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European Financial Stability Facility

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The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to combat the European sovereign debt crisis. It was agreed by the 27 member states[1] of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty.[2] The Facility is headquartered in Luxembourg City,[3] and the European Investment Bank provides treasury management services and administrative support to it through a service level contract.[4]

Function

The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalize banks or buy sovereign debt.[5] 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 (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 using the EU budget as collateral) and up to €250 billion from the International Monetary Fund (IMF) to obtain a financial safety net up to €750 billion.[6]

If there had not been any financial operation in activity the EFSF would have closed down after three years, on 30 June 2013. Since EFSF has in 2011 been activated to lend money to Ireland and Portugal, the Facility will exist until its last obligation has been fully repaid.[7]

Lending

The Facility can only act after a support request is made by a euro area 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 Eurogroup (euro area 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 is a request from a euro area 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 Eurogroup have approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.[7]

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 capital key weightings. 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 October 13, 2011. [8]

The €110 billion bailout to Greece of 2010 is not part of the EFSF guarantees and 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.[9] These additional guarantee amounts increase if the coupon payments of the issued EFSF bonds are high.

Country Initial contributions Enlarged contributions (see enlargement section)
Guarantee Commitments (EUR) Millions Percentage € per capita
[citation needed]		 Guarantee Commitments (EUR) Millions Percentage
 Austria €12,241.43 2.78% €1,464.86 €21,639.19 2.7750%
 Belgium €15,292.18 3.48% €1,423.71 €27,031.99 3.4666%
 Cyprus €863.09 0.20% €1,076.68 €1,525.68 0.1957%
 Estonia €1,994.86 0.2558%
 Finland €7,905.20 1.80% €1,484.51 €13,974.03 1.7920%
 France €89,657.45 20.38% €1,398.60 €158,487.53 20.3246%
 Germany €119,390.07 27.13% €1,454.87 €211,045.90 27.0647%
 Greece €12,387.70 2.82% €1,099.90 €21,897.74 2.8082%
 Ireland €7,002.40 1.59% €1,549.97 €12,378.15 1.5874%
 Italy €78,784.72 17.91% €1,311.10 €139,267.81 17.8598%
 Luxembourg €1,101.39 0.25% €2,239.95 €1,946.94 0.2497%
 Malta €398.44 0.09% €965.65 €704.33 0.0903%
 Netherlands €25,143.58 5.71% €1,525.60 €44,446.32 5.6998%
 Portugal €11,035.38 2.51% €1,037.96 €19,507.26 2.5016%
 Slovakia €4,371.54 0.99% €807.89 €7,727.57 0.9910%
 Slovenia €2,072.92 0.47% €1,009.51 €3,664.30 0.4699%
 Spain €52,352.51 11.90% €1,141.75 €92,543.56 11.8679%
European Union Eurozone (16) without Estonia (°) €440,000.00 100% €1,339.02
European Union Eurozone (17) with Estonia €779,783.14 100%

(°Estonia entered 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 and the German Ministry of Finance.

The Board of the European Financial Stability Facility comprise high level representatives of the 16 euro area member states, including Deputy Ministers or Secretaries of State or Director Generals of the Treasury. The European Commission and the European Central Bank can each appoint an observer to the EFSF Board. Chairman of the Board is Thomas Wieser, who is also Chairman of EU's Economic and Financial Committee.[10]

Although there is no specific statutory requirement for accountability to the European Parliament, the Facility is expected to operate a close relationship with relevant committees within the EU.[11][12]

Developments and implementation

On 7 June 2010 the euro area 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 Eurogroup 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.[13]

On the same day the European Financial Stability Facility has been established as a limited liability company under Luxembourg law (Société Anonyme),[14] while Klaus Regling has been appointed as chief executive officer of the EFSF on 9 June 2010[15] and took office on 1 July 2010.[16] The Facility became fully operational on 4 August 2010.[17]

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.[18] It achieved this in September 2010 when Fitch, and Standard & Poor's awarded it AAA and Moody's awarded it Aaa [19], making it easier for it to raise money. The rating outlook was qualified as stable.[20] Technically EFSF is a special purpose vehicle (SPV) off balance sheet of European Central Bank (ECB) placing collateralized debt obligation (CDOs) to raise money to financing the Deficit spending that European Governments used to replace a share of banking system losses.

Irish bailout

The Eurogroup and the EU's Council of Economics and Finance Ministers had decided on 28 November 2010 to grant financial assistance in response to the Irish authorities’ request. The financial package will cover financing needs up to €85 billion. The EU will provide up to €22.5 billion through European Financial Stabilisation Mechanism and the EFSF up to €17.7 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.[21] 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, a record breaking order book of €44.5 billion, i.e. about nine times the supply. Investor demand came from around the world and from all types of institutions.[22] The Facility chose three banks (Citibank, HSBC and Société Générale) to organise the inaugural bonds issue.[23]

Portuguese bailout

The second Eurozone country to request and receive aid from EFSF is Portugal. 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 Eurogroup and the EU’s Council of Economics and Finance Ministers on 17 May 2011. The financial package will cover Portugal’s financing needs of up to €78 billion. The European Union, through the European Financial Stabilisation Mechanism and the EFSF will each provide up to €26 billion to be disbursed over 3 years. Further support will be made available through the IMF for up to €26 billion, as approved by the IMF Executive Board on 20 May 2011.[24]

