ESM’s role in the European response
On 9 April 2020, the euro area finance ministers (Eurogroup) decided on a comprehensive economic policy response to the COVID-19 crisis. Concretely, three important safety nets for workers, businesses and sovereigns are established, amounting to a package worth € 540 billion. The ESM is the safety net for sovereigns and provides a Pandemic Crisis Support. On 23 April, the EU Heads of State of Government (European Council) endorsed this agreement. On 8 May, the Eurogroup agreed on the details attached to this credit line. After national procedures, the credit line was made operational by the ESM Board of Governors (the ESM’s highest decision-making body composed of the 19 euro area finance ministers) on 15 May 2020.
The Explainer below answers the most important questions in this context.
What part is the ESM expected to play in Europe’s concerted response to the coronavirus crisis?
- To address the coronavirus crisis, the ESM will establish a Pandemic Crisis Support, based on its Enhanced Conditions Credit Line (ECCL) available to all euro area countries.
- It will be available to all euro area member states, with standardised terms agreed in advance by the ESM governing bodies, reflecting the current challenges, on the basis of preliminary assessments by the European institutions.
- This is part of a concerted European response, which includes the European Commission with its safety net for workers called SURE and the European Investment Bank with its safety net for businesses.
- The Commission’s SURE initiative provides funding to Member States of up to €100 billion by covering part of the costs related to the creation or extension of national short-time work schemes.
- The European Investment Bank is offering liquidity support to help hard-hit small and medium-sized enterprises with an emergency support package of up to €200 billion.
What is the basis for euro area countries to become eligible for ESM support?
- Preliminary assessments by the European Commission, regarding financial stability risks, bank solvency, debt sustainability, and on the eligibility criteria for accessing the Pandemic Crisis Support, confirmed that each member state is eligible for receiving support.
- On this basis, the Pandemic Crisis Support is available to all euro area member states.
- These assessments were performed by the Commission, in liaison with the European Central Bank (ECB) and in cooperation with the ESM.
How much money would be made available to countries?
- Access granted will be 2% of the respective member states' gross domestic product as of end-2019, as a benchmark.
- Should all 19 euro area countries draw from the credit line, this would amount to a combined volume of around €240 billion.
- Although support will be available for all member states of the euro area, it is up to each member state to decide whether it wants to apply for it or not.
- So less than the theoretically available funds of €240 billion are expected to be requested.
- And even if a country applies for the credit line, funds do not have to be drawn. Credit lines are designed to be a protection or insurance.
Are there conditions attached?
- The only requirement to access the credit line will be that euro area member states requesting support would commit to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID-19 crisis.
- The credit line will be available until the end of 2022.
- This period could be adjusted if there is a need, given the evolution of the crisis.
- Afterwards, euro area member states would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions.
When does the country have to pay back the loan? How much will it cost?
- A country with a Pandemic Crisis Support can request to draw from the precautionary credit line.
- The ESM can disburse money under the credit line over a period of twelve months, which can be extended twice for six months.
- The loans would have a maximum average maturity of 10 years.
- The country will need to pay, in addition to the ESM cost of funding, a margin of 10 basis points (0.1%) annually, a one-off up-front service fee of 25 basis points (0.25%), and an annual service fee of 0.5 basis points (0.005%).
- This is lower than the pricing outlined for ESM’s usual precautionary credit lines and will help keep the cost of Pandemic Crisis Support to a minimum.
What is happening next?
- After endorsement from the Eurogroup, the ESM’s Board of Governors will meet to agree on making the financial support available to all euro area countries.
- A meeting is scheduled for 15 May.
What further steps are needed in case the ESM’s Pandemic Crisis Support is activated?
- A country requests access to the ESM’s Pandemic Crisis Support by sending a request to the Chairperson of the ESM Board of Governors.
- The stability support has to be approved by a unanimous vote in favour of the ESM Board of Governors (the 19 euro finance ministers, the ESM’s highest decision making body).
Will the use of the funds be monitored and who will perform that task?
- According to EU framework, the Member States that benefit from precautionary financial assistance from the ESM are subject to Enhanced Surveillance.
- This task is performed by the European Commission.
- As the Commission has detailed, it will focus its monitoring and the reporting requirements on the actual use of the funds to cover direct and indirect healthcare costs.
- For this purpose, the Commission will not perform ad-hoc missions in addition to the standard ones that take place within the European Semester.
- The Commission will report every quarter to the ESM Board of Directors.
What is the ESM’s Early Warning System?
- The objective of ESM’s early warning system is to determine, similarly to other creditors, the country’s ability to repay its loans.
- The ESM will analyse the repayment capacity for the next 12 months and whether there is any risk that the payments due might not be made.
- In the short-term, this requires an assessment of the country’s liquidity and market access.
- The work will take into account and complement the economic and fiscal analysis done by the European Commission.
- This has nothing to do with conditionality.
What is the impact on the ESM’s funding activities?
- There is no immediate impact on our funding volumes and funding activities.
- We will communicate the potential impact on our funding activities when we face the request of a country.
- The agreed maximum average maturity of 10 years and the agreed modalities for disbursements will enable us to use a wide range of funding instruments to raise potential additional funding needs smoothly over time.
- In general, a country can draw up to 15% of the aggregate amount of the Pandemic Crisis Support approved for the respective member state in cash per month. It is possible for the ESM to provide additional liquidity related to a particular disbursement when it has the funds available.
- The commitment to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID 19 crisis offers the option to fund the potential additional liquidity needs through the issuance of social bonds.
Could the ESM’s credit rating be at risk?
- The ESM’s long-term credit ratings are AAA, Stable Outlook (Fitch) and Aa1, Stable Outlook (Moody’s).
- The credit ratings assigned to the ESM by the credit rating agencies should not be impacted by new loans under the Pandemic Crisis Support.
- Moody’s confirmed on 28 April that the ESM's Aa1 rating would not be affected by the use of the Pandemic Crisis Support credit lines, thanks to its strong credit.
- Fitch also confirmed 1 May that the ESM’s coronavirus response is consistent with its AAA credit rating. Fitch assesses the ESM's credit quality based on a conservative scenario assuming the full use of its €500 billion lending capacity, meaning the AAA rating would tolerate up to €410 billion of extra lending, all else being equal.
Board of Governors