The lending capacity of the euro-zone’s bail-out funds is coming under strain again. €289bn of the ESM’s €500bn lending capacity has already been committed and developments in Portugal, Greece and Ireland last week suggested that all three might need more money before long. What’s more, the region’s weak and undercapitalised banks may need more than the €60bn in direct recapitalisation that has so far been pledged. Meanwhile, Fitch’s downgrade of the French sovereign highlighted a risk that the ESM could face higher borrowing costs in future. These costs would be passed on to borrowers, implying that even if there is enough left in the pot to offer more support to troubled nations in future, loans might be provided at higher interest rates, making them less effective at improving debt sustainability.
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