Borrowing Beyond the European Stability Mechanism: Arranging Additional Facilities

Abstract

Since its arrival in late spring 2018 the Italian Government has presented a series of measures capable of questioning the sustainability of the Italian public debt. The key point is that, in the absence of a steady economic growth, spending measures may involve an increase in interest rates and a downgrade of public debt. In this case, without a significant correction, market access can be lost and debt burden might become unsustainable. In order to avert this scenario, Italy would be obliged to require assistance to the ESM machinery. Nevertheless, such possibility has brought to light that the ESM machinery may be unavailable for some reasons: disagreement on conditionality, unsustainability of debt and insufficiency of resources. Additional resources may come from the OMT programme, but its operation is subject to some constraints, like the market access status of the requesting country. In this context, it is useful to investigate whether and to what extent financial assistance may be sought elsewhere. A first route may be for the Euro countries to establish a borrowing facility within the ESM, but this must take into account the borrowing limits of the ESM. A second route may be for Euro countries to establish a parallel mechanism outside the ESM that may overcome some requirements of the ESM assistance. A third route may be for non-Euro countries to establish a lending facility, provided that conditionality is respected. A fourth route may be for Euro and non-Euro countries alike to establish a facility in the case of withdrawal from the monetary union with the purpose of preserving the stability of the EU.