European Financial Stability Facility
Encyclopedia
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 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. The Facility is headquartered in Luxembourg City, and the European Investment Bank
provides treasury management
services and administrative support to it through a service level contract.
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. 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.
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.
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.
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.
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. These additional guarantee amounts increase if the coupon payments of the issued EFSF bonds are high.
(°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.
, 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 17 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.
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.
, where appropriate in liaison with the European Central Bank
, with the task of:
On the same day the European Financial Stability Facility has been established as a limited liability company under Luxembourg law (Société Anonyme), while Klaus Regling has been 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.
refinancing operations. It achieved this in September 2010 when Fitch, and Standard & Poor's
awarded it AAA and Moody's
awarded it Aaa , making it easier for it to raise money. The rating outlook was qualified as stable. 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.
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. 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. The Facility chose three banks (Citibank
, HSBC
and Société Générale
) to organise the inaugural bonds issue.
. 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.
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
.
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
(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.
no bailout provisions. On 13 October 2011, Slovakia approved EFSF expansion 2.0 after 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.
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
to combat the European sovereign debt crisis. It was agreed by the 27 member states of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
on 9 May 2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
states in economic difficulty. The Facility is headquartered in Luxembourg City, and the European Investment Bank
European Investment Bank
The European Investment Bank is the European Union's long-term lending institution established in 1958 under the Treaty of Rome. A policy-driven bank, the EIB supports the EU’s priority objectives, especially European integration and the development of economically weak regions...
provides treasury management
Treasury management
Treasury management includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding...
services and administrative support to it through a service level contract.
Function
The EFSF can issue bondsBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
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
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
countries in financial troubles, recapitalize 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
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
(ECB).
The €440 billion lending capacity of the Facility may be combined with loans up to €60 billion from the European Financial Stabilisation Mechanism
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...
(reliant on funds raised by the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
using the EU budget as collateral) and up to €250 billion from the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) to obtain a financial safety net up to €750 billion.
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.
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.
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 BankEuropean Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
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.
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. 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 | Guarantee Commitments (EUR) Millions | Percentage | ||
| €12,241.43 | 2.78% | €1,464.86 | €21,639.19 | 2.7750% | |
| €15,292.18 | 3.48% | €1,423.71 | €27,031.99 | 3.4666% | |
| €863.09 | 0.20% | €1,076.68 | €1,525.68 | 0.1957% | |
| €1,994.86 | 0.2558% | ||||
| €7,905.20 | 1.80% | €1,484.51 | €13,974.03 | 1.7920% | |
| €89,657.45 | 20.38% | €1,398.60 | €158,487.53 | 20.3246% | |
| €119,390.07 | 27.13% | €1,454.87 | €211,045.90 | 27.0647% | |
| €12,387.70 | 2.82% | €1,099.90 | €21,897.74 | 2.8082% | |
| €7,002.40 | 1.59% | €1,549.97 | €12,378.15 | 1.5874% | |
| €78,784.72 | 17.91% | €1,311.10 | €139,267.81 | 17.8598% | |
| €1,101.39 | 0.25% | €2,239.95 | €1,946.94 | 0.2497% | |
| €398.44 | 0.09% | €965.65 | €704.33 | 0.0903% | |
| €25,143.58 | 5.71% | €1,525.60 | €44,446.32 | 5.6998% | |
| €11,035.38 | 2.51% | €1,037.96 | €19,507.26 | 2.5016% | |
| €4,371.54 | 0.99% | €807.89 | €7,727.57 | 0.9910% | |
| €2,072.92 | 0.47% | €1,009.51 | €3,664.30 | 0.4699% | |
| €52,352.51 | 11.90% | €1,141.75 | €92,543.56 | 11.8679% | |
 European Union EurozoneEurozone The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender... (16) without Estonia (°) |
€440,000.00 | 100% | €1,339.02 | ||
| European Union Eurozone Eurozone The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender... (17) with Estonia |
€779,783.14 | 100% |
(°Estonia entered eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
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 ReglingKlaus Regling
Klaus P. Regling is a German economist and the current Chief Executive Officer of the European Financial Stability Facility...
, a former Director General of the European Commission’s Directorate General for Economic and Financial Affairs
Directorate-General for Economic and Financial Affairs (European Commission)
The Directorate-General for Economic and Financial Affairs is a Directorate-General of the European Commission. The DG ECFIN is located in Brussels, Belgium, and Luxembourg...
, having previously worked at the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and the German Ministry of Finance.
The Board of the European Financial Stability Facility comprise high level representatives of the 17 euro area member states, including Deputy Ministers or Secretaries of State or Director Generals of the Treasury
Treasury
A treasury is either*A government department related to finance and taxation.*A place where currency or precious items is/are kept....
