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lending toolkit

Financial assistance instruments

The ESM’s mission is to provide financial assistance to euro area countries experiencing or threatened by severe financing problems.


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, in May 2020 the ESM introduced its 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 was available until the end of 2022.

Lending Toolkit

Loans within a macroeconomic adjustment programme
To assist ESM Members in significant need of financing, and which have lost access to the markets, either because they cannot find lenders or because the financing costs would adversely impact the sustainability of public finances.
ESM loans are conditional upon the implementation of macroeconomic reform programs prepared by the European Commission, in liaison with the European Central Bank and, where appropriate, the International Monetary Fund.
The same institutions are entrusted with monitoring compliance with the agreed program conditions for economic reform. The ESM Member is obliged to cooperate with this monitoring and enable the ESM to perform its financial due diligence. If the country deviates significantly from the program, disbursements may be withheld.
Primary market purchases
The ESM may engage in primary market purchases of bonds or other debt securities issued by ESM Members at market prices to allow them to maintain or restore their relationship with the investment community and therefore reduce the risk of a failed auction. This can complement the regular loan instrument or a precautionary programme. The purchase will be limited to 50% of the final issued amount.
No additional conditionality beyond the underlying programme.
Secondary market purchases
To support the sound functioning of the government debt markets when lacking market liquidity threatens financial stability in the context of a loan either with a macroeconomic adjustment programme or without if the Member's economic and financial situation is fundamentally sound.
For ESM Members not under a programme, specific policy conditions will apply.
Precautionary credit line
To support sound policies and prevent crisis situations from emerging. It aims to help ESM Members whose economic conditions are sound to maintain continuous access to market financing by strengthening the credibility of their macroeconomic performance.
two types of credit lines
Both can be drawn via a loan or a primary market purchase, have an initial availability period of one year and are renewable:
• 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.
When an ECCL is granted or a PCCL drawn, the ESM Member is subject to enhanced surveillance by the EC. Surveillance covers the country’s financial condition and its financial system.
Loans for indirect bank recapitalisation
To preserve the financial stability of the euro area by addressing those cases where the financial sector is primarily at the root of a crisis, rather than fiscal or structural policies.
The beneficiary Member State should demonstrate an inability to:
• 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.
Will apply to financial supervision, corporate governance and domestic law relating to restructuring or resolution.
Direct recapitalisation of institutions
To help remove a serious risk of contagion from the financial sector to the sovereign by allowing the direct recapitalisation of institutions. The total amount available for this instrument is limited to €60 billion. The instrument is relevant for banks (systemically important credit institutions), financial holding companies, and mixed financial holding companies as defined in relevant EU legislation.
Eligible if the following situations apply:
• 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.
Will apply, addressing the sources of difficulties in the financial sector and, where appropriate, the general economic situation of the ESM Member. Additional institution-specific conditions will also apply.


ESM loans (in support of adjustment programme)
What is the purpose of ESM loans?
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.
How are loans linked to reforms?
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.

How are ESM loans disbursed?
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.
How are ESM loans repaid?
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.
Can beneficiary ESM Members repay their loans before the agreed maturity date?
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.

What interest rate does the ESM charge?
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.
Pandemic Crisis Support
Are there conditions attached?
Pandemic Crisis Support provides funds targeted at euro area member states’ healthcare costs related to the pandemic. Euro area member states requesting support would only need to commit to use this credit line only to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID-19 crisis.

The credit line will be available until the end of 2022. This period could be adjusted if there is a need, given the evolution of the crisis. Afterwards, euro area member states would remain committed to strengthen economic and financial fundamentals, consistent with the EU economic and fiscal coordination and surveillance frameworks, including any flexibility applied by the competent EU institutions.
Could the ESM’s credit rating be at risk?
The ESM’s long-term credit ratings are AAA, Stable Outlook (Standard and Poor's; Fitch) and Aa1, Stable Outlook (Moody’s). The credit ratings assigned to the ESM by the credit rating agencies should not be impacted by new loans under the Pandemic Crisis Support.

