The EFSF and ESM Klaus Regling, CEO, EFSF and Managing Director, ESM

“Les Midis de l’Europe”, Luxembourg

14 May 2014

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Euro area crisis resolution mechanisms

• As a result of the euro debt crisis, it became necessary to provide financial assistance to countries so they would not default on their sovereign debt

• Such a default would have caused very serious economic consequences

•  In May 2010 euro area Member States agreed on bilateral loans to Greece

• The European Financial Stability Facility (EFSF) was established in June 2010 as a temporary financial assistance mechanism

•  Leaders of euro area countries decided that a permanent crisis resolution mechanism was needed.

•  Thus the European Stability Mechanism (ESM) was inaugurated in October 2012

ESM Board of Governors (euro area finance ministers) at inauguration of ESM, 8/10/2013

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The 18 ESM Member States

Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland

Italy Latvia Luxembourg Malta the Netherlands Portugal Slovakia Slovenia Spain

Latvia joined the euro area in January 2014 and became a Member of the ESM on 13 March

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The ESM is located in Luxembourg

The ESM is located in Luxembourg, along with other European institutions such as • the European Investment Bank • the Court of Justice of the EU • the European Court of Auditors • Eurostat

The ESM’s premises at Circuit de la Foire Internationale, Luxembourg

The ESM currently employs around 120 staff members

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Mission and activities of EFSF and ESM

• The mission is to provide financial assistance to EFSF/ESM Members experiencing or threatened by severe financing problems.

• The assistance is granted if it is indispensable to safeguard the financial stability of the euro area as a whole and of the EFSF/ESM Members

• Every loan is linked to “conditionality”

• How is this financed and carried out?

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EFSF & ESM compared

Legal Structure

Duration

Private company under Luxembourg law

Maximum lending capacity

Temporary (no new financial assistance programmes possible since 1/07/2013)

€188 billion (committed)

Inter-governmental institution under international law

Permanent institution

€500 billion

Capital structure Backed by guarantees of euro area Member States Subscribed capital of €700 billion

including €80 billion in paid-in capital

Countries which have received assistance

Ireland, Portugal, Greece Spain, Cyprus

ESM governance structure

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Shareholders: 18 euro area Member States

Board of Governors • Highest decision-making body • Comprises euro area finance ministers • Mutual agreement needed to approve financial assistance programmes

Board of Directors • Specific tasks mandated in ESM Treaty or delegated by Board of Governors • Each Governor appoints one Director

Managing Director • Appointed by Board of Governors for 5-year term • Heads ESM staff and directs current business

Jeroen Dijsselbloem, Chairman of ESM Board of Governors, and Klaus Regling, ESM Managing Director

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EFSF and ESM financial assistance instruments

!  Loans Provided to countries that cannot raise money on financial markets at

reasonable rates

!  Loans to governments for the recapitalisation of banks Provided to support banks if their condition could threaten financial

stability in euro area or in a Member State

!  Precautionary financial assistance Two types of credit lines to ensure an adequate safety net in case a

Member State faces difficulties raising funds in capital markets

!  Purchase of bonds of ESM Member States •  On primary market to support ESM Member’s financing needs •  On secondary market to bring down the market yield of a Member

State’s bonds

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EFSF and ESM financial assistance is provided under strict conditions

!  All forms of ESM financial assistance are linked to appropriate conditionality: in order to receive assistance, beneficiary countries must implement policy reforms

!  Beneficiary countries receiving ESM loans must implement a macroeconomic adjustment programme, usually covering reforms in the following areas:

• Fiscal consolidation

• Structural reforms

• Financial sector reforms

!  For other ESM financial assistance instruments, beneficiary countries must meet criteria specific to each type of instrument

!  The assessment of compliance with policy conditionality is conducted regularly by the “Troika” (European Commission, ECB and IMF)

!  A positive assessment is necessary for ESM to approve and disburse successive tranches of financial assistance

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EFSF financial assistance programmes

Ireland: financial assistance programme (concluded in December 2013)

•  Total programme: €67.5 bn in loans from international lenders; €17.7 bn from the EFSF

•  Policy conditions included bank restructuring, restoring fiscal sustainability and wide-ranging structural reforms

Portugal: financial assistance to cover financing needs (concluded in May 2014)

•  Total programme: €78 bn (€26 bn from EFSF) •  Final tranche of assistance disbursed in April 2014 •  Policy conditions: structural reforms, fiscal consolidation, stabilisation of

the financial sector (recapitalisation and deleveraging)

Greece: financial assistance to cover financing needs and bank recapitalisation

•  Under the second programme, Greece will receive €144.6 bn from the EFSF and €28 bn from the IMF (total of €172.6 bn)

•  EFSF programme ends in Dec. 2014 •  Policy conditions: structural reforms, fiscal consolidation, recapitalisation

of the banking sector

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ESM financial assistance programmes

Spain: financial assistance for recapitalisation of banking sector (concluded in December 2013)

•  Total of €41 billion disbursed in Dec. 2012 and Feb. 2013 •  Programme concluded in Dec. 2013 •  Policy conditions included bank restructuring and sector-wide structural

reforms. Reforms concerning the governance, supervision and regulation of the financial sector are also being implemented

Cyprus: financial assistance to cover financing needs

•  Total programme: €10 bn (€9 bn from ESM and €1 bn from IMF) •  Financial assistance disbursed from 2013 to 2016 •  Macroeconomic adjustment programme addresses Cyprus’s financial

sector imbalances, fiscal consolidation, structural reforms and privatisation

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The EFSF and ESM issue bills and bonds to finance their loans

!  The ESM raises money by by issuing bonds (debt instruments with maturities of up to 30 years) and bills (up to one year)

!  The ESM’s issues are backed by €80 billion in capital paid in by Member States, and by €620 billion in callable capital.

