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No, the conditions of the PCS will not change. The changes to the treaty do not impact the PCS instrument. For more see the Explainer on Pandemic Crisis Support.
The ESM Treaty was revised to provide a legal basis for a set of new tasks assigned to the ESM. These tasks were part of a wider package of measures approved the by Heads of State or Government in December 2018 to complete the Banking Union and to strengthen further the Economic and Monetary Union (EMU) and the ESM. This included the introduction of the common backstop for the Single Resolution Fund (SRF), to be provided by the ESM on behalf of the euro area, as well as the further development of the financial assistance instruments and the role of the ESM.
The signature of the revised Treaty early next year will pave the way for the ratification process of the revised Treaty in the 19 ESM Member States.
No. After the establishment of the ESM common backstop, the Direct Recapitalisation Instrument for banks will be removed from the ESM’s toolkit of financial assistance instruments.
Decisions on loans and disbursements will be taken by the ESM Board of Directors (consisting of high-level officials from the 19 euro area finance ministries) by mutual agreement and on a case-by-case basis, guided by certain criteria. Such decisions should be taken within 12 hours of the SRB’s request, but in the case of a particularly complex resolution operation, the ESM Managing Director may agree to lengthen the deadline to up to 24 hours.
The Board of Directors may take a decision under an emergency voting procedure (qualified majority of 85% of the votes cast) if the European Commission and the ECB conclude that a failure to urgently adopt a decision would threaten the economic and financial sustainability of the euro area. A similar emergency voting procedure exists since 2012 for ESM’s financial assistance instruments.
The ESM common backstop will be used only as a last resort, in the situation that the SRF is depleted, and the Single Resolution Board (SRB) is not able to raise sufficient contributions or borrow funds from other sources at acceptable rates.
The common backstop was initially planned to be introduced by 1 January 2024. However, at its meeting on 30 November 2020, the Eurogroup decided to introduce the backstop in the beginning of 2022. This follows an assessment that sufficient progress has been made in reducing risks in the banking sector (see Monitoring Report on Risk Reduction Indicators, November 2020).
The criteria by which risk reduction was measured can be found in the “Term sheet on the European Stability Mechanism reform” (p.2, footnote 1).
The nominal cap for ESM loans to the SRF is set at €68 billion. This figure is expected to be above the target level of the SRF (1% of covered deposits in the banking union) when the ESM backstop is introduced in 2022. If the credit line is used, the SRF will pay back the ESM loan with money from bank contributions within three years, although this period can be extended so that the total maturity is up to five years. As a result, it will be fiscally neutral over the medium term.
The Single Resolution Fund (SRF) is a fund established by the EU for resolving failing banks in the context of the Banking Union. It is financed by contributions from the banking sector, not by taxpayer money. In the event that the SRF is depleted, the ESM can act as a backstop and lend the necessary funds to the SRF to finance a resolution. To this end, the ESM will provide a revolving credit line.
If non-euro area Member States join the Banking Union, the ESM and non-euro area Member States will together provide the common backstop to the SRF, through parallel credit lines.
Access to an Enhanced Conditions Credit Line (ECCL) is open to ESM Members that do not comply with some of the eligibility criteria required for accessing a Precautionary Conditioned Credit Line (PCCL) but whose general economic and financial situation remains sound. The requesting country has to sign a Memorandum of Understanding (MoU) detailing policy conditionality, aimed at addressing the remaining weaknesses, and requiring a continuous respect of the eligibility criteria which were considered met when the credit line was granted. Compliance with conditionality will be assessed on the basis of quarterly compliance reports submitted to the ESM Board of Directors. The ESM Member has the right to request funds at any time during the availability period according to the agreed terms.
If an ESM Member no longer complies with the eligibility criteria for the PCCL, access to the credit line will be discontinued, unless the Board of Directors decides by mutual agreement to maintain the credit line. If the country has drawn funds before the non-compliance is established, an additional margin will be charged.
Access to a PCCL will be based on eligibility criteria and limited to ESM Members where the economic and financial situation is fundamentally strong. As a rule, ESM Members need to meet quantitative benchmarks and comply with qualitative conditions related to EU surveillance. The eligibility criteria include a track record of two years preceding the request for a PCCL with a general government deficit not exceeding 3% of GDP, a general government structural budget balance at or above the country specific minimum benchmark, a debt/GDP ratio below 60% or a reduction in the differential with respect to 60% over the previous two years at an average rate of 1/20 per year. In addition, the requesting country should have access to international capital markets on reasonable terms and a sustainable external position. It should also not be experiencing excessive imbalances or severe financial sector vulnerabilities.
In the case of PCCL, there will be no need for the requesting country to sign a Memorandum of Understanding (MoU). Instead, the country will specify its policy intentions in a Letter of Intent (LoI), committing to continuous compliance with the eligibility criteria. Continuous respect of the eligibility criteria will be assessed at least every six months. The ESM Member has the right to request funds at any time during the availability period according to the agreed terms.
Precautionary credit lines are available for euro area Member States with sound economic fundamentals, which could be affected by an adverse shock beyond their control. In other words, precautionary credit lines intend to prevent potential small crises from turning into more serious ones that may make it necessary for the Member State to request an ESM loan with a full economic adjustment programme. The International Monetary Fund (IMF) also has precautionary credit lines and several countries have used them successfully in recent years.
Two types of credit lines are available in the ESM toolkit: a Precautionary Conditioned Credit Line (PCCL) and an Enhanced Conditions Credit Line (ECCL). The agreed reforms are meant to make the precautionary credit lines more effective.
Since 1 January 2013, bonds issued by euro area governments must include CACs. However, these are currently “double-limb CACs”, which require two separate majorities to approve a change in bond terms: one at the level of each “series” and one at the level of all “series” combined. This means that it is currently easier for holdout investors to block a restructuring by concentrating their investment in a single “series”, compared to a single-limb CAC, where this strategy is not sufficient, as described above.
Single-limb CACs are meant to address the problem of so-called holdout investors. Holdout investors in bonds can act strategically to take advantage of the problem a country faces and therefore deepen the crisis. In the past, certain firms have specialised in distressed sovereign debt by purchasing sovereign bonds at steep discounts. They then resisted any change of the terms of the bonds with the intent of subsequently litigating to get paid back in full, most of the time at the expense of the other bondholders. This strategy is feasible if the holdout investor can buy enough bonds to form a blocking minority in a restructuring vote. This is much easier if the voting system requires a majority within each “series”.
Single limb CACs address the described problem in the current voting system.
Research suggests that the change will not have a meaningful market impact on sovereign bonds.
Collective action clauses are clauses in the documentation of a bond that allow changes to the terms of bonds that are subject to a vote by their holders. If a qualified majority approves the change, it becomes effective for all those bonds. Unlike for companies, there is no bankruptcy or restructuring procedure for sovereign issuers. Therefore, collective action clauses in sovereign bonds help make sovereign debt restructuring more orderly and predictable. A sovereign state’s bonds are typically divided into a number of different issuances, or “series” (with different maturities, interest amounts, etc.). Single-limb CACs allow the majority vote to take place at the level of all these “series” combined, without the need for a majority at the level of the holders of each individual “series”.
The introduction of the single-limb CACs does not change the current possibility for countries to use so-called sub-aggregation, which is to hold separate votes for different groups of bond issuances, opening the door to offer different conditions to each group.
In the future the ESM may, if so requested by the relevant ESM Member, facilitate the dialogue between that ESM Member and its private investors on a voluntary, informal, non-binding, temporary, and confidential basis. The constant contact the ESM already has with key players in the euro area sovereign debt markets makes the ESM well placed for this role.
The ESM Treaty has since the ESM’s inception in 2012 included the requirement that the ESM should only provide stability support to countries whose debt is considered sustainable. The revised ESM Treaty will also require the confirmation of a country’s repayment capacity. The assessments on debt sustainability and repayment capacity will be conducted by the European Commission, in liaison with the ECB, and the ESM, on a transparent and predictable basis, while allowing at the same time a sufficient margin of judgement.
No changes are made regarding private sector involvement. The current ESM Treaty already addresses the point of an adequate and proportionate private sector involvement in accordance with long established IMF practice only in exceptional cases. Neither the current ESM Treaty, nor the revised Treaty make debt restructuring automatic.
