Where does the ESM stand?

Keeping track of the European bailout funds is hard enough, let alone trying to figure out when the changeover between the two largest ones, the EFSF and ESM, will take place.

Originally the plan was for the ESM to come into force on 1 July. However, this was then adjusted to the 9 July with eurozone leaders hopeful that they could announce it following their meeting that day. Now even that looks optimistic. Below we outline the state of play for the ESM treaty in the relevant parliaments:

Ratified: France, Greece, Slovenia, Portugal, Finland, Slovakia, Belgium, Netherlands, Luxembourg, Spain, Austria, Cyprus and Ireland

In the process of ratifying: Italy and Germany

In the next month: Malta and Estonia 

So when will it come into force? 

The next obvious target is the newly announced Eurogroup meeting on 20 July. One important point to remember is that it really comes down to Italy and Germany since, once it is ratified by members representing 90% of the capital subscription, it will automatically come into force. However, the process in these two countries is still uncertain and putting a definite date on completion is tricky.

In Italy the Senate needs to vote on it first, before the lower house can approve it, although there is no vote scheduled for the next week at least (the agenda gets updated on a weekly basis).

In Germany, both houses of the parliament have approved it, however, the Constitutional Court has asked the President to delay signing off on it due to the large number of challenges against the legality of the treaty – something which he agreed to. The court will analyse these challenges (thought to be around six distinct complaints) on the 10 July, although this could take a few days to complete. It will then decide whether to issue a temporary injunction against the treaty if any of the cases have merit. This seems unlikely and even Eurosceptic MPs such as the CDU’s Wolfgang Bosbach have said, "The judges do indeed decide only according to legal and constitutional criteria, but they also know what kind of impact a categorical 'no' would have in terms of foreign policy and financial policy."

So the situation is still unclear in the two countries that matter, but will hopefully become clearer in the next couple of weeks. There is still plenty of opportunity for a surprise but ultimately it looks increasingly likely that the ESM will be in force towards the end of the month. Whether Spain and Cyprus will be able to wait until then is even less certain though, and as we’ve heard today (and covered before) using the EFSF to disperse the funds throws up plenty of problems in itself (such as Finnish collateral demands).

Update 05/07/12 16.50

During his statement on the EU summit earlier this afternoon, Mario Monti has urged the Italian parliament to complete the ratification of both the fiscal treaty and the ESM "by the end of the month." Italian news agency AGI notes that only some 40 (out of 205) MPs from Silvio Berlusconi's party were listening to the statement. 

Update 05/07/12 15.30

It looks as if Malta has actually ratified the treaty, although in practice that makes no difference to when the ESM will come into force.

One final point to note is that, if the ESM does come into force quickly enough and does disperse the Spanish bailout, these loans will still be senior to other Spanish debt. The recent summit only concluded that loans which are issued by the EFSF then transferred to the ESM will remain pari passu (same seniority) with other debt.