EFSF was activated for Portuguese lending in June 2011, and has issued €5 billion of 10-year bonds on 15 June 2011, and €3 billion on June 22, 2011 through BNP Paribas, Goldman Sachs International and Royal Bank of Scotland. [25]

Enlargement

On 21 July 2011, the eurozone leaders agreed to amend the EFSF to enlarge its capital guarantee from €440 billion to €780 billion.[26][27] 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.[28][29]

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).[30]

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 (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. [31] 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.[32]

See also

References

  1. ^ Consilium.europa.eu "The Council and the member states decided on a comprehensive package of measures to preserve financial stability in Europe, including a European financial stabilisation mechanism, with a total volume of up to EUR 500 billion."
  2. ^ Economist.com "European Financial Stability Facility, the special-purpose vehicle (SPV) set up to support ailing euro-zone countries, is even being run by a former hedgie. But this is one fund that will never short its investments."
  3. ^ Etat.lu "Articles of Incorporation of the EFSF established as a public limited liability company under the laws of the Grand-Duchy of Luxembourg.
  4. ^ EIB.europa.eu "Limited services provision role for EIB in European Financial Stability Facility"
  5. ^ Bloomberg.com "European Rescue Fund May Buy Bonds, Recapitalize Banks, ECB's Stark Says"
  6. ^ Europeanvoice.com "Media reports said that Spain would ask for support from two EU funds for eurozone governments in financial difficulty: a €60bn ‘European financial stabilisation mechanism', which is reliant on guarantees from the EU budget."
  7. ^ a b "EFSF.europa.eu" (PDF). Retrieved 26 April 2011.
  8. ^ "Slovak parliament ratifies EFSF expansion". Reuters. 8 October 2011. Retrieved 16 October 2011.
  9. ^ Erik Kirschbaum (1 October 2011). "Schaeuble rules out larger German EFSF contribution". Reuters. Retrieved 1 October 2011.
  10. ^ "Europa.eu". Europa (web portal). 26 April 2010. Retrieved 26 April 2011. {{cite web}}: Italic or bold markup not allowed in: |work= (help)
  11. ^ "A6 – Does the European Parliament have an oversight role? Although there is no specific statutory requirement for accountability to the European. Parliament the EFSF will have a close relationship with the relevant committees" (PDF). Retrieved 26 April 2011.
  12. ^ "A6 – Does the European Parliament have an oversight role? Although there is no specific statutory requirement for accountability to the European. Parliament the EFSF will have a close relationship with the relevant committees". Google. Retrieved 26 April 2011.
  13. ^ Consilium.europa.eu "Decision of the 16 euro area Member States"
  14. ^ Consilium.europa.eu
  15. ^ "Indymedia-letzebuerg.net". Indymedia-letzebuerg.net. 9 June 2010. Retrieved 26 April 2011.
  16. ^ EFSF.europa.eu "European Financial Stability Facility CEO Takes Office"
  17. ^ EFSF.europa.eu "EFSF becomes fully operational"
  18. ^ Bloomberg.com "The ministers aim for ratings companies to assign a AAA rating to the facility, whose bonds would be eligible for European Central Bank refinancing operations. The fund will be based in Luxembourg."
  19. ^ [1] "EFSF Europa"
  20. ^ Andrew Willis (20 September 2010). "EUobserver.com". EUobserver.com. Retrieved 26 April 2011.
  21. ^ Goodman, Wes (26 January 2011). "Bloomberg.com". Bloomberg. Retrieved 26 April 2011.
  22. ^ "EFSF.europa.eu". Europa (web portal). Retrieved 26 April 2011. {{cite web}}: Italic or bold markup not allowed in: |work= (help)
  23. ^ "Europolitics.info". Europolitics.info. Retrieved 26 April 2011.
  24. ^ "EFSF places €3 billion bond in support of Portugal". Europa (web portal). Retrieved 11 October 2011. {{cite web}}: Italic or bold markup not allowed in: |work= (help)
  25. ^ "EFSF mandates BNP Paribas, Goldman Sachs International and Royal Bank of Scotland as joint lead managers for its second issue for Portugal". Europa (web portal). Retrieved 11 October 2011. {{cite web}}: Italic or bold markup not allowed in: |work= (help)
  26. ^ http://www.efsf.europa.eu/attachments/efsf_framework_agreement_amendment_agreement.pdf
  27. ^ http://www.efsf.europa.eu/attachments/efsf_framework_agreement_consolidated_version.pdf
  28. ^ "Slovak parliament ratifies EFSF expansion". Reuters. 8 October 2011. Retrieved 16 October 2011.
  29. ^ Eurozone crisis: Slovakia backs larger rescue fund (BBC News, Oct. 13th, 2011)
  30. ^ Philip Wright and Julian Baker (8 August 2011). "EFSF: getting bigger all the time". Reuters. Retrieved 8 August 2011.
  31. ^ Eurozone crisis explained (BBC, October 27, 2011)
  32. ^ http://online.wsj.com/article/SB10001424052970204505304577002020790056302.html
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