Context Information

During EFSF/ESM financial assistance programmes, loans to beneficiary countries are provided in one or more tranches, which may each consist of one or more disbursements. The ESM Board of Directors (where all 19 ESM Members are represented) decides on the disbursement based on a proposal from the Managing Director, taking into account the European Commission’s report on the compliance with the agreed reforms by the beneficiary ESM Member.

Each disbursement has a pre-defined purpose determining how a beneficiary country should use the funds. A common use of EFSF/ESM programme funds has been to finance a country’s budget, known as fiscal needs, but there are also other country-specific uses. In the Spanish programme, for example, the Spanish government dedicated the entire amount the ESM disbursed to bank recapitalisation.

For early EFSF disbursements to Ireland and Portugal, so-called back-to-back funding was applied – which means that certain EFSF bonds were earmarked to finance a loan to a beneficiary country so that the size and maturity of the EFSF bond exactly matched the amount and maturity of the loan. 

This type of funding was largely replaced by a strategy under which funds raised through bond and bill issuances are not attributed to a particular beneficiary country. Instead, under this diversified funding strategy, funds are raised through a variety of instruments, then pooled and disbursed to programme countries. The only type of loan where back-to-back funding continued to be used were loans to beneficiary countries for bank recapitalisation. Disbursements for this purpose are cashless – provided in the form of EFSF or ESM bonds and/or bills. Standard EFSF/ESM loans, provided as part of a macroeconomic adjustment programme, were disbursed in cash.