European Financial Stabilisation Mechanism

27 November 2012
by eub2 -- last modified 15 July 2015

The European Financial Stabilisation Mechanism (EFSM) mechanism provides financial assistance to EU Member States in financial difficulties.

The European Financial Stabilisation Mechanism (EFSM) essentially reproduces for the EU 28 the basic mechanics of the existing Balance of Payments Regulation for non-euro area Member States. Under EFSM, the Commission is allowed to borrow up to a total of €60 billion in financial markets on behalf of the Union under an implicit EU budget guarantee. The Commission then on-lends the proceeds to the beneficiary Member State. This particular lending arrangement implies that there is no debt-servicing cost for the Union. All interest and loan principal is repaid by the beneficiary Member State via the Commission. The EU budget guarantees the repayment of the bonds through a p.m. line in case of default by the borrower.

The EFSM has been activated for Ireland and Portugal, for a total amount up to €48.5 billion (up to €22.5 billion for Ireland and up to €26 billion for Portugal), to be disbursed over 3 years (2011 – 2014). Loan disbursements to both countries have been concluded in 2014.

The EFSM is a part of the wider safety net. Alongside the EFSM, the European Financial Stability Facility (EFSF), i.e. funds guaranteed by the euro area Member States, and funding from the International Monetary Fund (IMF) are available for euro area Member States. Non-euro area Member States are also eligible for assistance under the Balance of Payments Regulation. The EFSM and the EFSF can only be activated after a request for financial assistance has been made by the concerned Member State and a macroeconomic adjustment programme, incorporating strict conditionality, has been agreed with the Commission, in liaison with the European Central Bank (ECB).

On 8 October 2012, a new permanent crisis mechanism, the European Stability Mechanism (ESM), was inaugurated. Its main features build on the existing EFSF. The ESM complements the new framework for reinforced economic surveillance in the EU. This new framework, which includes in particular a stronger focus on debt sustainability and more effective enforcement measures, focuses on prevention and will substantially reduce the probability of a crisis emerging in the future.

Activation of EFSM: Programmes for Ireland and Portugal

The European Commission is empowered to contract borrowings on behalf of the European Union for the purpose of funding loans made under the EFSM (Article 2 of Council Regulation 407/2010) contributing the overall loan packages for Ireland and Portugal, which are co-funded by the EU, the EFSF, and the IMF, each acting independently but in a coordinated way.

Under the EFSM, the borrower is the European Union. The EU enjoys an AAA credit rating from the major rating agencies. The Commission is the institution that manages the borrowing on behalf of the EU. The Commission's role in this respect is comparable to a government finance agency contracting borrowing on behalf of the country.

Overview on EFSM funding and loan disbursements

verview on EFSM funding and loan disbursements

Amount	Maturity	Raised on	Loan beneficiary	Disbursement on
€ 5.0 bn	5 yr	5 Jan. 2011	Ireland	12 Jan. 2011
€ 3.4 bn	7 yr	17 March 2011	Ireland	24 March 2011
€ 4.75 bn	10 yr	24 May 2011	€ 3 bn for Ireland, € 1.75 bn for Portugal	31 May 2011
€ 4.75 bn	5 yr	25 May 2011	Portugal	1 June 2011
€ 5.0 bn	10yr	14 Sept. 2011	Portugal	21 Sept. 2011
€ 4.0 bn	15yr	22 Sept. 2011	€ 2 bn for Ireland; € 2 bn for Portugal	29 Sept. 2011
€ 1.1 bn	7yr	29 Sept. 2011	€ 0.5 bn for Ireland; € 0.6 bn for Portugal	6 Oct. 2011
€ 3.0 bn	30 yr	9 Jan. 2012	€ 1.5 bn for Ireland; € 1.5 bn for Portugal	16 Jan. 2012
€ 3.0 bn	20 yr	27 Feb. 2012	Ireland	5 March 2012
€ 1.8 bn	26 yr	17 April 2012	Portugal	24 April 2012
€ 2.7 bn	10 yr	26 April 2012	Portugal	4 May 2012
€ 2.3 bn	15 yr	26 June 2012	Ireland	3 July 2012
€ 3.0 bn	15 yr	23 Oct. 2012	€ 1 bn Ireland, € 2 bn Portugal	30 Oct. 2012
€ 2.6 bn	10 yr	18 March 2014	€ 0.8 bn Ireland, € 1.8 bn Portugal	25 March 2014
€ 0.4 bn	15 yr	5 Nov. 2014	Portugal	12 Nov. 2014

Scope

The EFSM provides assistance to Member States where:

• a Member State is experiencing, or is seriously threatened with, a severe financial disturbance;
• the financial disturbance or threat of financial disturbance is due to events beyond the control of the Member State concerned.

Financial assistance

Financial assistance by the EFSM may take the form of a loan or credit line granted to Member States. A credit line is an authorisation given to a Member State to draw funds up to a specified ceiling for a given period of time.

Procedure

Before it can benefit from the EFSM, a Member State shall submit a request comprising:

• an assessment of its financial needs;
• an economic and financial adjustment programme describing the various measures to be taken to restore financial stability.

The Council then decides whether to grant financial assistance to the Member State. It shall act by a qualified majority on a proposal from the Commission. If the Council decides to grant financial assistance to the Member State, its decision contains:

• the procedures for the financial assistance, such as the amount, the number of payments, the availability period of the financial assistance, etc.;
• the general economic policy conditions: these conditions are established by the Commission. They are attached to the EU financial assistance with a view to re-establishing a sound economic situation in the Member State concerned and to restoring its capacity to finance itself on the financial markets;
• the economic and financial adjustment programme of the Member State.

Moreover, the general economic policy conditions are the subject of a Memorandum of Understanding between the Member State and the Commission. The Commission then re-examines compliance with these conditions regularly in collaboration with the European Central Bank. Any changes to these conditions may result in an adjustment of the economic and financial adjustment programme of the Member State.

Granting of financial assistance

The disbursement of loans or the opening of credit lines granted to Member States is managed by the Commission. The latter then verifies at regular intervals whether the economic policy of the beneficiary Member State accords with its adjustment programme.

The Commission is also authorised to borrow on the capital markets or from financial institutions in order to finance the loans granted to Member States.

Moreover, 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.

Compatibility with other mechanisms providing financial assistance

The EFSM is compatible with the facility providing medium-term financial assistance for balances of payments. This financial assistance is for Member States which have not adopted the euro and are experiencing difficulties in their balance of payments.

The EFSM also does not exclude recourse to financing outside the EU, in particular by the International Monetary Fund. In that case the Commission examines whether the EFSM is compatible with the outside financing.