The European Financial Stability Facility (EFSF) is a
special purpose vehicle financed by members of the
eurozone
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro ( €) as their primary currency and sole legal tender, and have thus fully implemented EMU polici ...
to address the
European sovereign-debt crisis
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone memb ...
. It was agreed by the
Council of the European Union
The Council of the European Union, often referred to in the treaties and other official documents simply as the Council, and informally known as the Council of Ministers, is the third of the seven Institutions of the European Union (EU) as ...
on 9 May 2010, with the objective of preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty. The Facility's headquarters are in
Luxembourg City
Luxembourg ( lb, Lëtzebuerg; french: Luxembourg; german: Luxemburg), also known as Luxembourg City ( lb, Stad Lëtzebuerg, link=no or ; french: Ville de Luxembourg, link=no; german: Stadt Luxemburg, link=no or ), is the capital city of the Gr ...
, as are those of the
European Stability Mechanism
The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...
.
Treasury management
Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a fi ...
services and administrative support are provided to the Facility by the
European Investment Bank through a service level contract. Since the establishment of the
European Stability Mechanism
The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...
, the activities of the EFSF are carried out by the ESM.
The EFSF is authorised to borrow up to €440 billion, of which €250 billion remained available after the Irish and Portuguese bailout. A separate entity, the
European Financial Stabilisation Mechanism (EFSM), a programme reliant upon funds raised on the financial markets and guaranteed by the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
using the
budget of the European Union as collateral, has the authority to raise up to €60 billion.
Function
The mandate of the EFSF is to "safeguard financial stability in Europe by providing financial assistance" to eurozone states.
The EFSF can issue
bonds or other debt instruments on the market with the support of the
German Finance Agency to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalise banks or buy sovereign debt. Emissions of bonds would be backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centr ...
(ECB).
The €440 billion lending capacity of the Facility may be combined with loans up to €60 billion from the
European Financial Stabilisation Mechanism (reliant on funds raised by the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
using the EU budget as collateral) and up to €250 billion from the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF) to obtain a financial safety net up to €750 billion.
Had there been no financial operations undertaken, the EFSF would have closed down after three years, on 30 June 2013. However, since the EFSF was activated in 2011 to lend money to Ireland and Portugal, the Facility will exist until its last obligation has been fully repaid.
Lending
The Facility could only act after a support request is made by a eurozone member state and a country programme has been negotiated with the European Commission and the IMF and after such a programme has been unanimously accepted by the
Euro Group
The Eurogroup is the recognised collective term for the informal meetings of the finance ministers of the eurozone—those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 member ...
(eurozone finance ministers) and a memorandum of understanding is signed. This would only occur when the country is unable to borrow on markets at acceptable rates.
If there was a request from a eurozone member state for financial assistance, it will take three to four weeks to draw up a support programme including sending experts from the commission, the IMF and the ECB to the country in difficulty. Once the Euro Group approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.
Guarantee commitments
The table below shows the current maximum level of joint and several guarantees for capital given by the Eurozone countries. The amounts are based on the
European Central Bank
The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centr ...
capital key weightings. The EU requested the eurozone countries to approve an increase of the guarantee amounts to €780 billion. The majority of the risk of the increase from original €440 billion falls on the AAA rated countries and ultimately their taxpayers, in a possible event of default of the investments of EFSF. The guarantee increases were approved by all Eurozone countries by 13 October 2011.
The €110 billion bailout to Greece of 2010 was not part of the EFSF guarantees and is not managed by EFSF, but a separate bilateral commitment by the Eurozone countries (excluding Slovakia, who opted out, and Estonia, which was not in Eurozone in 2010) and IMF.
In addition to the
capital guarantees shown in the table, the enlarged EFSF agreement holds the guarantor countries responsible for all interest costs of the issued EFSF bonds, in contrast to the original EFSF structure, significantly expanding the potential taxpayer liabilities. These additional guarantee amounts increase if the coupon payments of the issued EFSF bonds are high. On 29 November 2011, European finance ministers decided that EFSF can guarantee 20 to 30% of the bonds of struggling peripheral economies.
(° Estonia entered the eurozone on 1 January 2011,
i.e. after the creation of the European Financial Stability Facility in 2010). Greece, Ireland and Portugal are "stepping out guarantors", except where they have liabilities before getting that status. Estonia is a stepping out guarantor with respect to liabilities before it joined the eurozone.
Management
The chief executive officer of the EFSF is
Klaus Regling, a former Director General of the
European Commission's Directorate General for Economic and Financial Affairs, having previously worked at the
IMF, the German Ministry of Finance and in the private sector as managing director of the Moore Capital Strategy Group in London.
The Board of the European Financial Stability Facility comprise high level representatives of the 17 eurozone member states, including Deputy Ministers or Secretaries of State or Director Generals of the
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
. The European Commission and the European Central Bank can each appoint an observer to the EFSF Board. Its chairman is Thomas Wieser, who is also chairman of the EU's Economic and Financial Committee.