The Commission and the ESM will meet informally to share assessments and analysis pertaining to their respective competences as well as to discuss and assess macro-financial risks. The Commission, in agreement with the Member State concerned, may also invite ESM staff to join its missions related to economic policy coordination and budgetary monitoring.
The Members of the Commission responsible for Financial Stability and Economic and Financial Affairs and the ESM Managing Director meet at least twice a year, also in non-crisis times, to discuss issues of common interest, including the main findings of the macro-financial risk analysis.
As until now, the ESM will participate in post-programme monitoring to safeguard its balance sheet by assessing the ability of a beneficiary Member to repay. In accordance with the Early Warning System (“EWS”) Procedure established pursuant to Article 13 (6) of the ESM Treaty, the EWS starts with the first disbursement and continues until all financial assistance is fully repaid.
In principle, post-programme surveillance missions by the Commission and EWS missions are combined, to prevent unnecessary duplication of analysis by the Commission and the ESM and to avoid unnecessary burden on the relevant Member.
The assessment of debt sustainability and repayment capacity, for the member state requesting financial assistance, will be carried out on a transparent and predictable basis. Assessments for financial assistance programmes will be carried out by the Commission in liaison with the ECB, and the ESM.
For the preparation of the debt sustainability analysis (“DSA”), the Commission will work on the basis of its growth forecasts and estimates, existing stocks and stock-flow adjustments, net borrowings and fiscal path, incorporating also the Commission’s assessment of compliance with Stability and Growth Pact requirements. The ESM will contribute to the DSA with the analysis of the Member’s financing plans and cost of funding, which entails the assessment of the liquidity position, sovereign bond market and potential risks stemming from the size and structure of outstanding debt, debt issuance plans, interest rate developments, refinancing capacity and market access.
The repayment capacity assessment builds upon and complements the debt sustainability analysis and shifts the focus to the beneficiary Member State’s ability to manage its overall payment obligations, or liabilities, in a way ensuring the repayment to the ESM over the entire horizon of the lending relationship.
The general expectation is that institutions will come to a common view and present the debt sustainability and the repayment capacity assessments to the ESM decision-making bodies. In case the collaboration does not yield a common view, the Commission makes the overall assessment of the sustainability of the public debt, while the ESM assesses the capacity of the Member concerned to repay ESM loans.
The ESM will have a stronger role in the design, negotiation and monitoring of conditionality in future financial assistance programmes.
When an ESM Member requests support, the Commission in liaison with the ECB, and the ESM will work closely together to prepare the assessments supporting the decision to grant a loan. These include the assessment of a Member’s debt sustainability and repayment capacity, the assessment of financial stability risks, and the financing needs of the Member requesting support. The ESM will perform its analysis and assessment from the perspective of a lender.
The ESM will be involved in the design of policy conditionality and any future Memorandum of Understanding (MoU) detailing the conditionality attached to the financial assistance facility will be signed by both the Commission and the ESM Managing Director.
The ESM will also monitor compliance with the conditionality attached to the financial assistance facility together with the Commission in liaison with the ECB.
When the ESM and its predecessor, the EFSF, were set up, their main task was to raise and disburse the money necessary for the rescue loans by issuing bills and bonds on the financial markets. Over time, the ESM has taken on additional responsibilities. With the ESM programmes for Cyprus and Greece, the ESM has become involved in policy related issues and has worked closely in particular with the Commission, but also with the European Central Bank (ECB) and the IMF. The current cooperation with the Commission has been reflected in a joint MoU signed in April 2018.
In November 2018, the Commission and the ESM agreed on a joint position. The joint position on future cooperation was incorporated in a memorandum of cooperation, which will enter into force at the same time as the amendments to the ESM Treaty.
The ESM reform is part of a comprehensive package of measures to deepen Economic and Monetary Union (EMU), including work on completing Banking Union. Capital Market Union serves to strengthen the single market for the European Union. It is particularly important for the euro area as it strengthens financing for the economy and makes it more robust.
Discussions will continue on the creation of a European deposit insurance scheme, which is the missing third pillar of banking union. More technical work will be needed to define the possible ways forward.
The revised ESM Treaty will come into force once it has been ratified by all 19 ESM Member States. This involves approval in parliaments in all Member States. The ratification process will start following the signature of the Amending Agreement to the ESM Treaty in January 2021.
The extent of underlying economic problems at the beginning of the crisis in Greece was much greater than in other ESM/EFSF programme countries. Having adopted the euro in 2001, Greece was able to borrow at low interest rates despite its falling competitiveness and weak public finances. While government spending and borrowing increased, tax revenues weakened due to poor tax administration. Public debt soared quickly and investor trust in Greece was seriously undermined. The Greek economy contracted sharply (nearly 30% from 2008 to 2016) and unemployment climbed to alarming levels. Furthermore, the country’s administration was weaker than in other euro area countries. The public sector was oversized and its efficiency was well below European standards.
During the first and second programmes (bilateral loans from the other euro area countries known as the Greek Loan Facility or GLF from 2010-2011; EFSF programme from 2012-2015), wide-ranging reforms were carried out to address Greece’s problems, and in 2014, the country recorded GDP growth for the first time since 2007 and unemployment began to fall. In the first half of 2015, the country reversed very important reforms. There was an attempt to halt the reform programme Greece had agreed to. The result was that the country dropped back into recession. The third programme, agreed with the ESM in August 2015, enabled Greece to remain in the euro area in return for implementing a series of much-needed reforms. After three years, on 20 August 2018, Greece successfully completed the ESM programme. As of this date, the country is no longer reliant on ongoing external rescue loans for the first time since 2010.
Greece has received a total of €288.7 billion in rescue loans since 2010. The details are shown below:
Euro area, EFSF/ESM and IMF assistance for Greece
The total amount disbursed by the EFSF and the ESM to Greece is €203.7 billion.
Greece will repay the ESM loans from 2034 to 2060. In November 2018, the EFSF Board of Directors approved a set of medium-term debt relief measures for Greece, which included an extension of the maximum weighted average maturity by 10 years on €96.4 billion of EFSF loans to Greece. Consequently, in April 2019, after a re-profiling of the EFSF loans to Greece, the current repayment period for the EFSF loans is from 2023 to 2070. (see detailed information on the repayment of EFSF loans)
The implementation of an ambitious growth strategy and prudent fiscal policies by the Greek government will be the key ingredients for debt sustainability. Through its long-term growth plan, Greece is committed to preserving its programme achievements, which includes completing the reforms that were enacted under the programme and continuing to implement further reforms designed to boost its growth potential.
In addition, the Greek government has committed to maintaining a primary surplus of 3.5 % of GDP until 2022, and around 2% in following years to continue to ensure that its fiscal commitments are in line with the EU fiscal framework.
Finally, the medium-term debt measures agreed by the Eurogroup, together with the significant cash buffer available to the Greek government, will provide strong support for Greece’s efforts. The European institutions’ Debt Sustainability Analysis (DSA) indicates that Greece’s gross financing needs are expected to remain below 15% of GDP over the medium term and to comply with the 20% threshold in the long run, and that Greece’s debt is therefore considered sustainable.
For the long-term, the Eurogroup also agreed to review at the end of the EFSF grace period in 2032, whether additional debt measures are needed to ensure the respect of these gross financing needs targets. However, additional measures can only be considered if Greece continues to respect the EU fiscal framework.
The ESM disbursed a total of €61.9 billion, out of a maximum programme volume of €86 billion. The unused amount mainly derives from the substantially lower recapitalisation needs of banks compared to what was originally foreseen (€5.4 billion used out of a maximum amount of €25 billion) and from more efficient management of cash resources by the Greek government.
It should be noted that in the ESM programmes for Spain and Cyprus, the amount disbursed was also lower than the maximum amount available under their respective programmes.
The chart below provides a breakdown of how the ESM loans were used by Greece:
Due to political uncertainty and fear of a Greek euro exit, deposit holders withdrew significant funds from Greek banks in 2015, and the banks experienced an increase in payment delays as borrowers waited to see whether the government would introduce debt relief measures.
Under the programme, the ESM committed up to €25 billion to Greece to address potential bank recapitalisation and resolution costs. In December 2015, the ESM disbursed a total of €5.4 billion to the Greek government for the recapitalisation of Piraeus Bank and NBG.
Yes. Before the capital raising, the banks’ bondholders and holders of preferred shares voluntarily exchanged their securities for equity capital. Another option for the banks was to sell units or wind down non-core business. These measures enabled all four systemic Greek banks to meet their capital shortfalls under the baseline scenario.
