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Intergovernmental support mechanisms

The European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) are  intergovernmental support mechanisms created by the euro area Member States.

EFSF was created as a temporary rescue mechanism, following the decisions taken on 9 May 2010 within the framework of the Ecofin Council. In October 2010, it was decided to create a permanent rescue mechanism, the European Stability Mechanism (ESM). The ESM entered into force on 8 October 2012.

From this date onwards, the ESM became the main instrument to finance new programmes. In parallel to the ESM, the EFSF continued with the ongoing programmes for Greece, Portugal and Ireland.

 European Stability Mechanism (ESM)

The ESM is a permanent international financial institution that assists in preserving the financial stability of the European Union monetary union. It is an intergovernmental organisation under public international law and it currently is the primary support mechanism to euro area Member States. 

The ESM issues bonds or other debt instruments on the financial markets to raise capital to provide assistance to Member States. Unlike the EFSF, which was based upon euro area Member State guarantees, the ESM has total subscribed capital of €700 billion provided by euro area Member States. €80 billion of this is in the form of paid-in capital with the remaining €620 billion as callable capital. This subscribed capital provides a lending capacity for the ESM of €500 billion.

Instruments

Financial assistance from the ESM will in all cases be activated upon a request from a Member State to the Chairperson of the ESM's Board of Governors and will be provided subject to conditionality appropriate to the instrument chosen. The initial instruments available to the ESM have been modeled upon those available to the EFSF:

  • Provide loans to a euro area Member State in financial difficulties;
  • Intervene in the debt primary and secondary markets;
  • Act on the basis of a precautionary programme;
  • Provide loans to governments for the purpose of recapitalisation of financial institutions

Each instrument will be linked to a Memorandum of Understanding that details the appropriate conditions a Member State has negotiated with the European Commission, in liaison with the European Central Bank, for financial support as well as the monitoring and surveillance procedures to ensure a Member State is progressing towards financial stability.

Overall, the ESM provides substantial advantages for all participants, thanks to its more robust capital and enhanced governance structure. It will be able to react quickly and decisively to financially support Member States in difficulty; it will be more insulated from the rating migration of Member States; and assistance provided by the ESM will not be rerouted to Member States in public finance statistics.

Background information:

>> Treaty Establishing the European Stability Mechanismpdf, signed 2 February 2012

>> ESM website

European Financial Stability Facility (EFSF)

The EFSF was created in response to the unprecedented financial crisis that began in 2008. It was established, as part of a wider safety net, to provide temporary stability support to euro-area Member States.

It is a société anonyme set up under Luxembourgish law on 7 June 2010, as part of the May 2010 package, mandated to provide financial assistance on a temporary basis and thus able to enter into new programmes only until 30 June 2013; although the EFSF will continue to service existing commitments thereafter.

The EFSF provides financial assistance to euro area Member States, linked to appropriate conditionality. It obtains financing by issuing bonds or other debt instruments on the financial markets backed by guarantees of the shareholder Member States. These guarantees total €780 billion.

A Member State subject to EFSF financial assistance may request an opt-out of the guarantee structure, thus effectively requesting that its guarantees are no longer used for any future lending. As a result of the Greek, Irish and Portuguese programmes, the EFSF has effective guarantees totalling €726 billion that provide a lending capacity of €440 billion.

Instruments

The EFSF is authorised to use the 4 instruments described in the ESM section under the same conditions. EFSF lending is ranked pari passu with other creditors.

In addition, the Heads of State or Government of the euro area Member States agreed on 26 October 2011 to maximise the capacity of the EFSF by providing two additional lending mechanisms.

  • Sovereign partial risk protection: The EFSF would provide a partial protection certificate to newly issued bonds of a Member State. The certificate would give the holder a fixed credit protection of 20-30% of the principle amount of the bond.
  • Co-Investment Fund: The creation of a Co-Investment Fund would allow a combination of public and private funding which would then be used to purchase bonds on either the primary and secondary markets on behalf of a beneficiary Member State.

Background information

>> EFSF website

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