Although there is no specific statutory requirement for accountability to the
European Parliament
The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
, the Facility is expected to operate a close relationship with relevant committees within the EU.
Developments and implementation
On 7 June 2010 the eurozone member states entrusted the European Commission, where appropriate in liaison with the European Central Bank, with the task of:
* negotiating and signing on their behalf after their approval the memoranda of understanding related to this support;
* providing proposals to them on the loan facility agreements to be signed with the beneficiary member state(s);
* assessing the fulfilment of the conditionality laid down in the memoranda of understanding;
* providing input, together with the
European Investment Bank, to further discussions and decisions in the
Euro Group
The Eurogroup is the recognised collective term for the informal meetings of the finance ministers of the eurozone—those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 member ...
on EFSF related matters and, in a transitional phase, in which the European Financial Stability Facility is not yet fully operational, on building up its administrative and operational capacities.
On the same day the European Financial Stability Facility was established as a limited liability company under Luxembourg law (Société Anonyme), while Klaus Regling was appointed as chief executive officer of the EFSF on 9 June 2010 and took office on 1 July 2010. The Facility became fully operational on 4 August 2010.
On 29 September 2011, the German Bundestag voted 523 to 85 to approve the increase in the EFSF's available funds to (Germany's share €211bn). Mid-October Slovakia became the last country to give approval, though not before parliament speaker
Richard Sulík
Richard Sulík (; born 12 January 1968) is a Slovak politician, economist and businessman. He is the leader of the political party Freedom and Solidarity and served as Deputy Prime Minister for Economy and Minister of Economy in Government of S ...
registered strong questions as to how "a poor but rule-abiding euro-zone state must bail out a serial violator with twice the per capita income, and triple the level of the pensions – a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon treaty has been ripped up?"
Granting of EFSF aid to Ireland
The Euro Group and the EU's Council of Economics and Finance Ministers decided on 28 November 2010 to grant financial assistance in response to the Irish authorities' request. The financial package was designed to cover financing needs up to €85 billion and would result in the EU providing up to €23 billion through the
European Financial Stabilisation Mechanism and the EFSF up to €18 billion over 2011 and 2012.
The first bonds of the European Financial Stability Facility were issued on 25 January 2011. The EFSF placed its inaugural five-year bonds for an amount of €5 billion as part of the EU/IMF financial support package agreed for Ireland. The issuance spread was fixed at mid-swap plus 6 basis points. This implies borrowing costs for EFSF of 2.89%. Investor interest was exceptionally strong, with a record breaking order book of €44.5 billion, i.e. about nine times the
supply
Supply may refer to:
*The amount of a resource that is available
**Supply (economics), the amount of a product which is available to customers
**Materiel, the goods and equipment for a military unit to fulfill its mission
*Supply, as in confidenc ...
. Investor demand came from around the world and from all types of institutions. The Facility chose three banks (
Citibank,
HSBC and
Société Générale
Société Générale S.A. (), colloquially known in English as SocGen (), is a French-based multinational financial services company founded in 1864, registered in downtown Paris and headquartered nearby in La Défense.
Société Générale ...
) to organise the inaugural bonds issue.
Granting of EFSF aid to Portugal
The second Eurozone country to request and receive aid from EFSF is
Portugal
Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country whose mainland is located on the Iberian Peninsula of Southwestern Europe, and whose territory also includes the Atlantic archipelagos of ...
. Following the formal request for financial assistance made on 7 April 2011 by the Portuguese authorities, the terms and conditions of the financial assistance package were agreed by the Euro Group and the EU's Council of Economics and Finance Ministers on 17 May 2011. The financial package was designed to cover Portugal's financial needs of up to €78 billion, with the European Union—through the European Financial Stabilisation Mechanism—, and the EFSF each providing up to €26 billion to be disbursed over 3 years. Further support was made available through the IMF for up to €26 billion, as approved by the IMF Executive Board on 20 May 2011.
EFSF was activated for Portuguese lending in June 2011, and issued €5 billion of 10-year bonds on 15 June 2011, and €3 billion on 22 June 2011 through
BNP Paribas,
Goldman Sachs International and
The Royal Bank of Scotland
The Royal Bank of Scotland plc (RBS; gd, Banca Rìoghail na h-Alba) is a major retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest (in England and Wales) and Ulster Ba ...
.
Enlargement
On 21 July 2011, the eurozone leaders agreed to amend the EFSF to enlarge its capital guarantee from €440 billion to €780 billion. The increase expanded the effective lending capacity of the EFSF to €440 billion. This required ratifications by all eurozone parliaments, which were completed on 13 October 2011.
The EFSF enlargement agreement also modified the EFSF structure, removing the cash buffer held by EFSF for any new issues and replacing it with +65% overguarantee by the guaranteeing countries. The increase of 165% to the capital guarantee corresponds to the need to have €440 billion of AAA-rated guarantor countries behind the maximum EFSF issued debt capital (Greece, Ireland, and Portugal do not guarantee new EFSF issues as they are recipients of Euroland support, reducing the total maximum guarantees to €726 billion).