Two of the banks, Alpha Bank and Eurobank, raised enough capital to also meet the adverse scenario; they did not require further funds. Piraeus Bank and NBG required additional state aid through the Hellenic Financial Stability Fund (HFSF), which is funded by loans from the ESM.
Greece has committed to maintain a primary surplus (a national government’s budget surplus excluding interest payments on its outstanding debt) of 3.5% of GDP until 2022 and, thereafter to ensure that its fiscal commitments are in line with the EU fiscal framework (around 2%).
Further commitments are described in What challenges does Greece still face?
The European Commission activated the Enhanced Surveillance framework, which implies quarterly reports of the Commission to assess its economic, fiscal and financial situation and the post-programme policy commitments. Enhanced surveillance is appropriate due to the large amount of money disbursed by the EFSF/ESM and the unprecedented debt relief. The ESM will closely collaborate with the Commission in the post-programme phase in the context of its Early Warning System.
With a combined €190.8 billion in outstanding loans to Greece, the EFSF and the ESM are by far the country’s largest creditors. This is an amount higher than Greece’s projected GDP in 2018. The rescue funds together hold a total 55.5% of Greek central government debt.
In order to ensure that Greece and other beneficiary countries repay their loans, the ESM is obliged by the ESM Treaty to carry out its own monitoring, called the Early Warning System(EWS), until the loans have been repaid in full. This requires an assessment of the country’s short-term liquidity, market access, and the medium- to long-term sustainability of public debt.
The ESM and EFSF have provided loans to Greece at much lower interest rates and with exceptionally long maturities compared to those that the market would offer. These favourable lending terms have generated considerable budgetary savings, facilitating fiscal consolidation and/or tax cuts. The amount of savings is calculated by comparing the effective interest rate payments on ESM and EFSF loans with the interest payments Greece would have paid had it covered its financing needs in the market. In 2017 the savings amounted to €12 billion, or 6.7% of Greek GDP. The savings take effect at similar level every year.
Greece has managed to significantly reduce its macroeconomic and fiscal imbalances. An unprecedented fiscal adjustment has resulted in a decline of the general government deficit by roughly 16 percentage points of GDP, to a surplus of 0.8% in 2017 from a deficit of 15.1% in 2009. Economic growth has returned as the recovery has begun to take hold, rebounding from -5.5% in 2010 to 1.4% in 2017. The Greek economy has improved its competitiveness by reducing unit labour costs.
Nominal unit labour costs in Greece (2000=100)Source: European Commission
The improvement can also be seen in the falling current account deficit: to -0.4% in 2018 from -15.8% in 2008.
Greece’s current account balance 2007-2018Source: European Commission
In 2010 unemployment was at 12.7%. After reaching a peak of 27.5% in July 2013, it has now decreased to 19.5% in May 2018. While unemployment is still the highest among all EU countries, labour market conditions continue to improve. The reduction in 2017 was the greatest single year decline since the peak in 2013. More than 100,000 new jobs have been created since the start of the ESM programme in 2015.
Since 2010, Greece has carried out a comprehensive range of reforms, which can be grouped into four areas (the most important examples are listed):
Although Greece’s achievements in rebounding from a deep crisis have been remarkable, significant challenges remain. Efforts must continue to liberalise the economy, create an effective public administration, as well as a business-friendly environment. Unemployment remains very high (19.5% in May 2018), and sustainable growth is the only way for Greece to deliver more jobs and prosperity for its people.
Greece needs to build upon the progress achieved under the ESM programme and strengthen the foundations for a sustainable recovery, notably by continuing and completing reforms launched under the programme. In an annex to the Eurogroup statement of 22 June 2018, the Greek government committed to ensure the continuity and completion of reforms in several key areas:
Also known as the PSI (private sector involvement) or private sector haircut, it was a restructuring of Greek debt held by private investors (mainly banks) in March 2012 to lighten Greece’s overall debt burden. About 97% of privately held Greek bonds (about €197 billion) took a 53.5% cut of the face value (principal) of the bond, corresponding to an approximately €107 billion reduction in Greece’s debt stock.
The EFSF encouraged bondholders to participate in the restructuring. It provided EFSF bonds as part of two facilities to Greece. These were the:
The Eurogroup agreed a set of measures designed to ease Greece’s debt burden and bring its public debt back to a sustainable path. These measures included:
In its statement of 9 May 2016, the Eurogroup informed that a package of debt measures for Greece could be phased in progressively, as necessary to meet the agreed benchmark on gross financing needs and subject to the conditionality of the ESM programme. The Eurogroup said it would consider short-, medium- and long-term debt relief measures, but nominal debt haircuts were excluded.
The ESM and EFSF Board of Directors approved a series of short-term measures for Greece in January 2017, which were implemented during the course of 2017:
Thanks to these measures, Greece’s debt-to-GDP ratio will be reduced by an estimated 25 percentage points until 2060, and Greece’s gross financing needs will be lower by an estimated 6 percentage points over the same period.
The Eurogroup politically approved three medium-term debt relief measures for Greece on 22 June:
Measures I and II are subject to compliance with policy commitments and monitoring. The total package of medium-term debt relief measures will reduce the Greece’s debt-to-GDP ratio by an estimated 30 percentage points by 2060, and the gross financing needs-to-GDP ratio by around eight percentage points. This comes on top of the already implemented short-term debt relief measures.
Based on a debt sustainability analysis (DSA) to be provided by the European institutions, the Eurogroup will review at the end of the EFSF grace period in 2032, whether additional debt measures are needed to ensure the respect of the agreed gross financing needs targets.
A contingency mechanism on debt could be activated in the case of an unexpectedly more adverse scenario. If activated by the Eurogroup, it could entail measures such as a further re-profiling and capping and deferral of interest payments to the EFSF to the extent needed to meet the gross financing needs benchmarks of 15 to 20% of GDP.
After Greece adopted the euro in 2001, it was able to borrow at much lower interest rates despite its deteriorating competitiveness and public finances. In the decade before the crisis, Greece was able to use this cheap funding to finance a deficit which grew to unsustainable levels. Conditions in the euro area during this period facilitated such lending, despite the build-up of the unsustainable deficit. This meant that Greece could delay difficult structural reforms that had become necessary and may have been unavoidable if cheap funding had not been available during the 2000s.
While government spending and borrowing increased, tax revenues weakened due to poor tax administration. At the same time, wages rising much faster than productivity growth undermined Greece’s competitiveness, while low productivity and existing and significant structural problems also contributed to the increasing economic difficulties. As a result, Greece’s economy contracted and unemployment began to climb to alarming levels.
Greece’s reliance on external financing for funding budget and trade deficits left its economy very vulnerable to shifts in investor confidence. In 2009, the Greek government revealed that previous governments had been misreporting government budget data. Much higher-than-expected deficits eroded investor confidence, causing the yields on Greek sovereign bonds (which correspond to the cost of borrowing money) to rise to unsustainable levels. The situation worsened to the point where the country was no longer able to refinance its borrowing, and it was forced to ask for help from its European partners and the IMF.
The Greek Loan Facility is the first financial support programme for Greece, agreed in May 2010. It consisted of bilateral loans from euro area countries, amounting to €52.9 billion, and a €20.1 billion loan from the IMF. The EFSF, which was only established in June 2010, did not take part in this programme.
Greece made major efforts to implement wide-ranging reforms, which were tied to the first financial assistance package. The challenges confronting Greece remained significant, however, with a wide competitiveness gap, a large fiscal deficit, a high level of public debt, and an undercapitalised banking system. The economic recession in Greece proved to be more serious and damaging than expected. The financial assistance provided under the first programme was not sufficient for Greece to make the necessary adjustments and to regain market access.
Furthermore, Greece’s public debt was considered unsustainable. A restructuring of debt held by private creditors became necessary to bring the total debt level back to a sustainable path. Additional time and funds were required to Greece’s fiscal consolidation efforts with structural reforms, to boost growth, and improve competitiveness. Therefore, a second programme for Greece, provided by the EFSF and IMF, was decided in February 2012.
The EFSF disbursed €141.8 billion in loans to Greece from 2012 to 2015. The EFSF programme was part of the second programme for Greece. The IMF contributed €12 billion in loans under the programme.
