By invitation: ESFS and should we secure foreign obligations?

01.10.2011, 15:23

Randu Riiberg, attorney-at-law and partner of Eversheds Ots & Co, writes about the ongoing debate whether the Riigikogu should decide for or against securing the obligations provided by the framework agreement of European Financial Stability Facility (EFSF).

Recently, in addition to the general theoretical discussion – to participate or not to participate – also a procedure-related side was added. More specifically, who, at a state level, can decide whether to secure the obligations provided by the framework agreement of EFSF and its amendments. In addition, within whose competence is the later approval of a specific loan of EFSF by the Republic of Estonia.

Both the Chancellor of Justice and the experts of constitutional law thought that joining with EFSF in the way it was planned is not in conformity with current laws and this is why it is necessary to change the State Budget Act before taking the decision, and to ensure engaging Riigikogu in approving specific EFSF loans later because these financial obligations are that important for the state

Despite that, it can be said beforehand, that the decision of the state about securing is a foregone conclusion – state guarantee is provided for the debt obligations of EFSF.

This kind of behaviour is a necessary activity by the state at the given phase, for example to demonstrate solidarity and to contribute, at least for a short term, to the financial stability in the markets. It has to be noted that the state does not bind the guarantee provided by this decision with securing a financing for a specific country, because it demands a supplementary decision by the state.
The purpose of the framework agreement – supporting the euro area member states that are in financing difficulties because of extraordinary circumstances to ensure the financial stability of the euro area – speaks also in favour of supporting.

Thus it can be said that we would not make the general decision to grant the security just because of popularity. The purpose is noble, is it not?

But if we lay the purpose of the framework agreement of EFSF aside and take a closer look for who EFSF is considered at the moment, a question arises whether it is possible to implement the framework agreement of EFSF, and its regulation, in respect of Greece? In case of Greece, can we talk about extraordinary circumstance as defined in framework agreement?  They are more likely conscious decisions of Greece, which have resulted in the inability of Greece to perform its obligations.

Taking into consideration the purpose of the framework agreement of EFSF, the further decisions of Estonia and other member states of the euro area about agreeing to secure specific financing solutions have to be carefully thought through. Popularity in the eyes of other euro area countries is not the best reason for making further decisions. Solidarity does not mean the obligation to agree with everything at all costs.

The state must convince us, that it places itself in the role of a careful creditor in case of further specific financing decisions and assesses the capability of the borrower to service the loan to be given. Banks are not ready today to grant a loan against assets but also want a positive cash-flow. The state has to follow this principle as well – any country that receives financing from EFSF in the future must be capable of servicing its loans.

To consider whether to be solidary with other countries in the future, it has to be kept in mind among other things, that for example at solving Greek problems, avoiding the bankruptcy of Greece to prevent the spreading of uncertainty in the financial system has been the noticeable aim so far. It is difficult to believe that with the measures to be implemented it has been hoped to resolve Greek problems. If so, this means, that the larger countries of euro area can be prepared to make allowances in the future and provide financing for Greece in the course of EFSF to postpone the arrival of uncontrollable bankruptcy.

The euro area has to gain time already for developing the bankruptcy mechanism for the member state of EU. The question is, whether we are ready to pay the price, which is incidental to deferring the bankruptcy? It has to be mentioned that the solution to stay insolvent that is being discussed about would influence also private creditors due to the risk incidental to insolvency – this in turn would influence the German and French banks in whose portfolios there are treasury bills of Greece in considerable amounts.

Based upon the above-mentioned, not all the decisions of euro area countries that have been solidary with us have been made perhaps on the same grounds on which we, as the state of Estonia, could make them. Thus, the general political decision of agreeing to secure the EFSF obligations has to be followed each time by a thorough assessment of specific financing solutions to prevent giving money to the state which cannot refund it.

Randu Riiberg
Attorney-at-law, partner