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Euro area countries forged a new shield for monetary union over the course of 2018, making the most of a period of reflection on how to deepen and strengthen their ties.
During the crisis, the ESM grew to become one of Europe’s established institutions with economic and financial expertise, offering a reliable safety net to the now 19 members of the monetary union.
Greece emerged from its programme in August 2018 with outstanding debt of €190.8 billion to the euro area rescue funds. As holders of 53.2% of Greek central government debt at the end of 2018[1], the EFSF and ESM are by far the country’s largest creditors.
Greek banks were shut and in need of cash when the government at last requested a third programme.
Greek voters, bitter over the wage and pension cuts required by the troika, sought change via Syriza, the party led by the charismatic newcomer Alexis Tsipras.
The ESM’s ability to safeguard financial stability is anchored by the paid-in capital provided by its Members. Preserving this capital is therefore essential to fulfilment of the ESM’s mission.
Initially the firewall was due to receive its capital gradually over five years.
The euro area established a direct channel to banks – a major advance for the monetary union – when the ESM’s toolbox was expanded to include a direct recapitalisation instrument (DRI).
Just as a private sector lender keeps tabs on the financial health of the borrower throughout the duration of the loan, the ESM needs to pay close attention to the balance sheets of the countries it assists.
The ESM proved its mettle in setting up the assistance programme for Cyprus, building on its success in providing bank-focused aid to Spain.