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Glossary

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Secondary market support facility

The purchase of bonds or other debt instruments by the ESM or EFSF issued by euro area countries  on the secondary debt market. The aim of such intervention is to support the proper functioning of the government debt markets in exceptional circumstances. For instance, if  a lack of market liquidity were to threaten financial stability, risking to push  sovereign interest rates towards unsustainable levels and creating refinancing problems for the banking system of a country.  ESM secondary market support is intended to ensure debt market liquidity and to incentivize investors to further participate in the financing of euro area countries.

Service fee (ESM loans)

A fee to cover the ESM’s operational costs. The service fee has two components: (i) up-front service fee (50 bps) deducted from the drawn amount, (ii) annual service fee (0.5 bp) paid on the interest payment date.

Single Resolution Mechanism (SRM)

Single Resolution Mechanism (SRM) – is one of the key elements of the Banking Union. It is a pan-European mechanism that is designed to coordinate the potential resolution of all banks participating in the SSM. The decision to establish the SRM was taken to avoid a situation in which bank resolution conducted at national level would have a disproportionate impact on public debt and the real economy. 
The SRM has a central decision-making body - the Single Resolution Board – which includes representatives of resolution authorities of all participating Member States. The SRM is supported by the Single Resolution Fund (SRF).

Single Supervisory Mechanism (SSM)

Single Supervisory Mechanism (SSM) - a mechanism for the prudential supervision of banks in the euro area (open to other EU member states). The SSM became operational in November 2014. 
Within the SSM framework, the ECB directly supervises the 129 significant banks of the participating countries. These banks hold almost 82% of banking assets in the euro area. Banks that are not considered significant continue to be supervised by their national supervisors, in close cooperation with the ECB. At any time the ECB can decide to directly supervise any one of these banks to ensure that high supervisory standards are applied consistently.

Six-Pack

A set of six legal acts adopted in 2011, enhancing procedures for the surveillance of the EU member states' fiscal policies (strengthening the Stability and Growth Pact) and macroeconomic policies (with a new Macroeconomic Imbalances Procedure). 
EU Member States are bound under the EU treaties and the Stability and Growth Pact by reference values for government deficit and public debt set at 3% and 60% of GDP respectively, and report their budgetary plans annually. In the event of not respecting these reference values, an excessive deficit procedure is initiated, with deadlines for corrective measures. The new solutions introduced in the Six-Pack are aimed at strengthening the provisions set for ensuring the respect of those criteria. They affect both the preventive arm of the pact, namely the procedures that are followed to ensure that excessive deficits are avoided, and the corrective arm of the pact, i.e. the procedure followed for the correction of excessive deficits.
In addition, the Six-Pack creates a formal framework for monitoring macroeconomic imbalances, including an early warning system and mechanisms for correcting imbalances, and lays down minimum requirements for national budgetary frameworks.

Spread

The difference in yield between a bond and  a benchmark bond or index . Spreads are commonly quoted in basis points (1 basis point is equal to 0.01%).

Stability and Growth Pact (SGP)

A set of EU budgetary rules agreed in 1997 underpinning the Economic and Monetary Union (EMU). The main aim of the Stability and Growth Pact is to prevent the occurrence of excessive budget deficits, defined as more than 3% of gross domestic product (GDP). Member states are also required to have a level of total public debt of no more than 60 % of GDP or be taking steps to reduce it to that level. The SGP requires EU Member States to promptly implement an excessive deficit procedure if it is found to be in serious breach of the rules. The procedure requires a Member State to correct the budget deficit below 3% of GDP within a certain timeframe. 
In December 2011, the EU adopted the Six-Pack of legislation on economic governance. Four of these laws are aimed at reforming the SGP by enforcing a stricter application and surveillance of fiscal rules.

Stability support

The term used in the ESM Treaty to support granted by to member countries. The ESM offers five forms of stability support instruments to countries: precautionary financial assistance (the ECCL and the PCCL), financial assistance for the recapitalisation of banks, primary market support facility, secondary market support facility, and loans. All forms or assistance are subject to appropriate policy conditionality reflecting the circumstances of the country.
Financial assistance in the form of ESM loans is subject to a macroeconomic adjustment programme and is intended to assist countries  that have significant financing needs but have to a large extent lost access to market financing and have severe problems in their general economic and fiscal situation. The decision to grant a loan is taken by the ESM Board of Governors, based on an assessment by the European, Commission, ECB and IMF. Loans are provided in one or more tranches, which may each consist of one or more disbursements. The disbursement of the first tranche is decided by the Board of Directors together with the approval of the Financial Assistance Facility Agreement (FFA). 

Stress test

An analysis carried out internally by banks or by supervisory authorities, to determine whether a bank has enough capital to withstand the impact of adverse developments. Stress tests are designed to detect weak spots in individual banks or in the banking system at an early stage, so that preventive action can be taken by the banks and supervisors.

Structural reforms

Structural reforms – reforms aimed at making the allocation of resources in an economy more efficient. As a consequence, the structure of the economy becomes more flexible, so that it has greater capacity to absorb and adapt to shocks. Such reforms are usually undertaken with regard to a country’s labour market, product markets, the framework of the social welfare system, and the fiscal framework.
Examples of structural reforms include the liberalisation of professional services, lifting restrictions  to open and run a business, pension system reform, and changes in the tax system with the goal of promoting productivity and private investment.

Supranational organisation

An organisation to whom Member States cede some sovereign decision-making power in selected policy areas. The European Union is an example of a supranational organisation.

Supranational, Sub-sovereign and Agency (SSA)

A sector of the bond market which comprises sub-sovereign, supranational and agency issuers. The ESM and the EFSF both belong to this category.

Syndication

A method of issuing bonds where a syndicate of several banks underwrites the bonds issued (i.e. buy the whole issue) and resells the bonds in the market.

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