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Greece can receive up to €86 billion in loans under the ESM programme. This amount will be disbursed in tranches over three years. The IMF is also expected to contribute to this financing plan with its own programme, which would consequently reduce the amount of financing provided by the ESM.
The funds can be used for debt service, banking sector recapitalisation, arrears clearance, and the build-up of cash buffers. The funds can thus ensure financial stability in Greece, providing liquidity and stimulating the economy. They will give Greece time to complete its reform agenda, modernise its administration, and deliver growth and jobs.
The ESM has disbursed €61.9 billion to Greece, including €5.4 billion for bank recapitalisation.
The maximum weighted maturity of loan tranches is 32.5 years. This means that some loan tranches may have a longer, and others a shorter, maturity, but the weighted average cannot exceed 32.5 years.
The Memorandum of Understanding (MoU) contains a reform agenda, which was designed to provide the basis for a sustainable Greek economic recovery. The reforms are built around four pillars:
Yes, a privatisation fund must be established in Greece and managed by the Greek authorities under the supervision of the relevant European institutions. The fund will privatise and manage state assets to increase their value. The proceeds of the fund will be used for the repayment of ESM bank recapitalisation loans, for decreasing Greece’s debt to GDP ratio and for investments.
On 20 July 2017, the IMF Executive Board approved in principle a precautionary Stand-By Arrangement (SBA) for Greece amounting to SDR 1.3 billion (about €1.6 billion). In a press release published on that date, the IMF stated; "The arrangement, which supports the authorities’ economic adjustment program, has been approved in principle, which means it will become effective only after the Fund receives specific and credible assurances from Greece’s European partners to ensure debt sustainability, and provided that Greece’s economic program remains on track. A second Executive Board decision is needed to make the arrangement effective. The arrangement will expire on August 31, 2018, shortly after the expiration of the European Stability Mechanism program."
In the decade before the crisis, Greece failed to modernise its economy while the public sector deficit grew to unsustainable levels. After Greece adopted the euro in 2001, it was able to borrow at much lower interest rates despite its deteriorating competitiveness and public finances.
While government spending and borrowing increased, tax revenues weakened due to poor tax administration. At the same time, rising wages undermined Greece’s competitiveness, while low productivity and 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-to-GDP ratio 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.
The EFSF disbursed €141.8 billion, making it Greece’s largest creditor by far. The EFSF programme was part of the second programme for Greece, and started on 1 March 2012.
The amounts disbursed in each of the three financial assistance programmes are presented in the following table:
Euro area, EFSF/ESM and IMF assistance for Greece
The PSI 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 PSI. It provided EFSF bonds as part of two facilities to Greece. These were the:
Under the ESM programme agreed in August 2015, 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.
Due to political uncertainty, 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.
Higher capital levels will allow banks to increase lending to Greece’s economy, which is crucial for restoring economic growth. The Greek government is also working to improve the governance of its banks and taking steps to tackle the problem of non-performing loans in the banking sector.
The Single Supervisory Mechanism (SSM), which is responsible for supervising the 130 largest banking groups in the euro area, conducted a comprehensive assessment of Greek banks. The assessment revealed a total capital shortage of €14.4 billion under an adverse scenario, in which banks must be able to withstand a serious worsening of economic and financial conditions. Under the baseline scenario, which reflects current economic projections, the total capital shortfall amounted to €4.4 billion.
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.
The ESM is providing loans to Greece in support of the macroeconomic adjustment programme that the Greek government is implementing. ESM loans include a component for the recapitalisation of Greek banks (up to €25 billion).
The ESM generally provides loans for bank recapitalisation in the form of ESM notes. In the case of Greece, the government transferred the notes to the HFSF, which received common shares in the recapitalised banks and other securities in exchange for the assistance.
Yes. ESM financial assistance for Cyprus (in support of its macroeconomic adjustment programme) included a component for bank recapitalisation (€1.5 billion). The ESM also provided a dedicated loan to the Spanish government of €41.3 billion for the recapitalisation of Spanish banks.
The EFSF provided loans to Greece, among which a portion was allocated for bank recapitalisation (€48.2 billion). Part of the EFSF loans to Ireland and Portugal were also used by the governments of these countries for bank recapitalisation. All the EFSF loans were granted in support of a macroeconomic adjustment programme.
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 over 16 percentage points of GDP, to a surplus of 0.7% in 2016 from a deficit of 15.6% in 2009.
The Greek economy has improved its competitiveness by reducing unit labour costs. The improvement can be seen in the falling current account deficit: to an expected 0.5% in 2016 from 18% in 2008. Furthermore, Greece has made major progress in carrying out structural reforms – it is the best performing economy in terms of implementing OECD recommendations on structural reforms.