The Irish economy suffered as a consequence of a boom-bust cycle in the housing market. House prices increased four-fold from 1997 to 2007, when the bubble burst. As the property boom was financed through aggressive lending by Irish banks, the decline in property prices and the collapse in construction activity resulted in severe losses in the Irish banking system. The government of Ireland responded by injecting public funds into banks to restore their solvency (over €60 billion). This led to a huge increase in Ireland’s public debt, while the sharp decline in economic activity caused GDP to fall and unemployment to rise. The Irish government was not able to resolve the situation on its own, and therefore requested financial assistance from the euro area countries, the EU and the IMF.
The programme for Ireland was financed as follows:
The majority of the EFSF programme amount was used for budget financing needs and a smaller portion was assigned for the recapitalisation of banks.
Ireland returned to the bond market in July 2012, when it issued a 5-year bond at 5.9%. Just one year earlier, the yield on 5-year Irish bonds was above 13%, which shows how quickly Ireland managed to put its economy back on track and regain the confidence of investors. The country had been forced out of international bond markets in September 2010.
Ireland has achieved a remarkable economic recovery since the conclusion of its financial assistance programme in December 2013. Ireland’s GDP growth was the highest among all EU countries in 2014 (8.5%), 2015 (26.3%) and 2016 (5.2%). In addition, Ireland’s unemployment rate of 7.9% in 2016 was well below the euro area average (10%).
Ireland will repay the principal of the loan tranches starting from 2029, and the repayment is scheduled to end in 2042.
Portugal had suffered from low GDP and productivity growth for more than a decade before the crisis started. During this period, the low interest rates resulting from adoption of the euro boosted private and public consumption, but also indebtedness. Portugal’s competitiveness was undermined by rising labour costs and structural problems. Growth in public spending was much higher than economic growth. Fiscal risks intensified through the expansion of state-owned enterprises and public-private partnerships. In early 2011, rising sovereign yields drove Portugal into a severe economic crisis. The country became unable to refinance its debt at sustainable rates and therefore requested financial assistance from the EFSF, the EU and the IMF.
The programme for Portugal was agreed as follows:
€78 billion in external support over three years, comprising
No. Each of the three programme financing institutions (EFSF, IMF and EFSM) committed €26 billion to support Portugal’s programme, but the country did not request the last loan tranche from the EFSM and IMF. Additionally, Portugal has already started making loan repayments to the IMF, reducing their outstanding amount with the fund. This makes the EFSF currently Portugal’s largest creditor (€26 billion in loans).
The financial assistance provided was conditional upon the implementation of a macroeconomic adjustment programme, with reforms in three main areas:
The majority of the EFSF programme amount was used for budget financing needs, while a smaller portion was used for the purpose of recapitalisation of banks (Millennium, Banco BPI and Caixa General de Depositos).
Portugal will repay the principal of the loan tranches starting from 2025, and the repayment is scheduled to end in 2040. An early repayment of €2 billion was made to the EFSF on 17 October 2019.
Portugal returned to bond markets in May 2013, when it issued a 10-year bond with a yield of 5.67%. This shows that investors had quickly regained confidence in the Portuguese economy, as Portugal’s 10-year bond yields were over 16% in January 2012.
Thanks to the implementation of reforms, Portugal has been successful in improving public finances, reinforcing the financial sector and bringing the economy back on a path of recovery. Portugal returned to economic growth in 2014 after four years of recession (1.4% in 2016, 1.8% predicted in 2017). Fiscal adjustment has been significant, with Portugal’s public deficit dropping from over 10% in 2009 to 1.8% (predicted) in 2017.
The disproportionate growth in the real estate sector, along with the expansion of credit to finance it, were the main reasons behind Spain’s economic imbalances. In the real estate sector, a spiral of growth in demand, prices and supply caused a major bubble, which burst when the impact of the international financial crisis was felt in Spain. The massive scale of loans for construction and property development caused an excessive exposure of the banking industry to those sectors. In particular, Spain’s savings banks (Cajas de Ahorros) were affected by solvency problems.
A restructuring process was started by the Spanish authorities in 2010. However, the economic downturn turned out deeper and longer than expected. The funding costs for Spain as well as Spanish banks significantly increased. These market conditions raised widespread concern that private and public resources would be insufficient to support the banking system with capital.
In June 2012, the Spanish government made an official request for financial assistance for its banking system to the Eurogroup for a loan of up to €100 billion. It was designed to cover a capital shortfall identified in a number of Spanish banks, with an additional safety margin.
In December 2012, the Spanish government formally requested the disbursement of €39.47 billion via a dedicated ESM loan for the recapitalisation of the banking sector. The funds were transferred in the form of ESM notes on 11 December 2012 to the Fondo de Restructuración Ordenada Bancaria (FROB), the bank recapitalisation fund of the Spanish government. The FROB used these notes for the recapitalisation, in an amount close to €37 billion, of the following banks: BFA-Bankia, Catalunya-Caixa, NCG Banco and Banco de Valencia. Additionally the FROB was to provide up to €2.5 billion to SAREB, the asset management company for assets arising from bank restructuring.
In January 2013, the Spanish government formally requested the disbursement of €1.86 billion for the recapitalisation of the following banks: Banco Mare Nostrum, Banco Ceiss, Caja 3 and Liberbank. The funds were transferred to the FROB in the form of ESM notes on 5 February 2013.
No further requests for disbursement were made, thus the overall amount of financial assistance provided by the ESM to Spain was €41.33 billion. This was the only instance so far when the ESM indirect recapitalisation loan was used.
In the case of Spain, conditions were strictly directed to the banking sector. There were three main conditions: first, identifying individual bank capital needs through an asset quality review of the banking sector and a bank-by-bank stress test. Second, recapitalising and restructuring weak banks based on plans to address any capital shortfalls identified in the stress test. Finally, problematic assets in those banks receiving public support (without any credible plans to address their capital shortfalls by private means) were to be segregated and transferred to an external asset management company (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria – SAREB).
In addition, conditionality was also applied in order to strengthen the banking sector as a whole. This included regulatory capital targets, bank governance rules, an upgrade of reporting requirements and improved supervisory procedures.
Yes, the European Commission was closely involved in the bank recapitalisation process and approved the state aid for the recapitalisation of the banks concerned.
No, the IMF did not make a financial contribution because unlike the ESM, it does not have a financial assistance tool related to bank recapitalisation. The IMF was only involved in an advisory and monitoring capacity.
Spain was scheduled to repay the loan principal from 2022 to 2027. However, starting in July 2014, the Spanish government made the first in a series of early repayments to the ESM. To date, Spain has repaid €17.6 billion (out of the total loan amount of €41.3 billion).
ESM assistance was key in cleaning the balance sheets of troubled banks, improving their capital base, and overcoming market fears about the depth of the problems in Spain’s financial sector.
Cyprus’s accession to the EU in 2004 and its adoption of the euro in 2008 contributed to a rapid growth of the financial sector and expansion of bank lending. At its height in 2009, the Cypriot banking sector was equivalent to nine times the country’s GDP, compared to the current ratio of 3.5 times GDP (close to the EU average). In addition, high current account deficits were recorded, and exports dropped due to Cyprus’s falling competitiveness.
The banking sector was increasingly cut off from international market funding and Cyprus’s largest banks recorded substantial capital shortfalls against the backdrop of the exposure to the Greek economy and deteriorating loan quality. Bank credit policy, poor risk management practices and insufficient supervision contributed to the problems. The excessive budget deficit limited Cyprus’s ability to help when the banks were on the verge of collapse.
The key conditions of the programme were:
The total amount of financial assistance agreed in 2013, in support of Cyprus’s macroeconomic adjustment programme, was up to €10 billion. However, thanks to the rapid economic recovery made by Cyprus, the full amount was not needed. The ESM disbursed €6.3 billion, and the IMF disbursed a further €1 billion.
Cyprus restructured and recapitalised its banks, which are now about half the size they were before the crisis. It has also improved financial regulation and supervision. It has introduced modern insolvency and foreclosure laws to facilitate restructuring of non-performing loans in a cooperative manner.
Restrictive measures had to be introduced to protect the financial stability of the Cypriot banking system. This refers in particular to preventing large deposit outflows and preserving the solvency and liquidity of credit institutions. The capital controls were gradually eased and they were fully lifted in April 2015.