Once the capacity of EFSF to extend new loans to distressed Euroland countries expires in 2013, it and the EFSM will be replaced by the
European Stability Mechanism
The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...
(once it is ratified, see
Treaties of the European Union#Eurozone reform). However, the outstanding guarantees given to EFSF bondholders to fund bailouts will survive ESM.
On 27 October 2011 the
European Council announced that the
member states had reached agreement to further increase the effective capacity of the EFSF to €1 trillion by offering insurance to purchasers of eurozone members' debt.
European leaders have also agreed to create one or several funds, possibly placed under IMF supervision. The funds would be seeded with EFSF money and contributions from outside investors.
Greek bailout
As part of the
second bailout for Greece, under a retroactive
Collective action clause A collective action clause (CAC) allows a supermajority of bondholders to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring. Bondholders generally opposed such cla ...
, 100% of the Greek-jurisdiction bonds were shifted to the EFSF, amounting to (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014.
Rating
The Facility aimed for
ratings agencies to assign a AAA rating to its bonds, which would be eligible for European Central Bank refinancing operations. It achieved this in September 2010 when
Fitch, and
Standard & Poor's awarded it AAA and
Moody's
Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
awarded it Aaa,
making it easier for it to raise money. The rating outlook was qualified as stable. On 16 January 2012 the Standard and Poors (S&P) lowered its rating on the European Financial Stability Facility to AA+ from AAA; the downgrade followed the 13 January 2012 downgrade of France and eight other euro-zone nations which has sparked worries that EFSF will have further difficulties raising funds. In November 2012, Moody's downgraded it. In May 2020, Scope Ratings – a leading European rating agency – assigned the European Financial Stability Facility a first-time long-term rating of AA+ with a Stable Outlook.
Controversies
The EFSF enlargement process of 2011 proved to be challenging to several Eurozone member states, who objected against assuming sovereign liabilities in potential violation of the
Maastricht Treaty
The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve Member state of the European Union, member states of the European Communities, ...
of no bailout provisions. On 13 October 2011, Slovakia approved EFSF expansion 2.0 after a failed first approval vote. In exchange, the Slovakian government was forced to resign and
call new elections.
On 19 October 2011, Helsingin Sanomat reported that the Finnish parliament passed the EFSF guarantee expansion without quantifying the total potential liability to Finland. It turned out that several members of the parliament did not understand that in addition to increasing the capital guarantee from €7.9 billion to €14.0 billion, the Government of Finland would be guaranteeing all of the interest and capital raising costs of EFSF in addition to the issued capital, assuming theoretically uncapped liability. Helsingin Sanomat estimated that in an adverse situation this liability could reach €28.7 billion, adding interest rate of 3.5% for 30-year loans to capital guarantee. For this reason the parliamentary approval process on 28 September 2011 was misleading, and may require a new Government proposal.
Operations
As of January 2012 the EFSF had issued 19bn euro in long-term debt and 3.5bn in short-term debt.
* 25 January 2011 5.0bn euro 5-yr bond
* 15 June 2011 5.0bn euro 10-yr bond
* 22 June 2011 3.0bn euro 5-yr bond
* 7 November 2011 3.0bn euro 10-yr bond
* 13 December 2011 1.9719bn euro 3-month bill
* 5 January 2012 3.0bn euro 3-yr bond
* 17 January 2012 1.501bn euro 6-month bill
Bailout programs for EU members (since 2008)
See also
*
European Fiscal Compact
The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union; also referred to as TSCG, or more plainly the Fiscal Stability Treaty is an intergovernmental treaty introduced as a new stricter version of the Stability ...
*
European Stability Mechanism
The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It was ...
(ESM)
*
Greek government-debt crisis
Greece faced a sovereign debt crisis in the aftermath of the financial crisis of 2007–2008. Widely known in the country as The Crisis ( Greek: Η Κρίση), it reached the populace as a series of sudden reforms and austerity measures that ...
*
Global financial crisis
Global means of or referring to a globe and may also refer to:
Entertainment
* ''Global'' (Paul van Dyk album), 2003
* ''Global'' (Bunji Garlin album), 2007
* ''Global'' (Humanoid album), 1989
* ''Global'' (Todd Rundgren album), 2015
* Bruno ...
*
Maiden Lane Transactions
Maiden Lane Transactions refers to three limited liability companies created by the Federal Reserve Bank of New York in 2008 as a financial vehicle to facilitate transactions involving three entities: the former Bear Stearns company as the first en ...
*
Term Asset-Backed Securities Loan Facility
The Term Asset-Backed Securities Loan Facility (TALF) is a program created by the U.S. Federal Reserve (the Fed) to spur consumer credit lending. The program was announced on November 25, 2008, and was to support the issuance of asset-backed secu ...
*
Troubled Asset Relief Program
The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President ...
(TARP)
*
List of acronyms: European sovereign-debt crisis
Notes
References
External links
About EFSF
{{Authority control
Policy and political reactions to the Eurozone crisis
Eurozone
European Union organisations based in Luxembourg
Monetary policy of the European Union
Organizations established in 2010
2010 in the European Union