European Stability Mechanism (ESM)

European Stability Mechanism (ESM)

The European Stability Mechanism (ESM) was set up as an international financial institution by the euro area Member States to help euro area countries in severe financial distress. It provides emergency loans but in return, countries must undertake reform programmes. Together with its predecessor, the European Financial Stability Facility (EFSF), it can lend a total of €700 billion.

With a paid-in capital of more than €80 billion, the ESM is one of the largest International Financial Institutions in the world. The ESM is the only official institution of the euro area. Combined with the EFSF, it has disbursed €250 billion in loans during the crisis, more than three times what the IMF disbursed globally during that period.  It is one of the largest issuers of euro-denominated debt in the world. Based in Luxembourg, it has 155 staff from 35 countries including the United States, China, and Brazil.

During Europe’s sovereign debt crisis, the ESM and the EFSF helped to hold the euro together. They lent money to Greece, Ireland, Portugal, Spain, and Cyprus. Without this help, some of these countries would have needed to leave the euro.

No taxpayer money is spent in ESM or EFSF assistance programmes. Both institutions obtain their funds in financial markets. Since they are financially backed by euro area countries, they can borrow money at very favourable rates. These are then passed on to programme countries.

The ESM replaces the EFSF, a temporary vehicle set up in 2010. The EFSF cannot enter new assistance programmes but continues to be active in the bond market to manage its debt.

WHO WE ARE

The European Stability Mechanism is an intergovernmental organisation established by member states of the euro area in 2012. Its mission is to enable the countries of the euro area to avoid and overcome financial crises and to maintain long-term financial stability and prosperity.

The ESM carries out this mission by providing loans and other types of financial assistance to member states that are experiencing or are threatened by severe financial distress. In other words, the ESM acts as a “lender of last resort” for euro area countries when they are unable to refinance their government debt in financial markets at sustainable rates.

In this role, the ESM is the successor to the European Financial Stability Facility (EFSF), a temporary institution created in 2010. Both institutions played a crucial role in preserving the integrity of the euro area during the euro debt crisis, by providing a total of €295 billion in loans to five countries (Ireland, Portugal, Greece, Spain, and Cyprus). As part of their ESM/EFSF programmes, these countries implemented reforms to address the weaknesses that led to economic and financial problems.

The ESM raises funds for its financial assistance through the sale of bonds and bills to investors. Taxpayers’ money is never used for lending to beneficiary countries.

The ESM’s scope of tasks will expand with the expected ratification of the revised ESM Treaty. The ESM will provide a backstop to the Single Resolution Fund, and will play a stronger role in crisis prevention and future economic adjustment programmes.

The ESM is based in Luxembourg.

WHAT WE DO

The ESM’s mission is to enable the countries of the euro area to avoid and overcome financial crises and to maintain long-term financial stability and prosperity. ESM can provide financial assistance to euro area countries experiencing or threatened by severe financing problems. This assistance is granted only if it is proven necessary to safeguard the financial stability of the euro area as a whole and of ESM Members.

For this, the ESM counts on several instruments. The ESM can grant a loan as part of a macroeconomic adjustment programme, such as the one that was already used by Cyprus and Greece. Ireland, Greece, and Portugal have used similar programmes delivered by the EFSF. The only other instrument used was an ESM loan to recapitalise banks which was provided to Spain. See the full ESM toolkit below.

Apart from these instruments, the ESM has created Pandemic Crisis Support, a credit line available to ESM Members to support domestic financing of healthcare, cure and prevention related costs due to the COVID-19 crisis. This credit line was available until the end of 2022.

HOW WE WORK

As an institution created by euro area countries, the ESM works very closely with its Members. Each country is represented in the Board of Governors – the ESM’s highest decision-making body – by its minister of finance. The Board’s most important decisions require unanimous agreement, including decisions to lend funds to an ESM Member.  

Between 2011 and 2018, the ESM and EFSF provided nearly €300 billion in loans to five countries: Ireland, Portugal, Greece, Cyprus, and Spain. This did not cost taxpayers any money, because the funds were raised in financial markets. The ESM does this by selling bonds and bills to investors all over the world. Even after the conclusion of all the financial assistance programmes, the ESM and EFSF continue their issuance activities. This is because bonds need to be refinanced, as their maturity is generally shorter than the maturity of ESM/EFSF loans. From our trading room, the funding team keeps a close eye on the market to decide on the next issuance. For 2023, the EFSF plans to raise €20 billion and the ESM €8 billion in bonds from investors. 

Following the completion of ESM/EFSF financial assistance programmes, post-programme surveillance (PPS) has been carried out by the European Commission in liaison with the European Central Bank. The procedure involves review missions in the programme country to assess its economic, fiscal, and financial situation. The ESM participates in the bi-annual PPS missions to fulfil the requirements of its Early Warning System, i.e. to assess a country’s capacity to repay its outstanding loans.

The ESM also manages its own capital of €80.5 billion. This money has been paid in by the euro zone countries. It cannot be used to grant loans. Paid-in capital serves as a guarantee for bonds issued by the ESM, and our portfolio managers prudently invest the capital to protect its value. They work under very strict guidelines and can only buy the safest instruments.

Thanks to these guarantees, the ESM has a strong credit rating and can raise money at very favourable rates. These low funding costs are passed on to our programme countries. As a result, the programme countries realise substantial budget savings.

Despite its large balance sheet of over €900 billion, the ESM only employs around 220 people. As the ESM was established under an intergovernmental treaty, it is formally not an EU institution. Therefore, it can recruit employees from countries all over the world. Currently, we employ staff from around 50 different nationalities.