The European Stability Mechanism (ESM) was set up as an international financial institution by the euro area Member States to help euro area countries in severe financial distress. It provides emergency loans but in return, countries must undertake reform programmes. Together with its predecessor, the European Financial Stability Facility (EFSF), it can lend a total of €700 billion.
With a paid-in capital of more than €80 billion, the ESM is one of the largest International Financial Institutions in the world. The ESM is the only official institution of the euro area. Combined with the EFSF, it has disbursed €250 billion in loans during the crisis, more than three times what the IMF disbursed globally during that period. It is one of the largest issuers of euro-denominated debt in the world. Based in Luxembourg, it has 155 staff from 35 countries including the United States, China, and Brazil.
During Europe’s sovereign debt crisis, the ESM and the EFSF helped to hold the euro together. They lent money to Greece, Ireland, Portugal, Spain, and Cyprus. Without this help, some of these countries would have needed to leave the euro.
No taxpayer money is spent in ESM or EFSF assistance programmes. Both institutions obtain their funds in financial markets. Since they are financially backed by euro area countries, they can borrow money at very favourable rates. These are then passed on to programme countries.
The ESM replaces the EFSF, a temporary vehicle set up in 2010. The EFSF cannot enter new assistance programmes but continues to be active in the bond market to manage its debt.