European stability mechanism: two steps

The eurozone is forever taking two steps backwards, so it is a relief when it takes a small one forward. Monday’s decision by the bloc’s finance ministers that the European Stability Mechanism, the eurozone’s permanent bail-out mechanism, will not have preferred creditor status, is an example. It was a mistake to put such a hulking creditor second only to the International Monetary Fund in the recovery queue. Policymakers should have foreseen that this would make private investors reluctant to buy sovereign bonds: they would be stuck with whatever was left after the ESM was made good. Two cheers for a sensible U-turn.

The move applies only to Greece, Ireland and Portugal. The question is whether it will facilitate their return to the markets. Irish finance minister Michael Noonan appeared in no doubt that it would; indeed, Dublin says it plans to “test” the markets again in the third quarter of 2012. But Irish bond yields across the maturity spectrum barely responded to the ESM move; a lot of other positive things must happen over the next 15 months if Ireland is to win back investor confidence.