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Support to member states in financial difficulty

Since 2010, several euro area member states have experienced financing difficulties. Action has been taken in a number of fields to preserve stability in the euro area.

Temporary mechanisms have been put into place to provide financial assistance. These are now being replaced by the permanent European Stability Mechanism (ESM), which was inaugurated in October 2012.

 

Financial assistance

 

Financial support is granted on strict conditions. Policy measures are established to help the member states concerned to reform their economies and bring their public finances onto a sustainable path.

 

The International Monetary Fund is always involved at the technical level, and in most cases financially as well.

 

Each new aid installment is disbursed upon a positive review of implementation. The review is carried out regularly by the "troika" - the European Commission, the European Central Bank and the International Monetary Fund.

 

Temporary mechanisms

 

Greek Loan Facility (GLF)

  • Established in May 2010 for Greece.
  • Bilateral loans from euro area member states to Greece.

 

 

European Financial Stabilisation Mechanism (EFSM)

  • Established in 2010; activated for Ireland in December 2010, and for Portugal in May 2011.
  • Covered by the EU budget within the limit of its own resources, estimated at €60 billion.
  • Loans are financed by the Commission's borrowings on financial markets, guaranteed by the EU budget.

 

 

European Financial Stability Facility (EFSF)

  • A private company established by euro area member states in 2010; activated for Ireland in December 2010, for Portugal in May 2011, for Spain, for the recapitalisation of its banking sector, in July 2012, and for Greece in March 2012.
  • Total effective lending capacity estimated at €440 billion.
  • Loans are financed by the EFSF's borrowings on financial markets, guaranteed by the shareholders (euro area member states)

The euro area's new permanent instrument

 

European Stability Mechanism (ESM)

  • International financial institution established in October 2012 by euro area member states to replace temporary mechanisms. It took over the EFSF commitments to Spain for the recapitalisation of its banking sector; activated for Cyprus in April 2013.
  • Total effective lending capacity is €500 billion.
  • Loans are financed by the ESM's borrowings on financial markets, guaranteed by a combination of paid-in capital and callable capital provided by the shareholders (euro area member states).
  • The ESM will in the future - when fixed criteria are met - be able to use up to €60 billion of its lending capacity to directly recapitalise banks through the ESM direct recapitalisation instrument.

 

Overview of financial assistance committed by the EU/euro area

Instrument

Overall lending ceiling (€ billion)

Greece

Ireland

Portugal

Spain*

Cyprus

 

GLF

52.9

52.9

 

 

 

 

EFSM

60

 

22.5 

26.0

 

 

EFSF

440

144.7

17.7

26.0

 

 

Bilateral loans

 

 

4.8 

 

 

 

ESM

500

 

 

 

41.3 

approximately 9

Totals

 

 197.6

45.0

52.0

 

 

 

* The upper limit of financial assistance to Spain for the recapitalisation of its banking sector was initially set at €100 billion; but only €41.3 billion were eventually needed. The IMF's involvement is limited to the technical level.

 

ECB support: Outright Monetary Transactions

 

In 6 August 2012, the European Central Bank announced that it would undertake outright transactions in secondary sovereign bond markets, aimed "at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy."

 

The technical framework for the ECB's  Outright Monetary Transactions (OMT) was presented on 6 September 2012. It lays down necessary conditions for ECB intervention, including "strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme." 

 

 

Last updated: 17/01/2013

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