The context
Euro zone debt crisis hits (2010)
Already struggling from financial turmoil that had washed up on its shores from the U.S. 2008-09 subprime mortgage collapse, a new home-grown crisis erupted in Europe in 2010. Markets began to mistrust a number of countries, requiring ever higher interest rates when they borrowed on the market. They judged them increasingly risky: their governments had let their deficits balloon, lost competitiveness, or allowed lax oversight of banks. Eventually, the unthinkable started to happen in 2010. Countries began to lose market access. They needed help; Greece was first to ask. The country received bilateral loans (Greek Loan facility) from the other euro zone countries on a bilateral basis.
A temporary backstop
The EFSF is established (June 2010)
The European Financial Stability Facility (EFSF), which was set up as a temporary solution in June 2010. The EFSF still exists as a legal entity and a big issuer of bonds, but it can no longer make new loans.
The ESM is established (October 2012)
The European Stability Mechanism (ESM) was set up in October 2012 as a successor to the EFSF. It is a permanent solution for a problem that arose early in the sovereign debt crisis: the lack of a backstop for euro area countries no longer able to tap the markets. The EFSF and ESM remain separate legal entities but share staff, facilities, and operations. Together, the EFSF and the ESM had €700 billion in firepower.
The programmes
EFSF and ESM disburse total of €254.5 billion (2010 – 2016)
The EFSF and ESM have so far disbursed €254.5 billion to five countries. They helped keep the euro together. They proved that cash-for-reform programmes work, and that countries that do their financial and structural homework emerge fitter and better equipped to grow. These programmes have also eased the debt burden on countries receiving loans, passing on low interest rates, and pushing out the repayment period. They testify to the solidarity among euro area countries, and are a telling example of how the crisis has brought Europe closer together.
EFSF assists three countries: Ireland, Portugal, and Greece (2010 – 2012)
Three countries knocked at the EFSF door for help. First came Ireland (February 2011), then Portugal (June 2011). Greece came back in March 2012. Fears the euro area would be torn apart grew. As events tumbled ahead, European leaders realised they needed to do more.
Spain first to get ESM disbursement (December 2012), Cyprus follows (May 2013)
Spain (December 2012) was the first programme country to receive disbursements from the ESM to recapitalise its ailing banking system. Later in May 2013, Cyprus received the first tranche of financial assistance in what became the first fully fledged ESM programme.
Greece gets third assistance programme (August 2015)
In the middle of 2015, Athens entered a new ESM programme of up to €86 billion. It was the third programme for the country, and followed months of tense negotiations. It is currently the only ESM or EFSF programme that is still active.
The results
The most visible example of the success of the two institutions is the improved performance of the countries that requested help. Cyprus (March 2016), Ireland (December 2013), Spain (December 2013) and Portugal (May 2014), successfully exited their EFSF/ESM programmes without a follow-up arrangement. After suffering severe financial distress just a few years ago, they emerged from European rescue loan programmes stronger and were able to return to normal market access (see figure below).
Greece also made great progress but, dogged by more initial problems than the others, it entered a new programme in 2015. With four successful programmes so far, the approach by the ESM and the EFSF underlines that Europe has found the right approach to the crisis.
ESM’s 5th anniversary
On 8 October 2012, the ESM formally began operating when the finance ministers of the euro area countries took part in the inaugural meeting of the ESM Board of Governors.
