The eurozone is for ever taking two steps backwards, so it is a relief when it takes a small one forward. Monday’s decision by the bloc’s finance ministers that the European stability mechanism, the eurozone’s permanent bail-out mechanism, will not have preferred creditor status, is an example. It was a mistake to put such a hulking creditor second only to the International Monetary Fund in the recovery queue. Policymakers should have foreseen that this would make private investors reluctant to buy sovereign bonds: they would be stuck with whatever was left after the ESM was made good. Two cheers for a sensible U-turn.
The move applies only to Greece, Ireland and Portugal. The question is whether it will facilitate their return to the markets. Michael Noonan, the Irish finance minister, appeared in no doubt that it would; indeed, Dublin says it plans to “test” the markets again in the third quarter of 2012. But Irish bond yields across the maturity spectrum barely responded to the ESM move; a lot of other positive things must happen over the next 15 months if Ireland is to win back investor confidence.
There are two problems with the ESM move. One is that it is almost irrelevant for Greece. True, only the gods (and, of course, the Greeks) can save the Greeks, who may be dependent on emergency external funding for years. The second problem is more serious: European taxpayers – the ultimate paymasters of the ESM – will now be on a par with ordinary private investors in the queue to be repaid after a sovereign default. That is likely to be unpopular; it may complicate approval of the new ESM structure.