Cyprus returned to the bond market in June 2014, when it issued a 5-year bond at a yield of 4.85%. Just one year earlier, in July 2013, the corresponding bond yield had been almost 14%, which shows how quickly Cyprus regained the trust of investors thanks to the implementation of reforms.
Cyprus resumed economic growth in 2015 (1.7%) after three years of recession; growth has been strong (2.8% in 2016) and is expected to continue in 2017 (2.5%). The country reduced its public deficit from nearly 6% in 2012 to a surplus of 0.4% in 2016. The oversized financial sector was significantly downsized and restructured. Capital controls and the economic adjustment programme helped stabilise deposits and the liquidity of the banking system. Unemployment has been gradually declining since 2014. Cyprus has returned to market financing and, with a cash buffer of over €1 billion, no longer requires financial assistance.
Cyprus will repay the principal on ESM loans from 2025 to 2031.
The main purpose of ESM loans is to provide financing to an ESM Member that has lost market access, i.e. it cannot refinance its debt by issuing bonds on the market due to the excessively high interest that it would have to pay.
The ESM takes a cash-for-reforms approach. ESM Members receive loans in exchange for economic reforms, called ‘conditionality’. A Memorandum of Understanding (MoU) details the reforms and adjustments to be carried out.
Loans are provided in one or more tranches, which may each consist of one or more disbursements. The ESM Board of Directors approves the loan contract - the Financial Assistance Facility Agreement (FFA) - between the ESM and the country, and decides on the disbursement of the first tranche and subsequent disbursements, based on a proposal from the Managing Director. The Board of Directors will have taken into account the European Commission’s report on the monitoring of and compliance by the beneficiary ESM Member with the agreed reforms.
Each loan tranche has its own specified repayment, or maturity, date. There is always a certain period before the beneficiary ESM Member starts repaying the principal amounts to the ESM. Cyprus will, for example, start repaying its loans in 2025 and Ireland in 2029.
Loan interest starts accumulating immediately after the disbursement. Beneficiary countries pay it annually.
Yes, beneficiary countries can make early loan repayments on a voluntary basis. The ESM Board of Directors must approve an early repayment, and there may be limitations resulting from changes that would have to be made to the ESM’s funding plans. The beneficiary ESM Member would need to pay certain related costs.
There is no single interest rate on loans for beneficiary Member States. The ESM passes on to programme countries its costs in funding the loans, specifically its cost of borrowing money from financial markets by issuing bonds and bills. This cost is expressed as the ‘base rate’ and is calculated daily.
Apart from the base rate, there are three other components that make up the total cost of a loan: a service fee (covering the ESM’s operational costs), margin, and commitment fee. The base rate is by far the largest component of the total interest paid by programme countries.
At the end of 2015, the interest rate charged by the ESM was below 1% for all beneficiary countries. As explained, this rate fluctuates according to market conditions.
Policy conditions (conditionality) are required for the following ESM support instruments: Loans to ESM Members as part of a macroeconomic adjustment programmes; loans to ESM Members for bank recapitalisation; direct recapitalisation of financial institutions; primary and secondary market purchases of bonds; Precautionary Conditioned Credit Line (PCCL) and Enhanced Conditions Credit Line (ECCL).
Conditionality implies that a beneficiary country is required to implement reforms to overcome the problems that led it to seek financial aid. These are usually reforms aimed at eliminating or reducing weaknesses in the beneficiary country’s economy, restoring competiveness, and regaining market access. The policy conditions are set out in a Memorandum of Understanding (MoU) signed by the programme country, and the European Commission on behalf of the ESM.
In the case of the Pandemic Crisis Support instrument, the only requirement is that ESM Members commit to use the funds to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the Covid-19 crisis. No other conditions will be required from the requesting country, as the pandemic crisis is a common external shock and not the result of incorrect economic policy decisions.
The conditions are usually specific reforms, which can eliminate or reduce weaknesses in the beneficiary country’s economy. These reforms normally focus on three areas:
The ESM, European Commission, ECB and, wherever possible, the IMF check whether the programme country is implementing the reforms it has agreed to. For this purpose, review mission with representatives of the four institutions periodically meet with the country’s authorities. Disbursement can only be made if the institutions assessment of the reform performance is positive.
The ESM can provide financial assistance for the banking sector in three ways:
Yes. First, the Bank Recovery and Resolution Directive (BRRD), which is fully applicable as of January 1, 2016, requires the bail-in of at least 8% of total liabilities before any alternative sources of funding can be used to resolve a bank. Second, beyond the requirements of the BRRD regarding bail-in, the guidelines of the bank recapitalisation instrument require a significant bail-in of private investors.
Loans for indirect bank recapitalisation help beneficiary ESM Members recapitalise troubled banks, when the country could not afford to and private sector measures including bail-in are insufficient to cover the capital shortfall.
No, the banks in question must pose a serious threat to the financial stability of the euro area as a whole or to its Member States.
Unlike loans for a general macroeconomic programme, the conditionality for indirect bank recapitalisation loans focuses only on the country’s financial sector. Reforms typically target financial supervision, corporate governance, and domestic laws relating to restructuring and resolution.
If the beneficiary bank is solvent, the recapitalisation will be known as a ‘precautionary recapitalisation’. In such case, state aid rules will apply, and the European Commission’s Directorate-General for Competition will decide, on a case-by-case basis, on possible burden-sharing measures.
If the beneficiary bank is failing or likely to fail, the rules of the Bank Recovery and Resolution Directive (BRRD) will apply. The resolution authority (the Single Resolution Board, in case of systemic banks and other banks benefitting from ESM assistance) may decide to put the bank into resolution and may restructure the bank, using resolution tools available under the BRRD. Bail-in of creditors and shareholders is one such tool, and the bail-in of 8% of total liabilities is a condition for any public aid (including ESM aid) to be used in the resolution; therefore the bail-in of subordinated debt should be obligatory before any public support (including an ESM loan) is granted.
Loans to ESM Members for indirect bank recapitalisation are generally paid ‘in kind’ rather than ‘in cash’. For this purpose, the ESM issues notes (i.e bills and/or bonds) and transfers them to the beneficiary country, which uses them to inject capital in the distressed banks. The ESM notes are later converted into cash loans.
For more detailed information, please consult the ESM Guideline on Recapitalisation of Financial Institutions (PDF, 366 KB).
Until the creation of the direct recapitalisation instrument, the ESM could only recapitalise banks indirectly, via the sovereign. In this case, the ESM provides a loan to the government of a euro area Member State. With these funds the government then recapitalises the financial institutions, which is how the ESM provided assistance to Spain.
However, such assistance adds to the beneficiary country’s public debt, which could depress market sentiment. This unhealthy link between governments and banks is widely regarded as a crucial destabilising factor for some euro area countries. As a result, the leaders of euro area countries decided in June 2012 to develop an instrument that would allow banks to strengthen their capital position without placing a large burden on the country where the institution is incorporated.
Direct recapitalisation means that the ESM would directly inject capital in a bank. This differs from indirect recapitalisation, under which the ESM loans funds to a country whose government then uses the funds to recapitalise a bank.
The ESM can directly recapitalise a bank only if it is unable to obtain sufficient capital from private sources, such as a bail-in. The beneficiary institution must also pose a serious threat to the financial stability of the euro area as a whole or one of its Member States.
An ESM Member requesting direct recapitalisation should address the request to the Chairperson of the ESM Board of Governors. The request should among others include the possible amount of capital needs, an opinion of the competent supervisory authority on the institution’s financial situation and the result of the most recent stress test. If the institution is not directly supervised by the ECB, then as a precondition for direct recapitalisation, the ESM Board of Governors will request the ECB to take over its direct supervision.
The European Commission, in liaison with the ECB and IMF (wherever appropriate) will assess whether the requesting ESM Member meets the eligibility criteria specified in the ESM Treaty and the Guideline on the direct recapitalisation instrument. Likewise, the ESM, in liaison with the European Commission, the competent resolution authority and the ECB in its capacity as the supervisor, will assess whether the institution meets the eligibility criteria specified in the Guideline on the direct recapitalisation instrument. Based on these assessments, the ESM Board of Governors will decide whether the eligibility criteria are met and if so, may decide to grant, in principle, financial assistance for direct recapitalisation.