Moody’s confirmed on 28 April 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.
How much money would be made available to countries?
Access granted will be 2% of the respective member states' gross domestic product as of end-2019, as a benchmark. Should all 19 euro area countries draw from the credit line, this would amount to a combined volume of around €240 billion.

Although support will be available for all member states of the euro area, it is up to each member state to decide whether it wants to apply for it or not. So less than the theoretically available funds of €240 billion are expected to be requested. And even if a country applies for the credit line, funds do not have to be drawn. Credit lines are designed to be a protection or insurance.
What is the impact on the ESM’s funding activities?
There is no immediate impact on our funding volumes and funding activities. We will communicate the potential impact on our funding activities when we face the request of a country. The agreed maximum average maturity of 10 years and the agreed modalities for disbursements will enable us to use a wide range of funding instruments to raise potential additional funding needs smoothly over time.

In general, a country can draw up to 15% of the aggregate amount of the Pandemic Crisis Support approved for the respective member state in cash per month. It is possible for the ESM to provide additional liquidity related to a particular disbursement when it has the funds available.

The commitment to use this credit line to support domestic financing of direct and indirect healthcare, cure and prevention related costs due to the COVID 19 crisis offers the option to fund the potential additional liquidity needs through the issuance of social bonds.
What is the basis for euro area countries to become eligible for ESM support?
Preliminary assessments by the European Commission, regarding financial stability risks, bank solvency, debt sustainability, and on the eligibility criteria for accessing the Pandemic Crisis Support, confirmed that each member state is eligible for receiving support. On this basis, the Pandemic Crisis Support is available to all euro area member states. These assessments were performed by the Commission, in liaison with the European Central Bank (ECB) and in cooperation with the ESM.
Will the use of the funds be monitored and who will perform that task?
According to EU framework, the Member States that benefit from precautionary financial assistance from the ESM are subject to Enhanced Surveillance. This task is performed by the European Commission. As the Commission has detailed, it will focus its monitoring and the reporting requirements on the actual use of the funds to cover direct and indirect healthcare costs. For this purpose, the Commission will not perform ad-hoc missions in addition to the standard ones that take place within the European Semester. The Commission will report every quarter to the ESM Board of Directors.
What part is the ESM playing in Europe’s concerted response to the coronavirus crisis?
To address the coronavirus crisis, the ESM has established a Pandemic Crisis Support instrument, based on its Enhanced Conditions Credit Line (ECCL) available to all euro area countries. It is available to all euro area member states, with standardised terms agreed in advance by the ESM governing bodies, reflecting the current challenges, on the basis of preliminary assessments by the European institutions.

This is part of a concerted European response, which includes the European Commission with its safety net for workers called SURE and the European Investment Bank with its safety net for businesses. The Commission’s SURE initiative provides funding to Member States of up to €100 billion by covering part of the costs related to the creation or extension of national short-time work schemes. The European Investment Bank is offering liquidity support to help hard-hit small and medium-sized enterprises with an emergency support package of up to €200 billion.
Can the funds be drawn immediately?
Applying for a credit line does not automatically mean drawing on the credit line. Some countries may use the credit line as an insurance to reassure investors (as is often the case with International Monetary Fund credit lines) that they have access to cheaper funding and may not actually draw it down.

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.
How long will it take to complete this process?
Among other things, the precise time frame depends on the duration of national procedures in the Member States. The expectation is that it can take about two weeks. After that, the country can draw from the credit line any time and no more procedures are needed.
What happens after the decision is taken?
The Commission, in collaboration with the ESM, finalise the country-specific Pandemic Response Plan with the requesting member (based on the agreed template), and the ESM Managing Director prepares a Financial Assistance Facility Agreement proposal.

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).
Who takes the decision to grant support?
The Board of Governors decides to grant support, in principle, based on the assessment of the European Commission in liaison with the European Central Bank and in collaboration with the ESM. The stability support has to be approved by a unanimous vote in favour of the ESM Board of Governors (the 19 euro finance ministers, the ESM’s highest decision making body).

