The potential for eurozone members to bail out one of their number in the event of financial distress is very limited, says a report by Standard & Poor’s Ratings Services.
The report, ‘No Friends In Need: Low Probability For Sovereign Bail-Outs Among Eurozone Members’, uses the example of financial transfers by the German central government to heavily indebted regional (Länder) governments to assess whether similar (as yet unprecedented) arrangements at eurozone level would be possible.
At present, the probability of any eurozone country requiring such a bail-out is still very remote, but over the coming decades, ageing populations are set to create more substantial pressures on public finances.
The report says that the concept of financial rescue packages between eurozone members is explicitly forbidden under the ‘no bail-out clause’ of Article 104b of the Maastricht Treaty.
In addition, the debt levels of the lowest-rated eurozone sovereigns as a proportion of total eurozone GDP are much higher than the debt of most German Länder as a proportion of total GDP for the Federal Republic. Indeed, a transfer package worth 75% of Italy’s general government debt (the proportion equivalent to the assistance offered to Bremen and Saarland) would cost almost as much as the entire annual nominal GDP of Spain and Finland combined.
Both in terms of national finance and of domestic politics, more creditworthy eurozone governments might view exiting the euro as preferable to footing the bill for another eurozone member’s budgetary mistakes, says the report.