Yes. After notifying the European Commission of the intention to grant state aid, a restructuring plan will be drawn up to ensure the viability of the institution after recapitalisation. This plan will be submitted to the European Commission for approval. In parallel, the ESM’s Managing Director, in liaison with the Commission and the ECB, and with the assistance of independent experts, will conduct a due diligence exercise, including a rigorous economic valuation of the assets.
Yes. A burden sharing scheme will determine the contributions of the requesting ESM Member and the ESM. The scheme will comprise two parts:
(i) If the beneficiary institution has insufficient equity to reach the legal minimum Common Equity Tier 1 of 4.5%3 (Common Equity Tier 1 is a category of capital consisting of common shares and retained earnings), the requesting ESM Member will be required to make a capital injection to reach this level. Only then will the ESM participate in the recapitalisation.
(ii) If the beneficiary institution already meets the capital ratio mentioned above, the requesting ESM Member will be obliged to make a capital contribution alongside the ESM. This contribution will be equivalent to 20% of the total amount of public contribution in the first two years after the Direct Recapitalisation Instrument enters into force. Afterwards, the ESM Member’s contribution will amount to 10% of the total public contribution.
The ESM Board of Governors will have the right to partially or fully suspend an ESM Member’s contribution. This refers to exceptional cases when the ESM Member is not able to contribute up-front due to fiscal reasons.
Yes. Direct recapitalisation by the ESM will only be considered if private capital resources are engaged first. The obligatory private sector contribution (as a precondition for the use of direct recapitalisation by the ESM) is defined in the Bank Recovery and Resolution Directive (BRRD). This requires that the following three conditions must be met:
- a bail-in equal to an amount of not less than 8% of total liabilities including own funds of the beneficiary institution;
- a contribution of the resolution financing arrangement of up to 5% of the total liabilities including own funds;
- a write-down or conversion in full of all unsecured, non-preferred liabilities other than eligible deposits (excluding certain types of liabilities listed in the BRRD).
In addition, a contribution from the Member State’s national resolution fund will be made, up to the target level of contributions to the resolution fund as it is defined under the BRRD and Single Resolution Mechanism.
There will be conditions applying to the recapitalised institution, established under EU state aid rules. In addition, the ESM, in liaison with the Commission and the ECB, can add additional institution-specific conditions. These can include rules on the governance of the institution, remuneration of management and bonuses. Other policy conditions may be related to the general economic policies of the ESM Member concerned. They will be included in the Memorandum of Understanding (MoU) attached to the financial assistance.
Yes. As a general rule, the ESM will acquire common shares in the bank through the Direct Recapitalisation Instrument. The ESM Board of Governors may authorise the acquisition of other capital instruments, such as special shares, hybrid capital instruments, or contingent capital to fulfil supervisory capital requirements.
Yes, the ESM’s participation is temporary. The ESM will actively seek opportunities to sell the investment. The ESM Board of Directors may decide to sell the instruments acquired in full or in tranches. The recapitalisation operation may also be terminated by the redemption or buy-back of capital instruments of the recapitalised institution.
Yes, to preserve the ESM’s lending capacity for other needs, the ESM resources available for direct recapitalisation are limited to €60 billion, out of the ESM’s maximum lending capacity of €500 billion. This also provides transparency for investors and helps preserve the high creditworthiness of the ESM.
The euro area’s Banking Union consists of a series of mechanisms to strengthen the banking sector in the euro area, including by resolving failing banks. The ESM complements, through its direct recapitalisation instrument, the foundations of the Banking Union - the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the Single Rulebook.
For detailed information concerning eligibility criteria, the procedure for requesting support, the beneficiary country’s contribution, the application of bail-in and other topics, please consult the ESM Guideline on Financial Assistance for the Direct Recapitalisation of Institutions (PDF, 366 KB).
When the instrument was first proposed, it was to cut the link between troubled banks and sovereigns. However, it soon became clear that banking union mechanisms could achieve this aim without resorting to the direct recapitalisation instrument.
More specifically, the bail-in of private investors, in accordance with the Bank Recovery and Resolution Directive (BRRD), and the contribution of the Single Resolution Fund (SRF), has shifted the bulk of potential financing from the ESM to the banks themselves, along with their investors and creditors.
With all the components of Banking Union operational since January 2016, the ESM direct recapitalisation instrument will only be applied as an instrument of last resort, when all other measures, including the bail-in mechanism, have been exhausted.
ESM precautionary credit lines are designed to maintain access to market financing for ESM Members whose economic conditions are still sound but may come under stress. The credit line prevents crises by acting as a safety net that strengthens the creditworthiness of the beneficiary country, allowing it to issue bonds at lower rates.
Two types of credit lines are available: a Precautionary Conditioned Credit Line (PCCL) and an Enhanced Conditions Credit Line (ECCL). Both credit lines can be drawn via a loan or a primary market purchase. Both have an initial availability period of one year and are renewable twice, each time for six months.
A PCCL is available to a euro area Member State whose economic and financial situation is fundamentally sound, as determined by a number of criteria. A beneficiary country would apply for an ECCL if it did not comply with the stricter PCCL criteria. Both types of credit lines require an MoU specifying policy conditionality. However, the policy conditions for an ECCL are wider-ranging. In addition, when an ECCL is approved, the beneficiary ESM Member would face enhanced surveillance. This would only apply to a PCCL if the country actually draws on the credit line.
An ESM Member can activate a credit line on its own initiative. The Member can request the use of the funds at any time during the availability period of the credit line.
For more detailed information, please consult the ESM Guideline on Precautionary Financial Assistance (PDF, 180 KB).
The ESM may purchase bonds or other debt securities issued by ESM Members directly from the issuing government in the primary market if there is insufficient demand for such securities. The ESM’s purchase would reduce the risk of a failed auction. It would thus help the beneficiary country finance its debt on the bond market.
The ESM could purchase such bonds as a complement to regular ESM loans for a programme country or to draw down funds under a precautionary programme. Normally, such purchases would be made towards the end of an adjustment programme to help the country return to the market.
Yes, the conditions would be those of the macroeconomic adjustment or precautionary programme.
The ESM may also purchase bonds or other debt securities issued by ESM Members in the market for previously issued securities, the secondary market, if the lack of market liquidity could push sovereign interest rates too high. An ESM secondary market purchase will increase debt market liquidity and create incentives for investors to further participate in the financing of ESM Members.
Secondary market purchases could be provided for ESM Members under a macroeconomic adjustment programme and also for non-programme Members whose economic and financial situation is fundamentally sound, as determined by eligibility criteria.
Yes, for countries under a macroeconomic adjustment programme, the conditionality of that programme applies. For ESM Members outside a macroeconomic adjustment programme, an MoU detailing the policy conditions would be negotiated with the ESM Member concerned by the European Commission in liaison with the ECB.
For more detailed information, please consult the ESM Guidelines on Primary (PDF, 356 KB) and Secondary (PDF, 188 KB) Market Support Facilities
The repayment period for loans provided by the ESM (and EFSF) is much longer than loans from other IFIs. For example, the ESM loans disbursed to Greece in 2015 need to be repaid between 2034 and 2059. This is considerably longer than the loans provide by the IMF. The IMF Extended Fund Facility has a maximum repayment period of 10 years.
Furthermore, the ESM charges very low interest rates on its loans, because it can borrow money very cheaply thanks to its strong creditworthiness.
Without loans from the ESM, the beneficiary countries would be forced to pay high interest rates on the bonds they issue because markets believe they pose a high credit risk. This would place a serious burden on their public finances. Thanks to the low rates the ESM charges, programme countries save significant amounts compared to the cost of issuing bonds themselves. The long maturities of ESM loans also reduce the countries’ financing burden by pushing repayment into the future and extending it over time.
The following table shows the savings for all five EFSF/ESM beneficiary countries in 2018 alone as a result of ESM loans vs. the theoretical market cost. Similar savings as a result of the advantageous EFSF/ESM lending conditions can be expected for the years to come.
The evaluation of financial assistance programmes, an established practice in international institutions, is designed to improve future ESM crisis management. With the benefit of hindsight, the evaluation will draw up a series of lessons learned which will then inform future ESM programme policies and practices. The timing of this evaluation is also appropriate as four of the five financial assistance programmes granted by the EFSF/ESM, were completed successfully without a need for follow-up arrangements.
The evaluation will assess the relevance, effectiveness, and efficiency of EFSF and ESM financial assistance in meeting with the institutions’ overarching goal: safeguarding the financial stability of the euro area and its Member States.