Greece is also making its economy more efficient thanks to improved business regulations. This can be seen in Greece’s rapid progress in the World Bank’s Doing Business ranking: to 61st position in 2017 from 109th in 2010.
Thanks to the reforms carried out by Greece as part of the second financial assistance programme, the Greek economy returned to a path of economic growth – it achieved GDP growth of 0.7% in 2014 after six years of recession. As a result, yields on Greek bonds came down to levels which enabled the Greek government to return to market financing. Greece successfully issued two bonds in that year: a 5-year bond in April, and a 3-year bond in July.
Greece’s debt was significantly reduced with the private sector haircut in March 2012. The improvement of the lending terms for Greece agreed by the European creditors has also resulted in a significant alleviation of the debt.
In November 2012, the Eurogroup approved a set of measures designed to ease Greece’s debt burden and bring its public debt back to a sustainable path. These measures included:
Thanks to the debt relief measures approved by the Eurogroup, the Greek government saved an equivalent of 49% of its 2013 GDP. This includes savings of 34% of GDP thanks to eased conditions on EFSF loans to Greece.
The Eurogroup agreed on a package of debt measure for Greece, to be phased in progressively, as necessary to meet the agreed benchmark on gross financing needs and subject to the pre-defined conditionality of the ESM programme.Short-term measures (to be implemented after the first review is completed, up to the end of the programme in 2018):
The repayment of certain loan tranches under the EFSF loan facility can be extended within the agreed maximum weighted average maturity of 32.5 years;
The diversified funding strategy to issue regularly liquid benchmark notes on all parts of the curve will not change. The EFSF/ESM is working on different ways to optimise the structure of outstanding debt according to the different loan profiles of our beneficiary Member States. This aims to enable the EFSF/ESM to reduce interest rate risk for Greece without increasing costs for other beneficiary Member States. At the same time it is crucial for the EFSF/ESM to continue with the diversified funding strategy to keep a wide and diversified investor base by issuing regularly liquid benchmark bonds on all parts of the curve;
The margin on this loan was set at an elevated level (200 basis points) to encourage Greece to strengthen its privatisation operations during the EFSF programme. As new mechanisms related to privatisation have been agreed under the ESM programme, the EFSF Board of Directors and EFSF guarantors could authorise this margin to be foregone for the year 2017.Medium-term measures (to be possibly adopted following the successful implementation of the ESM programme in 2018):
Out of the €25 billion earmarked for bank recapitalisation under the ESM programme, only €5.4 billion was used. The remaining €19.6 billion could possibly be used for partial early repayments of existing official loans. Greece would benefit from this as the ESM loans are much cheaper than some of the other official loans. Also, ESM loans have a longer maturity.
Currently the ESM still holds around €1.8 billion of SMP profits from 2014 in a segregated account. This amount and the remaining SMP and ANFA profits from the budget year 2017 onwards will be held by the ESM as a buffer to reduce future gross financing needs for Greece. Euro area central banks (excluding the Bank of Greece) will accumulate around €3.5 billion in profits from holdings of Greek bonds from 2017 to 2026;
If necessary, targeted further debt re-profiling measures would be considered, including an extension of the maximum weighted average maturity of loans, re-profiling of the EFSF repayment plan, capping and deferral of interest payments;
This mechanism would be activated, if needed, after the end of the ESM programme in August 2018 to ensure debt sustainability in the long run in case a more adverse scenario were to materialise; such a mechanism could entail measures such as a further EFSF re-profiling and capping and deferral of interest payments.
How do these measures relate to the sustainability of Greece’s debt?
The Eurogroup assesses debt sustainability using a metric called gross financing needs. This is the sum of the overall fiscal deficit plus principal debt payments in a given year, expressed in terms of GDP. Thanks to the debt relief measures envisaged, Greece’s gross financing needs are expected to remain below 15% of GDP during the post-programme period for the medium term, and below 20% of GDP thereafter. This would bring Greece’s very high debt-to-GDP level on a persistently declining path and ensure the long-term sustainability of Greek debt.
The Eurogroup assesses debt sustainability using a metric called gross financing needs. This is the sum of the overall fiscal deficit plus principal debt payments in a given year, expressed in terms of GDP. Thanks to the debt relief measures envisaged, Greece’s gross financing needs are expected to remain below 15% of GDP during the post-programme period for the medium term, and below 20% of GDP thereafter. This would bring Greece’s very high debt-to-GDP level on a persistently declining path and ensure the long-term sustainability of Greek debt.
