolf wrote “It was also agreed that loans from rescue funds would not be senior to existing loans, which should reduce the risk of panics by lenders.”

It is only on paper that the ESM loans enjoy senior creditor status since in practice all existing loans undertaken by the EFSF, if transferred to the ESM (as in the case of Spain), which is possible by a decision by the Board of Governors of the ESM, would still not gain seniority status. Besides, on the basis of the equal treatment principle, it is now difficult to envisage that if another country, say Italy or Cyprus, demands assistance to its banks, such loans would be granted senior creditor status as this would imply that the private sector would demand a higher premium for lending to such banks, thus aggravating their funding difficulties.       

In any case, the EFSF will still remain in operation until June 2013, and therefore any lending directly to banks by the EFSF between now and June 2013 could be still transferred to the ESM without seniority in creditor status.

Therefore, while Tonio Fenech was making grand declarations on how Malta would not budge in that the ESM would retain its seniority in creditor status, the Eurogroup heads of government, with the Maltese delegation spearheaded by Lawrence Gonzi and Richard Cachia Caruana, had decided and agreed otherwise. If anything, Tonio Fenech’s declaration exposes the PM and RCC as not holding their ground in the stand claimed by Fenech. This, apart from the fact that Minister Fenech was apparently not made aware of what was decided and agreed by his Prime Minister and Consultant in the Euro Area summit of 29th June. But the, under GonziPN everything is possible!