Blog Post

The European Financial Stability Facility

What’s at stake: On Monday, the Finance Ministers of the Euro-area states signed documentation establishing the European Financial Stability Facility (EFSF) in line with the actions taken by the Economic and Financial Affairs (ECOFIN) Council last month, providing more details about how this will work. Most notably, they plan to create a joint eurozone "special […]

By: Date: June 13, 2010 Topic: European Macroeconomics & Governance

What’s at stake: On Monday, the Finance Ministers of the Euro-area states signed documentation establishing the European Financial Stability Facility (EFSF) in line with the actions taken by the Economic and Financial Affairs (ECOFIN) Council last month, providing more details about how this will work. Most notably, they plan to create a joint eurozone "special purpose vehicle"(SPV) which will issue up to €440bn in bonds, if needed, to provide loans which can then be used to support countries. Together with €60bn from the European Union and €250bn from the International Monetary Fund, it provides a total of €750bn – initially for three years – which troubled Eurozone members can borrow from in times of need. After three years the fund will be replaced by a permanent crisis mechanism – the form of which is currently being debated by a high-level task force led by European Council President Herman Van Rompuy. The task force conclusions as well as further details on the functioning of the SPV will be presented at the next European summit on Thursday.

The terms of reference of the eurogroup EFSF establish the EFSF as a limited liability company under Luxembourg law. The objective of the EFSF is to collect funds and provide loans in conjunction with the IMF to cover the financing needs of euro area Member States in difficulty, subject to strict policy conditionality. Euro area Member States will provide guarantees for EFSF issuance up to a total of € 440 billion on a pro rata basis. The obligation of euro-area Member States to issue guarantees for the EFSF debt instruments will enter into force as soon as a critical mass of Member States, representing 90% of shareholding, has completed the relevant national parliamentary procedures. Ministers have agreed on a number of measures to ensure the best possible credit quality and rating for the debt instruments issued by EFSF, such as a 120% guarantee of each Member State’s pro rata share for each individual bond issue and the constitution, when loans are made, of a cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF. See also Reuters which has a good Q&A on how the EFSF will work.

Lex argues that the danger is that the EFSF structure proves too cumbersome or collapses under the weight of its central contradiction: that one group of financially stretched countries should be expected to bail out another.  First, securing a triple A rating – and holding on to it is a leap of faith. Only two of its top four owners – Germany and France – enjoy that status. Second, any conditions it sets on loans to borrowers may need to be approved in those countries. That could be a tall order if, say, the condition for a loan to Spain were reform of the Spanish labour market.  Alphaville argues that with the beggar-thy-neighbour quality of the SPV duly avoided with some structured finance flattery, there’s just one problem left: the threat of legal challenges to the debt guarantees of the SPV.

Gillian Tett raises some issues about how the EFSF will work in actuality. It has yet to be determined where the debt that is issued by the EFSF will stand in seniority to existing sovereign debt. If the SPV made loans to Greece, would these be senior to existing Greek bonds? Would joint eurozone SPV issued bonds undermine investor appetite for national bonds? If so, could Europe be inching towards an American-style "two-tier" market, where part of the market would be highly liquid (like so-called "on the run" US Treasury bonds), but the rest an illiquid backwater (like, say, US municipal bonds)?

Jean Quatremer writes that France is unhappy about the Germanic terms of the SPV, which is now created under Luxembourg law and is likely to be run by a German. The fund is limited to 4% to the eurozone’s GDP, and there is no joint solidarity. Everybody is only responsible for their own share of the fund. But at least Paris managed to negotiate away the German insistence that national parliaments should sanction each payment.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

The role of the ECB in stabilizing sovereign debt markets

What are the main lessons of ECB interventions in specific sovereign debt markets?

Topic: European Macroeconomics & Governance Date: April 1, 2021
Read about event
 

Past Event

Past Event

Disruption or transformation: the impact of a digital euro on the financial system

How would a digital Euro impact the financial system?

Speakers: Fabio Panetta and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 10, 2021
Read about event
 

Past Event

Past Event

CANCELLED: How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
Read article More on this topic More by this author
 

Blog Post

Banks in pandemic turmoil

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 24, 2020
Read article More on this topic More by this author
 

Opinion

The European coronavirus response must be a solution, not more stigma

Lagarde needs a different bazooka in responding to a natural disaster like COVID-19.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: March 18, 2020
Read about event More on this topic
 

Past Event

Past Event

CANCELLED: The new age of old age? Laying out the Non-Financial Defined Contribution scheme

Are Non-Financial Defined Contribution (NDC) schemes the best approach to reforming pension systems?

Speakers: Robert Holzmann and Maria Demertzis Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 18, 2020
Read article Download PDF
 

External Publication

Analysis of developments in EU capital flows in the global context

This report presents an overview of the recent trends of capital flows, focused especially on the past year. It provides a detailed analysis at the global level and at the European Union level.

By: Grégory Claeys, Maria Demertzis, Marta Domínguez-Jiménez, Konstantinos Efstathiou and Tanja Linta Topic: European Macroeconomics & Governance Date: March 16, 2020
Read article More on this topic More by this author
 

Blog Post

What is fuelling the Dutch house price boom?

Housing prices have been rising fast in the West of the Netherlands in the last five years. However, mortgages outstanding have remained flat, raising the question of what has driven the increase. Evidence suggests that housing supply constraints have, this time around, played a role in pushing the house prices up.

By: Sybrand Brekelmans Topic: European Macroeconomics & Governance Date: February 19, 2020
Read article More on this topic
 

Blog Post

Recent euro-area house price increases are dissimilar to earlier housing booms

Current housing markets relative to those pre-crisis seem to be far less driven by mortgage credit, and the size of the construction sector has not increased. This is possibly good news for financial stability because an eventual house price correction would transmit less into mortgage defaults and corrections in economic activity.

By: Zsolt Darvas, Marta Domínguez-Jiménez and Guntram B. Wolff Topic: Finance & Financial Regulation Date: February 17, 2020
Read article Download PDF
 

Policy Contribution

European Parliament

From climate change to cyber attacks: Incipient financial-stability risks for the euro area

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability, we highlight issues that deserve more attention.

By: Zsolt Darvas, Marta Domínguez-Jiménez and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: February 6, 2020
Read article
 

Blog Post

Incorporating political risks into debt sustainability analysis

DSA applies to crisis countries only, but an early warning system identifying vulnerabilities is relevant for all countries. A more general, less stringent, debt vulnerabilities analysis (DVA) could be used to assess countries’ debt management policies and identify vulnerabilities, without leading immediately to policy consequences. A more general framework could also incorporate political risks that are significant determinants of debt dynamics

By: Andrea Consiglio and Stavros Zenios Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 22, 2020
Load more posts