The EFSM is an emergency funding programme that was set up in May 2010 under a Regulation issued by the Council of the European Union, with immediate effect. Its mission is to provide financial assistance to Member States that are experiencing or threatened with severe financial distress, in particular due to exceptional events beyond their control.
Under the EFSM, the European Commission is allowed to borrow up to €60 billion on financial markets on behalf of the EU under an implicit EU budget guarantee. The ESFM can provide two forms of financial assistance to Member States: a loan or a credit line authorising the state to draw down funds up to a set limit and over a specified period.
To benefit from the EFSM, Member States must submit an assessment of their financial needs and a draft economic and financial adjustment programme showing how they plan to restore financial stability. The Council of the European Union then decides whether to grant the assistance, acting by a qualified majority on a proposal from the Commission.
The Commission and Member State sign a memorandum of understanding (MoU) setting out the general economic policy conditions for the loan. The Commission verifies at regular intervals that the conditions are being met, in liaison with the European Central Bank.
The EFSM is compatible with other forms of financial assistance, namely the balance of payments (BoP) assistance facility for EU countries outside the euro area, and funds from outside the EU, in particular from the International Monetary Fund (IMF), subject to approval by the Commission.
The EFSM was used to provide a total of €46.8 billion of loans to Ireland and Portugal (€22.5 billion for Ireland and €24.3 billion for Portugal), spread out over three years, from 2011 to 2014.
In July 2015, the EFSM was used again to provide €7.16 billion of short-term financial assistance to Greece.
The EFSF was set up as a temporary crisis resolution mechanism at an exceptional summit of euro area heads of state and government in May 2010. It came into operation on 4 August 2010, after all euro area member countries had ratified its statutes.
It had a lending capacity of €440 billion, backed by guarantees from euro area member countries.
The EFSF provided financial assistance to Ireland, Portugal and Greece.
The financial assistance used to recapitalise the Spanish banking system, which was agreed by the Eurogroup in July 2012, was transferred from the EFSF to the ESM when the latter was created.
Since 1 July 2013, the EFSF has provided no new assistance programmes or loans. However, the facility will continue to operate until all outstanding loans have been repaid in full.
The ESM is the permanent mechanism for safeguarding financial stability in Europe, and was set up in September 2012 to replace the temporary mechanism, the EFSF.
The ESM provides stability support to member countries that are experiencing or threatened by severe market financing problems. Its mission is to preserve financial stability in the overall euro area and in its individual member countries. In exchange for ESM loans, beneficiary countries must agree to implement specific measures to address the weaknesses that caused their economic difficulties.
Based in Luxembourg, the ESM is an “international financial institution”, which means it was set up under an intergovernmental treaty. All EU Member States that have adopted the euro as their currency are de facto members. It is managed by a Board of Governors made up of the finance ministers of euro area member countries. Voting rights are proportionate to each country’s capital contribution, and decisions are taken by majority vote.
The ESM has a lending capacity of €500 billion and subscribed capital of €700 billion, of which €80 billion has been paid in by member countries and €620 billion is callable capital.
The ESM can use various instruments to support countries in difficulty: loans, purchases of bonds in the primary and secondary market, loans to governments for the recapitalisation of financial institutions, or even the direct recapitalisation of financial institutions.
The ESM helped Spain to recapitalise its financial sector and is currently providing financial assistance to Cyprus and Greece, which are both implementing macroeconomic adjustment plans. In August 2015, the ESM approved a further three-year financial assistance programme for Greece, with a disbursement of €86 billion.