Malta non-committal on COVID-19 eurobond, Scicluna prefers credit lines

The original story, published in MaltaToday Midweek, incorrectly stated that the minister did not support a eurobond. This is incorrect. As quoted in the story itself, Edward Scicluna said Malta cannot be against or in favour until it knows the details of any eurobond.

Malta is being cautious about supporting a COVID-19 eurobond, or ‘coronabond’ so that member states can receive a massive liquidity injection to keep public spending up.

Nine eurozone countries sent a letter last week to the EU President Charles Michel, asking for a common debt instrument that can help them mitigate the damage from the shuttered economy caused by the coronavirus crisis.

Belgium, France, Italy, Luxembourg, Spain, Portugal, Greece, Slovenia and Ireland said the Eurobond could help them secure long-term financing to counter the damage of the pandemic.

“We are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all. And we are collectively accountable for an effective and united European response,” the letter said.

But Malta is non-committal on the eurobond, with northern countries like Germany and the Netherlands leading the staunch opposition of the debt instrument.

“Issuing a eurobond [means] Malta may become jointly and severally liable to debts of another country. Malta may go as far as accepting liability up to a particular share of the outstanding EU debt but not beyond,” finance minister Edward Scicluna told MaltaToday.

In this Scicluna echoed the cautious stand of countries like Germany who are generally sceptical of debt mutualization, because it fears other countries would be free-riding on its fiscal prudence.

Eurobonds is debt issued under joint and several liability, to provide member states with liquidity to deal with the large economic shock from the COVID-19 epidemic.

When this debt is issued by the European Investment Bank or European Central Bank, such bonds come with a high credit rating for banks to consider them as “safe assets”.

Italy needs the money after launching a €25 billion fiscal stimulus, with its government deficit expected to surge as the economy contracts sharply. France wants the EIB, the EU’s lending arm, to issue these bonds, with the European Stability Mechanism (ESM) – the eurozone’s rescue fund – offering a guarantee.

A substantive eurobond would go far in helping member states afflicted by austerity and hit further by the coronavirus pandemic.

A quicker route to a fiscal stimulus could come from the European Central Bank, which announced it would buy €750 billion in public and private-sector securities that can be used flexibly.

Scicluna however said Malta is not willing to take up the debt for other countries. “Malta is in favour of solidarity towards an affected country. We express this ourselves when we request the EU to agree to burden-sharing on migration. However while with migrants the story ends once the migrants are flown to another EU member state, with financial borrowing the story is much more complicated.

“When we chipped in the past financial crisis’s bailout, we contributed about 3% of GDP, a rather high figure – but at least it was capped. It was not open-ended. We cannot be in favour or against a Eurobond unless the details of this bond are given,” Scicluna said.

Malta prefers to use the approved instruments of the ESM, which can issue credit lines to sound but stressed countries, including Malta.

“ESM precautionary credit lines are designed to maintain access to market financing for ESM Members whose economic conditions are still sound but may come under stress. Two types of credit lines are available: precautionary conditioned credit line (PCCL) and an enhanced conditions dredit line (ECCL).”

But Scicluna said the hesitancy of using these credit lines is at the moment down to the reputational risk associated with borrowing from the ESM, since the ESM is associated with bailouts.

“However if many countries decide to make use of these credit lines, the ESM would be seen as a normal European bank. Having said that, all loans would be ‘conditioned’. Unlike eurobonds the credit would be available and used for specific purposes in the interest of the creditor countries providing the capital and the guarantees. It should therefore garner full support from around all member states.”

The member states supporting the coronabonds also support specific funding for COVID-19 related spending.

“By giving a clear message that we are facing this unique shock all together, we would strengthen the EU and the Economic and Monetary Union and, most importantly, we would provide the strongest message to our citizens about European determined cooperation and resolve to provide an effective and united response,” the member states said in their letter to the EU Council.