The exercise will cover activities relevant to EFSF and ESM programmes for Ireland, Spain, Cyprus, and Portugal. The evaluation period covers the negotiations for each programme and runs through the post-programme period up to end-June 2016.
The second Greek programme (EFSF programme) will also be covered but only until the initial expiry date of end-December 2014. This reduced scope is designed to help avoid compromising the current activities of the ongoing third Greek programme (ESM programme). The entire second Greek programme and the third programme could be evaluated after completion in August 2018.
It will investigate design, financing, and cooperation issues, ensuring it is complementary to, and does not duplicate, other evaluation exercises. It will not, for example, focus on examining certain aspects of programme design – such as conditionality – which fall under the remit of other institutions.
The evaluation team will seek to answer a series of questions on the relevance, effectiveness, efficiency of the programmes during the negotiation, programme execution, and post-programme phase. In this context, it will also examine the collaboration among the programme partners and with the beneficiaries. It will not look into the decision-making process of the Eurogroup or other political bodies.
Given that the evaluation is designed to generate lessons learned, the report will approach the relevant activities in a cross-cutting manner, identifying potential lessons across the programmes.
In spring 2017, one year after the ESM was mandated to conduct the evaluation, the high-level evaluator will report to the ESM Board of Governors, made up of the euro area finance ministers. The evaluator may present a set of recommendations to improve the functioning of the ESM and its programme activities. The report will be made public on the ESM website.
The ESM Management Board will ensure that the report’s findings and recommendations are appropriately followed up to improve future programmes.
The ESM Board of Governors’ Chairperson determined that Ms Tumpel-Gugerell, an Austrian national, is eminently well-equipped for the role, with the appropriate skillset and personal qualities. She has extensive professional experience in economic policy and financial stability, including eight years on the ECB executive board (2003–2011) and, previously, five years as deputy governor of the Austrian central bank (1998–2003). The chairperson, Jeroen Dijsselbloem, stated that she also demonstrates the authority, competence, and impartiality needed for the post.
Ms Tumpel-Gugerell will lead the evaluation process, with the support of an ESM evaluation team and external experts who have evaluation experience at other IFIs. She will also have ESM administrative support, but no designated office space at the ESM. Ms Tumpel-Gugerell will receive daily allowances in line with peer institutions.
The ESM is the permanent rescue fund set up in 2012 to provide loans to financially distressed euro area countries. The assistance is granted, under strict conditionality, if needed to safeguard the financial stability of the entire euro area and of each euro area country.
No, the ESM is an intergovernmental organisation. In 2012, the then 17 euro area countries signed an international treaty creating the ESM. Currently there are 19 ESM and euro area Member States.
Breakdown of ESM’s lending capacity (€ billion)
The Board of Governors is the ESM’s highest decision-making body. It comprises the finance ministers of the euro area countries as voting members (the European Commission and ECB may participate in the Board’s meetings as observers). The Board of Governor’s most important decisions require unanimous agreement, including decisions to lend funds to an ESM Member. Since January 2018, the Board of Governors is chaired by Mário Centeno, who is also the President of the Eurogroup and the Portuguese finance minister.
The voting procedure depends on the type of decision, as shown in the following chart:
Board of Governors
Decisions by mutual agreement
(unanimity of members participating in vote)
Decisions by qualified majority
(80% of votes cast)
Emergency voting procedure
(85% of votes cast)
The Board of Directors consists of high ranking government officials, generally deputy finance ministers, one from each ESM Member. The Board of Directors is responsible for specific tasks specified in the ESM Treaty, such as the approval of loan disbursements, or tasks delegated by the Board of Governors. The ESM Board of Directors is chaired by the ESM Managing Director, currently Klaus Regling.
Board of Directors
The Managing Director is the ESM’s top executive and legal representative. He/ she conducts the on-going business of the ESM under the direction of the Board of Directors. The Managing Director is appointed by the Board of Governors for five years and may be reappointed once. The current Managing Director is Klaus Regling, who was appointed when the ESM was established in 2012.
To finance its loans, the ESM borrows money from financial markets. This is done by issuing bonds with maturities of up to 43 years, bills (currently with maturities of 3 and 6 months) and other funding instruments. Thanks to its high creditworthiness, the ESM is able to borrow money from the markets at much lower interest rates than those charged to financially distressed countries.
Financial institutional investors, such as commercial banks, central banks, asset managers, insurance companies, pension funds and sovereign wealth funds buy the ESM’s debt issues. These institutions regard ESM securities as safe investments, thanks to the ESM’s strong financial backing and capital structure. Investors also value ESM securities because they can be sold easily.
No, the ESM does not finance its loans with taxpayer money. The ESM raises the full amount of loans by issuing bonds, bills and other instruments. ESM Member States make a contribution to the ESM’s paid-in capital, which is invested conservatively in high quality assets. ESM members’ contributions are therefore invested and never used for lending. Only in the extreme case of a loss can the ESM recur to its paid-in capital. This has never occurred.
The ESM has a total capital of nearly €705 billion. This consists of over €80 billion in paid-in capital provided by ESM Members and approximately €624 billion in committed callable capital.
The paid-in capital underpins the financial strength and high creditworthiness of the ESM as an issuer. It serves as a security buffer for the bonds and bills the ESM issues and is not used for lending operations.
Paid-in capital is the portion of the ESM’s total capital paid in by ESM Members. The other portion of ESM’s capital is committed but will only be called if needed.
The financial contribution of each ESM member to the ESM capital is based on the capital key of the European Central Bank (ECB). It reflects the respective country’s share in the total population and gross domestic product of the euro area.
The 17 founding Members of the ESM completed their payment of paid-in capital in April 2014. New joiners Latvia and Lithuania began their payments in 2014 and 2015, respectively. The ESM Members’ contribution keys, corresponding capital subscription, and amount of paid-in capital are as follows:
The ESM may require its Members to make a capital payment. In other words, it may call capital which has been committed and is part of the ESM’s total capital. Such a capital call would only happen in three specific situations:
The total amount of committed callable capital is €624.3 billion; each ESM Member’s share of this amount is based on the capital contribution key.
The ESM currently has the largest amount of paid-in capital among all international financial institutions in the world, as shown in the following chart:
Note: Amounts for the World Bank and Asian Development Bank converted from USD according to exchange rate of 18 March 2016.
Source: most recent financial statement of each institution
The ESM invests its paid-in capital very carefully, according to conservative criteria in high-quality liquid assets, such as bonds, covered bonds, or secured deposits with minimum rating criteria. The investments are diversified across various asset classes, geographical areas, issuers, and instruments. One of the key objectives of the ESM’s investment policy (PDF, 350 KB) is to preserve the paid-in capital.
The ESM’s financial result has been positive every year since 2013. Any net income from investment and lending operations is transferred to the ESM’s Reserve Fund, unless the Board of Directors decides otherwise. This is a fund created to cover losses, e.g. if a beneficiary country were to default on a loan repayment.
The Board of Directors may decide to distribute a dividend to the ESM Members after deductions of operational costs. The dividends may come from investment returns, fees paid to ESM or other profits. Dividends would be distributed to the ESM Members according to their shareholder contribution key. (More information in the ESM Guideline on Dividend Policy (PDF, 258 KB))
The ESM has, as specified in the ESM Treaty, created an Early Warning System to detect loan repayment risks and allow for corrective actions. The EWS also applies to EFSF loans.
The objective is to determine a programme country’s ability to repay its loans. This requires an assessment of the country’s short-term liquidity, market access, and the medium- to long-term sustainability of public debt.
This work takes into account and complements the fiscal and debt sustainability analysis that the European Commission and the European Central Bank (ECB) perform during and after a programme.
The ESM prepares, on a quarterly basis, a payment overview (interest, fees, and principal repayments) for each beneficiary ESM Member, covering the next 12 months. The beneficiary country provides the ESM with a cash flow overview each quarter covering the next 12 months. This overview is sufficiently detailed for the ESM to determine if the country can meet its upcoming obligations. The ESM also considers the implications of the medium and long-term economic and financial outlook for the repayment capability of beneficiary countries.
To avoid duplication and unnecessary reporting burdens on the programme countries, the ESM joins the bi-annual Post-Programme Surveillance missions that the European Commission, in liaison with the ECB, carries out in programme countries.
