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European Stability Mechanism managing director Klaus Regling attends a euro zone finance ministers meeting in Brussels on Nov. 7, 2019.

Johanna Geron/Reuters

A new mechanism to enable the issuance of joint euro zone debt to counter economic fallout from the coronavirus epidemic, as recommended by nine European leaders, could take up to three years to set up, the head of the bloc’s bailout fund said.

However, common ‘corona bonds’ could in theory be issued immediately if the bloc’s existing funding institutions were used, European Stability Mechanism (ESM) head Klaus Regling told the Financial Times.

France, Italy, Spain and six other countries called last week for work on a common debt instrument issued by a European institution to cushion the effects of the pandemic, which is on course to trigger a global recession.

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Germany and the Netherlands strongly opposed such a mechanism, and the nine states who supported it did not specify how it would work.

EU leaders gave the bloc’s finance ministers until April 9 to come up with ideas on how to further support the economy after the bloc relaxed state aid rules and debt limits to let countries spend to prop up their economies.

Regling said the euro zone was already issuing common debt when the ESM was borrowing on the market to lend to governments.

The European Union could also borrow jointly through the European Commission, which raised money against the EU budget, and through the European Investment Bank (EIB), owned jointly by EU governments.

“If you use existing institutions ... the EIB could do it immediately. The ESM is there. They can all issue mutualised European debt,” Regling said.

“Of course, one can also create a new institution if that is what the member states want. It would take one, two or three years, and member states have to come up with capital or guarantees, or assign future revenue.”

’TIME IS OF THE ESSENCE’

Euro zone finance ministers had suggested that governments use a precautionary credit line (ECCL) from the bailout fund worth up to 2 per cent of GDP to fight the crisis, a move that would also pave the way for unlimited European Central Bank bond purchases if needed.

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Leaders did not reject that suggestion last week, but did not clearly endorse it either.

Regling said that, to cover common short-term financing needs stemming from the outbreak, “I think the only way is to use existing institutions with existing instruments.”

The euro zone’s finance ministers are due to discuss the matter again on Apr.7. Luxembourg’s Pierre Gramegna expressed support for Regling’s proposal on Tuesday.

“COVID-19 warrants a common EU response,” he tweeted. “The EU Commission and EIB together with ECB have the tools to quickly implement the ESM proposals. Time is of the essence to overcome this crisis.”

ECB head Christine Lagarde; European Commission President Ursula von der Leyen; Charles Michel, the chairman of EU leaders; and Mario Centeno, president of the eurogroup of euro zone finance ministers, are due to discuss the matter further at 1300 GMT on Tuesday.

To secure an ECCL, a country has to submit to a European Commission analysis of whether its debt is sustainable, something that heavily indebted Italy is reluctant to do.

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However, Regling said that, given the circumstances, conditions attached to such a credit line could be minimal. “There should also be a commitment to respect EU surveillance frameworks ... it would be no more than that,” he said.

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