What about the second measure, the reduction of interest rate risk?

There are three different schemes for the second measure.

The first is a bond exchange. To recapitalise banks, the EFSF/ESM provided loans to Greece worth a total of €42.7 billion. These loans were not disbursed in cash, but in the form of floating-rate notes. Greece used the notes to recapitalise banks.

The ESM is now exchanging these bonds for fixed-rate notes, which it is then buying back for cash. This significantly reduces the interest rate risk that Greece bears. The ESM has raised all the funds that are needed for the bond exchange through issuing longer-dated bonds.

The second scheme foresees the ESM entering into swap arrangements. This scheme aims at stabilising the ESM’s overall cost of funding and reducing the risk that Greece would have to pay a higher interest rate on its loans when market rates start rising.

A swap is a financial contract that enables two counterparties to exchange the cash flow on two different securities, for instance, fixed-rate payments for floating-rate payments.

The ESM has now put the swap programme in place, and will continue to be active in the derivatives markets to maintain it.

The third scheme, known as matched funding, foresees the ESM charging a fixed rate on part of future disbursements to Greece. This would entail issuing long-term bonds that closely match the maturity of the Greek loans. This scheme will be implemented in 2018.

Market conditions may influence the degree to which the ESM can implement any of these three schemes.