The diversified funding strategy helps the EFSF/ESM maintain a strategic presence with liquid benchmark bonds on all parts of the curve, and is designed to keep a wide investor base; have market access in different and also difficult market situations, while maintaining a balance between the cost of funding, which is passed on to beneficiary countries, and interest rate risk. This strategy is crucial for the ESM and the EFSF to fulfil their mission and therefore will not change.
In its statement of 25 May 2016, the Eurogroup mandated the ESM to work on a first set of debt relief measures, referred to as short-term measures.
The ministers said that these measures would be implemented after the closure of the first review and before the end of the current ESM programme (the third programme). On 5 December 2016, the ESM presented detailed plans for the short-term measures to the Eurogroup.
On January 23, the governing bodies of the ESM and of the EFSF completed the approval process of the measures. The measures were successfully implemented over the course of 2017.
In its statement of 25 May 2016, the Eurogroup also mentioned a possible second set of measures, if needed, following the successful implementation of the third programme by Greece. These are called medium-term measures. For the long term, the Eurogroup has agreed to a contingency mechanism to ensure long-run debt sustainability in case a more adverse economic scenario materialises in the country.
The Eurogroup laid down guiding principles for additional debt relief in its statement of May 2016. It excluded any nominal haircuts, and further decided that the measures must: facilitate market access for Greece to replace publicly financed debt with privately financed debt; smooth the repayment profile; incentivise the country’s adjustment process (even after the ESM programme ends); and ensure flexibility to accommodate uncertain economic growth and interest rate developments in the future.
There are three sets of short-term measures:
The smoothing of the repayment profile refers to Greece’s second programme, with the EFSF. The maximum weighted average maturity of the loans in this programme was agreed to be 32.5 years. Due to several factors, such as the return of bonds by Greece to the EFSF in February 2015, it dropped to approximately 28 years. The maturity has now been brought back up to the maximum of 32.5 years, and the repayment scheduled re-profiled, to avoid a number of repayment humps in the 2030s and 2040s.
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.
The waiver of the step-up interest rate margin applies to the €11.3 billion instalment of the EFSF programme (second programme) used to finance a debt buy-back. A margin of 2% had originally been foreseen for 2017 onwards. This margin was waived, and has not been charged for the year 2017.
When implemented in full, these measures should lead to a cumulative reduction of Greece’s debt-to-GDP ratio of around 25 percentage points until 2060, according to ESM estimates in a baseline scenario. It is also expected that Greece’s gross financing needs will fall by around six percentage points over the same time horizon. The bond exchange and the interest rate swaps make up the largest part of this reduction. Second-round effects on Greece’s refinancing rates would be an additional benefit. The short-term measures will improve Greece’s debt sustainability.
However, caution is warranted. The impact of some of the measures hinges on several factors beyond the ESM’s control. These include the interest rate environment and the availability of other market participants to conclude some transactions.
The adjusted repayment profile is expected to bear no cost. The cost of the waiver of the step-up margin will consist of the foregone profit for the EFSF and its shareholders.
Any costs from the three schemes to reduce the interest rate risk will be borne by Greece. This is particularly the case for the bond exchange and the interest rate swaps. Such short-term costs are more than compensated by the long-term benefits of the operation for Greece.
No. The Eurogroup set as a condition that the transactions would not have any direct cost for other programme countries.
The scheme is expected to be neutral for Greek banks and needed their consent for implementation.
The funding strategy remains unchanged. The ESM and EFSF will remain present as an issuer in benchmark sizes along the entire yield curve.
For internal purposes, the ESM has created a portfolio that will contain the proceeds of all the operations required to fund the short-term measures, known as the ‘Greek Compartment’. This will enable us to isolate these costs, and pass them on directly to Greece, so that other beneficiary countries don’t bear any extra cost.
The measures seek to address a general concern that future debt payments will pose an undue burden on budget spending and thus stifle the economy. Gross Financing Needs (GFN), the total amount of money a country spends in one year on interest rates payments and repaying maturing debt, is the benchmark used to measure this burden. The Eurogroup has agreed that, under a baseline economic scenario, Greece’s GFN should remain below 15% of GDP during the post-programme period for the medium term, and below 20% of GDP after that.
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.
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 €11.6 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.
No, ESM loans are always tied to conditionality. The economic policy conditions are set out in the MoU that the programme country signs. The country and the European Commission on behalf of the ESM negotiate the MoU.
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 2016 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 Hans Vijlbrief, the Treasurer-General at the Dutch finance ministry.
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 Fitch and Aa1 by Moody’s. The short-term rating is 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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