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Treaty establishing the European Stability Mechanism (ESM) signed

11.07.2011 - The signing of the Treaty paves the way for the ESM to take over from the European Financial Stability Facility and the European Financial Stabilisation Mechanism in July 2013

On 11 July, finance ministers of the 17 euro-area countries signed the Treaty establishing the European Stability Mechanism (ESM). The Treaty follows  the European Council decision of 25 March 2011 and builds on an amendment of Article 136 of the Treaty on the Functioning of the European Union (TFEU).

In July 2013, the ESM will assume the tasks currently fulfilled by the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Although the Treaty was signed by the 17 euro-area countries, the ESM will also be open to non-euro area EU countries for ad hoc participation in financial assistance operations.

Financial assistance under strict conditions

Based in Luxembourg, the ESM will will provide financial assistance to euro-area Member States following mutual agreement and under strict conditions.  Financial assistance will only be provided if it is considered as necessary to ensure the financial stability of the euro area as a whole. Any euro-area Member State receiving assistance must implement a macro-economic adjustment programme and a rigorous analysis of public-debt sustainability, and foresee IMF participation in liaison with the ECB. The ESM may, exceptionally, decide to purchase bonds issued by an ESM Member on the primary market if this maximises the cost efficiency of the financial assistance.

Strengthened effective lending volume

The ESM's initial maximum lending volume, after the EFSF has been completely wound down, is set at €500bn. Its capital stock of €700bn will ensure that lending can effectively be made up to this amount and consists of €80bn in paid-in shares and €620bn in callable shares. National contributions are established with a contribution key and would increase automatically if a non-euro-area country were to join the euro area. 

Provisions for negotiations with creditors

Collective action clauses (CACs) will be included as of July 2013 in all new euro-area government securities with maturity above one year. However, ESM financial assistance based on assistance programmes that were already in place before the signature of the ESM Treaty are exempt from this provision.  The standardised form of CACs will ensure an equal legal basis for all countries in their negotiations with creditors, so that creditors can decide by qualified majority on case-by-case changes to the terms of payment.

As of 1 July 2013, the ESM will enjoy preferred creditor status similar but junior to  the IMF. Euro-area Member States will support equivalent creditor status of the ESM and that of other EU Member States lending bilaterally alongside the ESM.

Financing ESM assistance

Borrowing on the capital markets, ESM financial assistance pricing will cover ESM funding costs plus an additional margin determined by the ESM Board of Governors. As of 2013, euro-area countries will pay the initial paid-in shares in five annual instalments ensuring to maintain a minimum 15 % ratio between paid-in capital and the outstanding amount of ESM issuances. A temporary exemption to the contribution key would be granted to new euro-area countries with a GDP below 75% of the EU average.

Next steps

The treaty now needs to be ratified  by the euro-area Member States before 31 December 2012 to enter into force following approval of signatories representing no less than 95 % of the total subscriptions.

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