The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objective of preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty.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." The Facility's headquarters are in Luxembourg City,Etat.lu "Articles of Incorporation of the EFSF established as a public limited liability company under the laws of the Grand-Duchy of Luxembourg. as are those of the European Stability Mechanism. Treasury management 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 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 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 (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.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."
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 (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 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.
Country Initial contributions Enlarged contributions(see enlargement section) Guarantee Commitments (EUR) Millions Percentage € per capita Guarantee Commitments (EUR) Millions Percentage€12,241.432.78%€1,464.86€21,639.19 2.7750%€15,292.183.48%€1,423.71€27,031.99 3.4666%€863.090.20%€1,076.68€1,525.68 0.1957%€1,994.86 0.2558%€7,905.201.80%€1,484.51€13,974.03 1.7920%€89,657.4520.38%€1,398.60€158,487.53 20.3246%€119,390.0727.13%€1,454.87€211,045.90 27.0647%€12,387.702.82%€1,099.90€21,897.74 2.8082%€7,002.401.59%€1,549.97€12,378.15 1.5874%€78,784.7217.91%€1,311.10€139,267.81 17.8598%€1,101.390.25%€2,239.95€1,946.94 0.2497%€398.440.09%€965.65€704.33 0.0903%€25,143.585.71%€1,525.60€44,446.32 5.6998%€11,035.382.51%€1,037.96€19,507.26 2.5016%€4,371.540.99%€807.89€7,727.57 0.9910%€2,072.920.47%€1,009.51€3,664.30 0.4699%€52,352.5111.90%€1,141.75€92,543.56 11.8679% Eurozone (16) without Estonia (°)€440,000.00100%€1,339.02 Eurozone (17) with Estonia€779,783.14 100%
(° 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 Since December 2022, the chief executive officer of the EFSF is Pierre Gramegna, who is also the managing director of the ESM, and who previously was the minister of finance of the Grand-Duchy of Luxembourg.
Gramegna succeeded 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. 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 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 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),http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/.../114977.pdf 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.The Monetary Policy of the ECB 2011 page 17, (print) (online)
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 €211 billion). Mid-October Slovakia became the last country to give approval, though not before parliament speaker Richard Sulík 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?"Markman, Jon, "Occupy the euro-zone bailout fund", commentary, MarketWatch, 14 Oct 2011, 1:56 pm EDT. Retrieved 2011-10-14.
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. Investor demand came from around the world and from all types of institutions. The Facility chose three banks (Citibank, HSBC and 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. 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.
Enlargement