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.
How do countries apply for support?
A country can request pandemic crisis support by sending a letter to the Chairperson of the ESM Board of Governors.
Is the Pandemic Crisis Support already available?
Yes. The ESM’s Board of Governors (BoG), the Finance ministers from the 19 countries of the euro area, agreed on 15 May 2020 to make the Pandemic Crisis Support available to member states.
When does the country have to pay back the loan? How much will it cost?
A country that applied for Pandemic Crisis Support can request to draw from the precautionary credit line. The ESM can disburse money under the credit line over a period of twelve months, which can be extended twice for six months. The loans would have a maximum average maturity of 10 years.

The country will need to pay, in addition to the ESM cost of funding, a margin of 10 basis points (0.1%) annually, a one-off up-front service fee of 25 basis points (0.25%), and an annual service fee of 0.5 basis points (0.005%). This is lower than the pricing outlined for ESM’s usual precautionary credit lines and will help keep the cost of Pandemic Crisis Support to a minimum.
Policy conditions attached to loans
Are policy conditions always tied to ESM loans?
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.
What kind of policy conditions do programme countries have to implement?
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:

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.
How is conditionality monitored during an ESM programme?
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.
How the ESM can help banks
What are the ways that the ESM can help banks in the euro area?
The ESM can provide financial assistance for the banking sector in three ways:

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.
Are private investors bailed in before ESM funds are used to rescue a distressed bank?
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.
Indirect bank recapitalisation
What reforms are required in return for indirect bank recapitalisation loans?
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.
Are the loans for indirect bank recapitalisation disbursed as cash?
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).
Would there be a bail-in of the beneficiary bank’s creditors and shareholders?
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.
What is the purpose of ESM’s indirect bank recapitalisation?
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.
Are all banks eligible to benefit from these ESM loans for indirect bank recapitalisation?
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.
Direct bank recapitalisation
Is direct recapitalisation of banks likely to occur in the current setting?
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.
Can the ESM be a shareholder in the bank it recapitalises?
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.
Can the ESM eventually sell its shares in the recapitalised institution?
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.
Is there a cap on the amount available to recapitalise banks directly?
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.
How does the direct recapitalisation of banks relate to Banking Union?
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).
What is the procedure for requesting support?
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.
Does the beneficiary institution have to be restructured?
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.
Will the requesting ESM Member contribute financially to the recapitalisation?
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.
Will there be a bail-in or other form of private sector contribution?
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.
Why is a direct bank recapitalisation instrument necessary?
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.
What kind of conditionality will apply for the ESM Member and the institution requesting the use of direct recapitalisation and for the beneficiary institution?
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.
How does direct recapitalisation work?
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.
Precautionary credit lines
Why are ESM precautionary credit lines needed?
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.
How do these two credit lines differ?
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.
How can a credit line be activated?
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).
What type of ESM precautionary credit lines are available?
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.
Buying bonds in primary and secondary market
What is a primary market purchase?
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.
Which countries could benefit from an ESM primary market purchase?
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.
Would conditionality be attached?
Yes, the conditions would be those of the macroeconomic adjustment or precautionary programme.

What is a secondary market purchase?
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.
Which countries could benefit from an ESM secondary market purchase?
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.
Would conditionality be attached?
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
How loans create savings for programme countries?
How much do programme countries save from ESM lending?
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.

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
How do ESM loans compare to loans of other international financial institutions (IFIs)?
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.
How do ESM loans save money for programme countries?
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.
Programme evaluation
Why was Gertrude Tumpel-Gugerell chosen as the high-level evaluator?
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.
Will the high-level evaluator have an office at the ESM and will she receive compensation for this role?
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.
Why is an evaluation of past EFSF/ESM programmes needed?
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.
What is the scope of the evaluation?
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.
What topics will the evaluation address?
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.
When will the evaluation be finished and how will the results be used?
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.