Financial assistance instruments
The ESM’s mission is to provide financial assistance to euro area countries experiencing or threatened by severe financing problems. This assistance is granted only if it is proven necessary to safeguard the financial stability of the euro area as a whole and of ESM Members.
For this, the ESM counts on several instruments. The ESM can grant a loan as part of a macroeconomic adjustment programme, such as the one that was already used by Cyprus and Greece. Ireland, Greece, and Portugal have used similar programmes delivered by the EFSF. The only other instrument used was an ESM loan to recapitalise banks which was provided to Spain. See the full ESM toolkit below.
Apart from these instruments, the ESM has created Pandemic Crisis Support, a credit line available to ESM Members to support domestic financing of healthcare, cure and prevention related costs due to the COVID-19 crisis. This credit line is available until the end of 2022.
• Precautionary Conditioned Credit Line (PCCL): available to a Member State whose economic and financial situation is fundamentally sound, as determined by respecting six eligibility criteria such as public debt, external position or market access on reasonable terms.
• Enhanced conditions credit line (ECCL): access open to euro area Member States whose economic and financial situation remains sound but that do not comply with the eligibility criteria for PCCL. The ESM Member is obliged to adopt corrective measures addressing such weaknesses and avoiding future problems in respect of access to market financing. The ESM Member has the flexibility to request funds at any time during the availability period.
• Meet capital shortfalls via private sector solutions.
• Recapitalise the institutions without adverse effects for its own financial stability and fiscal sustainability. The institutions should be of systemic relevance or pose a serious threat to the financial stability of the euro area or its Member States. The ESM Member should demonstrate its ability to reimburse the loan.
• They are or are likely to be in breach of the relevant capital requirements and are unable to attract sufficient capital from private sector sources to resolve their capital problems.
• Burden-sharing arrangements, such as bail-in (fully applicable in 2016), in the Bank Recovery and Resolution Directive, are insufficient to fully address the capital shortfall.
• They have a systemic relevance or pose a serious threat to the financial stability of the euro area as a whole or the requesting ESM Member.
• The institution is supervised by the ECB.
• The beneficiary Member State should also demonstrate that it cannot provide financial assistance to the institutions without very adverse effects on its own fiscal sustainability, and that therefore the use of the indirect recapitalisation instrument is infeasible.
Loan interest starts accumulating immediately after the disbursement. Beneficiary countries pay it annually.
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.
The credit line will be available until the end of 2022. This period could be adjusted if there is a need, given the evolution of the crisis. Afterwards, euro area member states would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions.
Moody’s confirmed on 28 April 2020 that the ESM's Aa1 rating would not be affected by the use of the Pandemic Crisis Support credit lines, thanks to its strong credit.
Fitch also confirmed 1 May that the ESM’s coronavirus response is consistent with its AAA credit rating. Fitch assesses the ESM's credit quality based on a conservative scenario assuming the full use of its €500 billion lending capacity, meaning the AAA rating would tolerate up to €410 billion of extra lending, all else being equal.
Although support will be available for all member states of the euro area, it is up to each member state to decide whether it wants to apply for it or not. So less than the theoretically available funds of €240 billion are expected to be requested. And even if a country applies for the credit line, funds do not have to be drawn. Credit lines are designed to be a protection or insurance.
In general, a country can draw up to 15% of the aggregate amount of the Pandemic Crisis Support approved for the respective member state in cash per month. It is possible for the ESM to provide additional liquidity related to a particular disbursement when it has the funds available.
The commitment to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID 19 crisis offers the option to fund the potential additional liquidity needs through the issuance of social bonds.
This is part of a concerted European response, which includes the European Commission with its safety net for workers called SURE and the European Investment Bank with its safety net for businesses. The Commission’s SURE initiative provides funding to Member States of up to €100 billion by covering part of the costs related to the creation or extension of national short-time work schemes. The European Investment Bank is offering liquidity support to help hard-hit small and medium-sized enterprises with an emergency support package of up to €200 billion.
Should a country take the decision to draw on the loan, it can draw up to 15% of the aggregate amount of the Pandemic Crisis Support approved for the respective Member State in cash per month. It is possible for the ESM to provide additional liquidity related to a particular disbursement when it has the funding available.
The Board of Governors agrees on the Pandemic Response Plan and the Financial Assistance Facility Agreement proposal. The country signs the Response Plan with the Commission, on behalf of the ESM and the ESM Board of Directors approves the final country specific Financial Assistance Facility Agreement (based on the proposal approved earlier by the Board of Governors).
Preliminary assessments by the European Commission, regarding financial stability risks, bank solvency, debt sustainability, and on the eligibility criteria for accessing the Pandemic Crisis Support, have already confirmed that each member state is eligible for receiving support. This makes the decision by the Board of Governors, in principle, a mere confirmation.
The country will need to pay, in addition to the ESM cost of funding, a margin of 10 basis points (0.1%) annually, a one-off up-front service fee of 25 basis points (0.25%), and an annual service fee of 0.5 basis points (0.005%). This is lower than the pricing outlined for ESM’s usual precautionary credit lines and will help keep the cost of Pandemic Crisis Support to a minimum.
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.
Fiscal consolidation – measures to cut government expenditure, by reducing public administration costs and improving its efficiency, and to increase revenue through privatisations or tax reform;
Structural reforms – measures to boost potential growth, create jobs, and improve competitiveness;
Financial sector reforms – measures to strengthen banking supervision or recapitalise banks.
indirect bank recapitalisation via a loan to the ESM Member;
direct bank recapitalisation;
general loan to the ESM Member, under a loan programme, part of which would be used to support the banking sector.
For more detailed information, please consult the ESM Guideline on Recapitalisation of Financial Institutions (PDF, 366 KB).
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.
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.
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).
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.
(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.
- 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.
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.
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.
For more detailed information, please consult the ESM Guideline on Precautionary Financial Assistance (PDF, 180 KB).
For more detailed information, please consult the ESM Guidelines on Primary (PDF, 356 KB) and Secondary (PDF, 188 KB) Market Support Facilities
in € billion As percentage of GDP
Cyprus 0.4 1.9
Greece 13 7
Ireland 0.8 0.2
Spain 1.6 0.1
Portugal 1.5 0.7
Furthermore, the ESM charges very low interest rates on its loans, because it can borrow money very cheaply thanks to its strong creditworthiness.
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.
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.
The ESM Management Board will ensure that the report’s findings and recommendations are appropriately followed up to improve future programmes.