If the EWS detects a repayment risk, the Managing Director will inform the ESM Board of Governors and Board of Directors, and will propose possible remedies, such as the creation of provisions and corrective financial measures, if necessary.
Former programme countries will be under the ESM Early Warning System until they repay the full amount of their ESM loan. This ESM monitoring will therefore outlive the post-programme monitoring by the European Commission in the context of the EFSM, which expires when the country reimburses 75% of its financial assistance.
All euro area Member States are obliged to join the ESM. The ESM was established by the 17 euro area countries in 2012, and since then two additional countries – Latvia and Lithuania – have joined the euro area and became ESM Members.
After the decision to adopt the euro is taken for a new country, its government should apply to join the ESM. The technical terms, including the country’s capital share, are agreed and then the ESM Board of Governors approves the application. The new Member State should then ratify the ESM Treaty; this usually takes place about one to two months after the country adopts the euro as its currency.
No, the ESM provides loans only to ESM Members, all of which are by definition in the euro area. EU countries that do not use the euro as their currency may request assistance from the EU’s Balance of Payments facility.
No, it is not required. Latvia and Lithuania did not join the EFSF when they became ESM Members.
RFAs are mechanisms or agreements through which groups of countries mutually pledge financial support to countries experiencing financial difficulties in their regions. The ESM is the Regional Financing Arrangement for the euro area, while a few other world regions have their own RFA. Together they are the regional line of defence in the Global Financial Safety Net.
Apart from the ESM, the other major RFAs are: the Arab Monetary Fund, the BRICS Contingent Reserve Arrangement, the Chiang-Mai Initiative Multilateralisation1, the Eurasian Fund for Stabilization and Development, the EU Balance of Payments Facility, the European Financial Stabilisation Mechanism, the Latin American Reserve Fund (FLAR), and the North American Financial Agreement.
1 ASEAN+3 Macroeconomic Research Office (AMRO), an international organisation since February 2016, functions as an independent surveillance unit of the CMIM.
The GFSN has a triple objective vis-à-vis sovereign governments: to provide precautionary insurance against a crisis; to supply liquidity when crises hit; and to incentivize sound macroeconomic policies.
It consists of four layers: countries can self-insure against external shocks using foreign reserves or fiscal space at national level. At the bilateral level, there are swap lines concluded bilaterally among countries. At regional level, the protection comes from Regional Financing Arrangements. And finally, the IMF provides a global financial backstop.
Given numerous comparative advantages among different institutions, there are good reasons for strong cooperation between the IMF and RFAs and among RFAs themselves. A well-structured cooperation between the IMF and RFAs will generate synergies for resource allocation and surveillance. It will also trigger a mutual learning process for institutions to improve their own policy frameworks. Coordination failure with respect to conditionality could lead to “programme shopping” and associated moral hazard.
An adequately resourced and well-coordinated GFSN will contribute to the macroeconomic and financial stability in the international monetary system. The first high-level dialogue of RFAs held in Washington in October 2016 established a regular framework for policy dialogue and coordination at the highest level among RFAs, with the IMF, and the G20 International Financial Architecture Working Group.
This high-level seminar defined the terms of future cooperation between the Regional Financing Arrangements. The participants are committed to explore the great potential for cooperation in areas of common interest, such as economic surveillance. They also agreed to convene high-level dialogue among RFAs, the G20 International Financial Architecture Working Group and the IMF on an annual basis, at the margins of the IMF annual meetings. In addition, a research seminar focusing on key issues related to RFAs will be organised annually.
The European Financial Stability Facility (EFSF) was created as a temporary crisis resolution mechanism by the euro area Member States in June 2010. The EFSF has provided financial assistance to Ireland, Portugal and Greece. The EFSF financed these loans by issuing bonds and bills on capital markets.
The EFSF is a private company incorporated in Luxembourg under Luxembourgish law on 7 June 2010. The shareholders are euro area countries with the exception of Latvia and Lithuania.
Yes, they are separate legal entities with different governing bodies and shareholders. However, the ESM and EFSF share the same staff and offices in Luxembourg.
The EFSF has provided financial assistance to three countries, as shown in the following table:
Amounts disbursed by the EFSF to programme countries
* The outstanding EFSF loan amount for Greece is €130.9 billion
No, since July 2013, the EFSF may no longer grant new loans. The ESM is the sole and permanent mechanism for responding to new requests for financial assistance by euro area Member States.
Yes, the EFSF will continue to operate in order to:
No, the EFSF country governments guarantee only the bonds issued by the EFSF, up to a total amount of €724.47 billion, according to the contribution key in the table below. The issuance of EFSF guaranteed debt is limited to a maximum principal amount of €241 billion.
Notes:* The amended contribution key takes into account the stepping out of Greece, Ireland, Portugal and Cyprus as guarantors.
Notes: * The amended contribution key takes into account the stepping out of Greece, Ireland, Portugal and Cyprus as guarantors.
The CEO of the EFSF is Klaus Regling, who is also Managing Director of the ESM.
High-level representatives of the 17 EFSF Member States (deputy ministers, secretaries of state or director generals of national treasuries) represent their countries in the EFSF Board of Directors. The European Commission and ECB each have observers on the Board. The current Chairman of the EFSF Board of Directors is Harald Waiglein, the Director General for Economic Policy and Financial Markets at the Austrian ministry of finance.
The euro is the ESM’s main currency of issuance. In October 2017, the first US dollar denominated bond was launched, in order to broaden the ESM’s investor base. The ESM plans to build up a dollar yield curve with standard two-, three- and five-year maturities with a minimum of one to two benchmark deals each year. The ESM runs no currency risk through the USD issues, as the proceeds are swapped back into euros.
The EFSF only issues in euros and this is not envisaged to change in the future.
The ESM’s long-term debt is rated AAA by Standard & Poor's and Fitch, and Aa1 by Moody’s. The short-term rating is A-1+ (Standard & Poor's), F1+ (Fitch) and P-1 (Moody’s).
The EFSF’s long-term debt is rated AA by Standard & Poor’s and Fitch, and Aa1 by Moody’s. The short-term rating is A-1+ (S&P), P-1 (Moody’s) and F1+ (Fitch).
The ESM and EFSF apply a diversified funding strategy, i.e. they use a variety of instruments and maturities to ensure the efficiency of funding and continuous market access. One feature of this strategy is that funds raised through various instruments are not attributed to a particular country. The funds are pooled and then disbursed to programme countries. The ESM applies two such pools: a short-term and medium-to-long-term funding pool.
The ESM applies capital market and money market instruments. Capital market tools include benchmark bonds with maturities ranging from one year to a maximum of 43 years for the ESM, and a maximum of 38 years for the EFSF (the longest loan maturity being the limit). The ESM may hold its own bonds for a limited amount, so that additional funding may be raised by selling the bonds on the secondary market or by using them as collateral in the secured money market. As a supplement to the regular benchmark bond programme, the ESM may issue N-bonds and promissory/registered notes.
The ESM issues bills through regular auctions and may also engage in unsecured money market transactions. Transactions may be conducted overnight, on a rolling basis or for tenors up to one year. The ESM may also issue commercial paper, money market promissory notes and engage in repo transactions. In addition, the ESM has established liquidity lines with the DMOs of ESM members and a network of credit lines with private banks.
The EFSF applies capital market and money market instruments. Capital market tools include benchmark bonds with maturities ranging from 1 to 30 years. The EFSF may hold its own bonds for a limited amount, so that additional funding may be raised by selling the bonds on the secondary market or by using them as collateral in the secured money market.
Investors in ESM and EFSF securities are mainly institutional investors such as commercial and central banks, pension funds, sovereign wealth funds, asset managers, and insurance companies.
ESM and EFSF bond issuance is conducted via syndications, auctions, private placements or taps of existing lines.
The lead managers are mandated from international institutions that make up the ESM/EFSF Market Group. The lead managers are chosen following a rigorous and transparent selection process.
The Basel Committee on Banking Supervision announced on 18 March 2014 that securities issued by the ESM and EFSF are to be designated as Level I high quality liquid assets under Basel III - Liquidity Coverage Ratio. As a result, securities issued by both institutions have been assigned a 0% risk weight under the Basel II Standardised Approach for Credit Risk.
The 0% risk weight for ESM and EFSF securities is also stated in the Capital Requirements Regulation (CRR), which together with the Capital Requirements Directive (CRD IV), implement the Basel Committee’s recommendations into EU law and national law, respectively.
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