EFSF & ESM

European Financial Stability

The European Financial Stability Facility (EFSF) has been created by the euro area Member States as a mechanism for providing assistance to financially unstable countries. It is based on a macro-economic adjustment programme that aims at maintaining financial stability in Europe in accordance with the decisions taken by the Ecofin Council on 9 May 2010. The organisation was conceived as a special purpose vehicle (SPV) functioning as a lending institution under the management of the European Investment Bank.

The EFSF raises money by issuing bonds or other debt instruments on the major markets, and then lends the proceeds of these issues to countries that have entered into one of its programmes. Other actions, such as intervention in both primary and secondary bond markets, implementation of precautionary programmes, and government loans for the purpose of finance recapitalisations of financial institutions also fall under the institution’s jurisdiction.

When the ESFS came into being, European policymakers were responding to financial crisis that was quickly spreading across several European countries, and the organisation was only intended to function as a temporary rescue mechanism. It was later deemed necessary, however, to maintain a permanent rescue mechanism and the decision gave rise to the European Stability Mechanism (ESM). From 8 October 2012 the ESM took force as the main instrument for the financing of new programmes, while the EFSF remained in operation only for the maintenance of the already existing programmes for Greece, Portugal, and Ireland. Once it will have served its purpose and all funding instruments issued by the EFSF will have been paid in full, the EFSF will be resolved and liquidated.

Beginning on 1 July 2013, new requests for financial aid by euro area Member States are handled exclusively by the European Stability Mechanism. As of this date, the EFSF has not engaged in any new financial programmes, nor has it entered into any new agreements regarding loan facility. Since its inceptions, the ESM has entered into agreements with Spain for the recapitalisation of its financial institutions and with Cyprus under a macroeconomic adjustment programme. The ESM has a maximum lending capacity of €500 billion.