Klaus Regling Les Midis de l'Europe : presentation on the European Stability Mechanism (ESM) and the European Financial Stabilisation Mechanism (EFSM)

1. The EFSF and ESM
Klaus Regling, CEO, EFSF and Managing Director, ESM
“Les Midis de l’Europe”, Luxembourg
14 May 2014

2. 1
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

3. 2
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

4. 3
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

5. 4
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?

6. 5
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

7. ESM governance structure
6
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

8. 7
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

9. 8
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

10. 9
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

11. 10
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

12. 11
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

13. 12
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

14. 13
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

15. 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)
14
Germany Ireland Greece
Portugal Spain Italy

16. 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

17. EFSF/ESM programme countries are the reform champions
16
■ 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 structural reform
recommendations] was highest and also
where it most increased compared with
previous period.”
- Going for Growth 2013 (OECD Report)

18. 17
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

19. 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

20. 19
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

21. ■ 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
20

22. 21
Thank you for your attention!

23. 22
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