. The European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
and the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
can each appoint an observer to the EFSF Board. Chairman of the Board
Chairman of the Board
The Chairman of the Board is a seat of office in an organization, especially of corporations.Chairman of the Board may also refer to:*Chairman of the Board , a 1998 film*Chairmen of the Board , a 1970s American soul music group...
is Thomas Wieser, who is also Chairman of EU's Economic and Financial Committee.
Although there is no specific statutory requirement for accountability to the European Parliament
European Parliament
The European Parliament is the directly elected parliamentary institution of the European Union . Together with the Council of the European Union and the Commission, it exercises the legislative function of the EU and it has been described as one of the most powerful legislatures in the world...
, the Facility is expected to operate a close relationship with relevant committees within the EU.
Developments and implementation
On 7 June 2010 the euro area member states entrusted the European CommissionEuropean Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, where appropriate in liaison with the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
, 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 BankEuropean Investment BankThe European Investment Bank is the European Union's long-term lending institution established in 1958 under the Treaty of Rome. A policy-driven bank, the EIB supports the EU’s priority objectives, especially European integration and the development of economically weak regions...
, 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.
On the same day the European Financial Stability Facility has been established as a limited liability company under Luxembourg law (Société Anonyme), while Klaus Regling has been 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.
Rating
The Facility aimed for ratings agencies to assign a AAA rating to its bonds, which would be eligible for European Central BankEuropean Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
refinancing operations. It achieved this in September 2010 when Fitch, and Standard & Poor's
Standard & Poor's
Standard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
awarded it AAA and Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
awarded it Aaa , making it easier for it to raise money. The rating outlook was qualified as stable. Technically EFSF is a special purpose vehicle (SPV)
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
off balance sheet of European Central Bank (ECB)
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
placing collateralized debt obligation (CDOs) to raise money to financing the Deficit spending
Deficit spending
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....
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 MechanismEuropean Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...
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. 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
Supply (economics)
In economics, supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell.In economics the...
. Investor demand came from around the world and from all types of institutions. The Facility chose three banks (Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
, HSBC
HSBC
HSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
and Société Générale
Société Générale
Société Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
) to organise the inaugural bonds issue.
Portuguese bailout
The second Eurozone country to request and receive aid from EFSF is PortugalPortugal
Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...
. 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
European Financial Stabilisation Mechanism
The European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...
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.
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
BNP Paribas
BNP Paribas S.A. is a global banking group, headquartered in Paris, with its second global headquarters in London. In October 2010 BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over $3.1 trillion. It was formed through the merger...
, Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
International and Royal Bank of Scotland
Royal Bank of Scotland
The Royal Bank of Scotland Group is a British banking and insurance holding company in which the UK Government holds an 84% stake. This stake is held and managed through UK Financial Investments Limited, whose voting rights are limited to 75% in order for the bank to retain its listing on the...
.
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
European Stability Mechanism
The European Stability Mechanism is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation 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
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...
announced that the member states
Member State of the European Union
A member state of the European Union is a state that is party to treaties of the European Union and has thereby undertaken the privileges and obligations that EU membership entails. Unlike membership of an international organisation, being an EU member state places a country under binding laws in...
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.
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 TreatyMaastricht Treaty
The Maastricht Treaty was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. On 9–10 December 1991, the same city hosted the European Council which drafted the treaty...
no bailout provisions. On 13 October 2011, Slovakia approved EFSF expansion 2.0 after failed first approval vote. In exchange, the Slovakian government was forced to resign and call new elections
Slovak parliamentary election, 2012
A parliamentary election will take place in Slovakia on 10 March 2012. The election follows the fall of Prime Minister Iveta Radičová's Slovak Democratic and Christian Union – Democratic Party-led coalition in October 2011 over a no confidence vote her government failed because of its support for...
.
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.
See also
- European Financial Stabilisation MechanismEuropean Financial Stabilisation MechanismThe European Financial Stabilisation Mechanism is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral...
- European Stability MechanismEuropean Stability MechanismThe European Stability Mechanism is a permanent rescue funding programme to succeed the temporary European Financial Stability Facility and European Financial Stabilisation Mechanism...
- Maiden Lane TransactionsMaiden Lane TransactionsMaiden 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 entity, the former American International Group's...
- Term Asset-Backed Securities Loan FacilityTerm Asset-Backed Securities Loan FacilityThe Term Asset-Backed Securities Loan Facility is a program created by the U.S. Federal Reserve to spur consumer credit lending. The program was announced on November 25, 2008 and was to support the issuance of asset-backed securities collateralized by student loans, auto loans, credit card...
- Troubled Assets Relief ProgramTroubled Assets Relief ProgramThe Troubled Asset Relief Program is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector that was signed into law by U.S. President George W. Bush on October 3, 2008...