№265. Liquidity in times of crisis: Even the ESM needs it
№265. Liquidity in times of crisis: Even the ESM needs it

Author(s): Thomas Mayer, Daniel Gros
Subject(s): Economic policy, Government/Political systems, Financial Markets, Fiscal Politics / Budgeting
Published by: CEPS Centre for European Policy Studies
Keywords: ESM; Liquidity; European rescue fund; European Central Bank;
Summary/Abstract: This paper argues that the new permanent European rescue fund, the European Stability Mechanism (ESM), should be provided with a liquidity backstop by having it registered as a bank – and be treated as such by the European Central Bank. If the crisis were to become acute again, the ESM would stand ready to intervene in secondary markets, potentially with almost unlimited amounts of funding. Access to central bank financing will be crucial in a future crisis, because in such a crisis risk aversion is likely to be extreme, and even the ESM might not be able to raise at very short notice the huge sums that might be required to prevent a breakdown of the financial system. Hundreds of billions of euro might be needed just to top up the programmes for Greece, Ireland and Portugal – and Spain and Italy may require more than a thousand billion euro. Sums of this order of magnitude cannot be raised quickly by a new institution. Simply increasing the headline size of the ESM might thus be of little use.

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