European Financial Stabilisation Mechanism

 The EFSM represents the MFS instrument launched by the EU to tackle the problems associated with the sovereign debts of euro area countries. It was introduced in May 2010, immediately after approval of the bilateral loans extended specifically for the case of Greece. In fact the mechanism reproduces the same scheme used for BoP assistance with the intention of supporting euro area countries.

 The institutional mechanisms of the EFSM are partially modelled on those of BoP assistance, since the procedure follows the same pattern described in section 0, but in this case more important than the role played by the Economic and Financial Committee is that played by the Eurogroup Working Group, a configuration of the EFC in which only the euro area member states, the Commission and the ECB are represented.

 Every six months, since the establishment of the EFSM, the Commission has had to review and forward to the Economic and Financial Committee and to the Council its view on whether the exceptional circumstances justifying the establishment of this MFS instrument are still present, and thus whether the EFSM should be maintained.

 The EFSM can establish loans or credit lines, up to a total of €60 billion. The functioning mirrors that of the BoP assistance programmes. However, a peculiarity of the EFSM is the possibility (not granted to the BoP facility) to borrow from capital markets more funds than those actually disbursed.

 The EFSM assistance was activated for the first time in December 2010 in support of Ireland for a total of €22.5 billion. Moreover, in May 2011 it gave assistance to Portugal totalling €26 billion.

16 Council Decisions 2009/290/EC of 20 January 2009 providing Community medium-term financial assistance for Latvia, OJ L 79/39, 25.3.2009 and 2009/289/EC of 20 January 2009 granting mutual assistance for Latvia, OJ L 79/37, 25.3.2009.

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The EFSM represents the MFS instrument launched by the EU (Council Regulation (EU) No.

407/2010)17 to tackle the problems associated with the sovereign debts of euro area countries. It was introduced in May 2010, immediately after approval of the bilateral loans extended specifically for the case of Greece by the euro area member states. The mechanism reproduces the same scheme used for BoP assistance with the intention of supporting euro area countries: although the Regulation states that it has been designed for all the EU members, the EFSM assistance should be activated “taking into account the possible application of the existing facility providing medium-term financial assistance for non-euro-area member states’ balances of payments”¹⁸, thus limiting its activity mainly to euro area member states. In other words, it provides medium-term support for member states that are experiencing or are seriously threatened by a severe financial disturbance due to events beyond the control of the member state concerned. The EFSM does not exclude recourse by the assisted member state to financing programmes outside the EU, and in the case of multilateral assistance programmes (in particular through the IMF) the Commission examines whether EFSM assistance is compatible with the external financing.

Institutional framework. The institutional mechanisms of the EFSM are partially modelled on those of BoP assistance (see section 0). The activation of the funding through the EFSM takes place only after the expressed request of financial support is made by a euro area member state (containing an assessment of its financial needs) and, simultaneously, the presentation of a macroeconomic adjustment programme, outlining the measures the country must take to restore its economic stability as agreed with the Commission. Then, the procedure follows the same pattern described in section 0, but in this case more important than the role played by the Economic and Financial Committee is that played by the Eurogroup Working Group (EWG), a configuration of the EFC in which only the euro area member states, the Commission and the ECB are represented.

The disbursement of loans (or the opening of credit lines) granted to member states is managed by the Commission, which verifies at regular intervals (usually quarterly) whether the economic policy of the beneficiary member state accords with the agreed adjustment programme contained in the MoU. Moreover, the release of each instalment is decided by the Council, in consultation with the EWG and the Commission. Finally, the Court of Auditors has the right to carry out financial controls and audits in order to verify the legality of financial assistance granted by the EU.

Every six months, since the establishment of the EFSM, the Commission has had to review and forward to the Economic and Financial Committee and to the Council its view on whether the exceptional circumstances justifying the establishment of this MFS instrument are still present, and thus whether the EFSM should be maintained. Although the Commission in the last Communication has concluded that “the exceptional events and circumstances that justified the adoption of Regulation n°407/2010 still exist and that the Mechanism should, therefore, be maintained” (European Commission, 2010), it is likely that once the ESM enters into force the EFSM will cease to provide new assistance and exist only as a guarantee for existing commitments.

How the financial assistance functions. The EFSM can establish loans or credit lines, up to a total of €60 billion. The functioning mirrors that of the BoP assistance programmes (see section 0 for the detailed description). In this case, however, the ECB acts as the fiscal agent for the

17 Council Regulation (EU) No. 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism, OJ L 118/1, 15.5.2010.

18 Ibid.

BUDGETARY IMPLICATIONS OF THE USE OF EUINSTRUMENTS FOR MACRO-FINANCIAL STABILITY |13 administration of the loans between the European Commission and the central bank of the beneficiary. A peculiarity of the EFSM is the possibility (not granted to the BoP facility) to borrow from capital markets more funds than those actually disbursed, to optimise in this way the cost of funding. More specifically, once the decision to grant a loan has been made by the Council, the Commission can borrow on funds and keep them in a dedicated cash or securities account that is handled in accordance with the rules applying to off-budget operations. But these funds cannot be used for any purpose other than to provide financial assistance to member states already receiving EFSM assistance. The costs incurred by the Union in implementing the financial assistance are entirely borne by the beneficiary.

Current level of utilisation. The EFSM assistance was activated for the first time in December 2010 in support of Ireland for a total of €22.5 billion (Council Decision 17211/10),19 representing one-third of an international bailout package comprising IMF, EFSF and bilateral loans from the UK, Denmark and Sweden. Programme disbursements are being made over 3 years, with an average maximum maturity of 12.5 years. Up to April 2012, €18.4 billion has been disbursed to Ireland (backed by bonds with an average maturity of 11 years) and the remaining €4.1 billion is scheduled to be disbursed by the end of this year. Further funding requirements will be financed by EFSF operations and by the IMF, as agreed in the initial EU/IMF agreement.

In May 2011 (Council Decision 10231/11),²⁰ the EFSM gave assistance to Portugal totalling

€26 billion, also in this case as part (one-third) of the total bailout package funded by the IMF and the EFSF amounting to €78 billion. As of May 2012, €20.1 billion has been disbursed, backed by bonds with an average maturity of 12 years (see Table 4).

Table 4. EFSM assistance programmes

Country Agreed

amount Disbursed Period covered by the assistance

Other partners

Ireland 22.5 18.4 2010-13

IMF, EFSF and bilateral loans from the UK, Denmark and

Sweden

Portugal 26 20.1 2011-14 IMF and EFSF

Remainder for utilisation: 11.5 Note: * As of May 2012, € billion

Source: European Commission, DG ECFIN.

19 Council Decision 17211/10 of 7 December 2010 on granting Union financial assistance to Ireland

20 Council Decision 10231/11 of 17 May 2011 on granting financial assistance to Portugal

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