!  The bonds and bills issued by the EFSF and ESM are purchased by institutional investors, such as commercial banks, central banks and investment funds

!  The ESM does not lend taxpayer money to beneficiary countries – only funds raised through the sale of bonds and bills

The ESM’s trading room

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Cost of EFSF and ESM financial assistance

!  Thanks to the ESM’s strong capital structure, it is able to borrow money cheaply by issuing bonds

!  The EFSF’s bonds are backed by guarantees of EFSF Member States

!  When the EFSF/ESM lends money to beneficiary countries, it passes on to them the cost of funding (issuing bonds) plus a very low margin (0.1 % in the case of loans) and annual fees to cover operating costs

!  As a result, Member States are able to borrow money from the EFSF and ESM at a much lower cost than if they tried to borrow the funds themselves on financial markets

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How the EFSF and ESM fit into the comprehensive response of the euro area?

1)  Significant fiscal consolidation and structural reforms at national level

2)  Improved economic policy coordination in the euro area

3)  Monetary policy measures

4)  Strengthening the banking system

5)  The EFSF and ESM

The strategy is delivering results - competitiveness

■  Divergences within EMU are declining

■  Competitiveness is improving in all Member countries having requested EFSF/ESM financial assistance

Current Account Balance (as % of GDP)

Source: Eurostat, EC European Economic Forecast - Spring 2014

Nominal unit labour costs, whole economy (2008=100)

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Germany Ireland Greece

Portugal Spain Italy

The strategy is delivering results - fiscal

Source: European Commission, European Economic Forecast – Spring 2014

Fiscal balance, Euro area vs USA and Japan (as % of GDP)

Fiscal balance, euro area Member States (as % of GDP)

*

* Actual figure for Ireland in 2010: -30.6% 15

EFSF/ESM programme countries are the reform champions

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■  Greece, Ireland, Portugal and Spain are in top 5 of 34 OECD countries with regard to implementation of structural reforms. Policy areas concerned:

•  Labour productivity (e.g. product market regulation, human capital) •  Labour utilisation (e.g. labour market regulation, social welfare system, active labour

market policies)

Source: OECD report Going for Growth 2013 Ranking takes into account responsiveness to OECD recommendations on structural reforms in key policy areas

Ranking in OECD report 1. Greece 2. Ireland 3. Estonia 4. Portugal 5. Spain

“Euro area countries under financial assistance programmes are among the OECD countries whose responsiveness [ to the OECD’s s t ructura l re form recommendations] was highest and also where it most increased compared with previous period.”

- Going for Growth 2013 (OECD Report)

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Improved economic policy coordination to avoid future crisis

!  Stability and Growth Pact: prevents Member States from running up excessive budget deficts (e.g. automatic consequences if 3% deficit ceiling is breached)

!  Fiscal Compact: balanced budget rule to be introduced in national legal systems

!  Macroeconomic Imbalance Procedure: a surveillance mechanism to identify risks that could lead to harmful macroeconomic problems

!  European Semester: annual mechanism for coordination of national budgets of Member States, with recommendations from European Commission

Crisis response by ECB

■ The ECB has expanded its balance sheet more cautiously than other central banks

Crisis measures taken by the ECB:

■ SMP proved to be very profitable

■ LTRO gave banks unlimited liquidity

■ OMT announcement in August 2012 calmed the markets 18

Expansion of central banks’ balance sheets since April 2008 (April 2008 = 100%)

source: central banks named in chart    

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Strengthening the banking system

!  New supervisory authorities: EBA, EIOPA and ESMA. The new ESRB early warning system for identifying and monitoring macro-prudential risks is functioning

!  Banks added €450 bn to their capital since 2008

!  Single Supervisory Mechanism (SSM): supervision of systemic euro area banks will be carried out by the ECB starting in Nov. 2014

!  When SSM becomes effective, and all Member States approve, the ESM will be able to recapitalise banks directly

!  Bank Recovery and Resolution Directive – will create a framework for orderly bank resolution (restructuring or winding down troubled banks) at national level

■  Single Resolution Mechanism (SRM) with Single Resolution Fund (SRF): preliminary agreement between European Parliament and Council in March 2014

!  Harmonisation of funding rules for national deposit guarantee schemes

■ Support for five countries (EFSF: Ireland, Portugal, Greece; ESM: Spain and Cyprus) ■ Combined lending capacity: €700 bn

■ Committed amount to the five countries: €238.6 bn

■ Disbursed so far: €229.6 bn

■ Potential concerted ESM – ECB intervention (Outright Monetary Transactions/OMT)

" ESM programme provides conditionality

" The ECB could engage in secondary market purchases

EFSF/ESM lending and assistance

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Thank you for your attention!

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Media Enquiries

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Luis Rego Deputy Spokesperson Phone: +352 260 962 235 Mobile: +352 621 136 935 l.rego@esm.europa.eu

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