European Financial Stability Facility

The European Financial Stability Facility (EFSF) was a temporary financial-assistance mechanism created by the euro-area countries in response to the European sovereign-debt crisis. It was incorporated in Luxembourg as a special-purpose société anonyme and began operating in 2010. Its purpose was to preserve financial stability in the euro area by giving governments access to loans and other forms of support when they could no longer obtain affordable financing in capital markets. The EFSF did not operate like a commercial bank or an ordinary investment fund. It raised money in capital markets by issuing bonds and other debt instruments, with the obligations supported by guarantees from euro-area member states. The proceeds could then be lent to countries receiving an assistance programme. Its lending capacity and guarantee structure were revised as the crisis developed, and the facility was designed to maintain a high credit standing so that it could borrow at comparatively favorable rates. The EFSF was used in assistance programmes for Ireland, Portugal and Greece. It also provided the institutional and financial framework for euro-area support to Spain’s financial sector, although the European Stability Mechanism subsequently became the main permanent rescue institution. Assistance was conditional: recipient states generally had to accept economic-policy conditions, fiscal measures, financial-sector reforms or programme monitoring agreed with European institutions and, in relevant cases, the International Monetary Fund. The EFSF was created as an emergency and temporary mechanism alongside the European Financial Stabilisation Mechanism and the IMF-supported crisis response. In October 2012, the permanent European Stability Mechanism (ESM) was inaugurated. The ESM assumed responsibility for new financial-assistance programmes, while the EFSF continued managing its existing commitments, loans and bond liabilities. The EFSF therefore remained operational after 2012, but primarily as a legacy programme vehicle rather than as the euro area’s principal new lending institution. The facility’s borrowers and creditors were exposed to the broader political and economic debates surrounding the euro crisis. Support programmes involved controversial fiscal-adjustment requirements, debt restructuring discussions and questions about democratic accountability, burden sharing and the division of responsibilities between national governments and European institutions. Nevertheless, the EFSF helped create a common financing backstop during a period when several euro-area sovereigns and banking systems faced acute market pressure. Its residual activities are administered within the wider ESM institutional framework from Luxembourg.

The EFSF emerged from the first phase of the euro-area sovereign-debt crisis. In May 2010, euro-area governments agreed to create a temporary rescue structure capable of borrowing against member-state guarantees and passing the funds on to countries that needed official financial assistance. The facility was incorporated under Luxembourg law and began operating later that year. It formed part of a broader European and international response that also included the European Financial Stabilisation Mechanism and the International Monetary Fund. Its operating model was based on market funding rather than direct annual budget transfers. The EFSF issued bonds and other instruments, generally seeking a strong credit profile through guarantees from participating euro-area states. When a programme was approved, the facility could use the proceeds to extend loans or provide other authorised forms of support. Assistance was subject to conditions negotiated with the recipient country and monitored by European institutions, with IMF participation in some programmes. Ireland was the first country to receive support involving the EFSF framework, followed by Portugal. As the crisis deepened, the facility’s role expanded. It became a major lender to Greece under the second adjustment programme and was connected to the official response to the Greek debt crisis. The EFSF also provided financing for Spain’s programme to recapitalise and restructure banks. These operations made the facility one of the principal institutional mechanisms used to contain contagion across the monetary union. The EFSF’s mandate and capacity evolved as euro-area governments sought a more permanent crisis-management system. In 2011, governments agreed changes intended to broaden the facility’s flexibility and lending capacity, including the ability to support financial-sector recapitalisation and intervene under specified circumstances. The European Stability Mechanism was established as a permanent intergovernmental institution and opened in October 2012. From that point, the ESM handled new assistance programmes, while the EFSF remained responsible for outstanding commitments and debt issued for earlier programmes. The EFSF’s legacy is closely linked to the political controversies of the euro crisis. Programme conditions were criticized by some governments, economists and civil-society groups for imposing severe fiscal adjustment and social costs. Other critics argued that rescue arrangements exposed creditor countries to risks or created moral hazard. The facility itself was not a commercial brand competing for customers; its significance lay in its role as a common financial backstop and as an early institutional experiment in euro-area fiscal solidarity. Today, the EFSF is best understood as a legacy mechanism within the ESM family. It continues to have financial obligations and administrative responsibilities associated with assistance programmes issued during the crisis, but it is no longer the normal channel for new euro-area rescue lending. Its headquarters and institutional administration are in Luxembourg, and its work is closely integrated with the ESM’s management, reporting and capital-markets operations.

• 2012

  Second Greek programme

  [5]European Stability Mechanism: Greeceesm.europa.eu

  The EFSF provides the principal euro-area loan financing for Greece’s second adjustment programme.

• 2012

  ESM begins operations

  [1]European Stability Mechanism: Historyesm.europa.eu

  The permanent European Stability Mechanism starts operations and assumes responsibility for new financial-assistance programmes.

• 2012

  Spain banking-sector programme

  [6]European Stability Mechanism: Spainesm.europa.eu

  EFSF funding is used in the euro-area programme supporting the recapitalisation and restructuring of Spanish financial institutions.

• 2011

  Facility mandate is expanded

  [1]European Stability Mechanism: Historyesm.europa.eu

  Euro-area governments revise the EFSF framework to increase flexibility and strengthen its crisis-management capacity.

• 2011

  Portugal assistance programme

  [4]European Stability Mechanism: Portugalesm.europa.eu

  The facility becomes part of the financing structure for Portugal’s macroeconomic adjustment programme.

• 2010

  EFSF is created

  [1]European Stability Mechanism: Historyesm.europa.eu

  Euro-area member states establish a temporary facility able to raise funds through capital-market issuance and provide conditional financial assistance.

• 2010

  Ireland assistance programme

  [3]European Stability Mechanism: Irelandesm.europa.eu

  The EFSF participates in the financing framework for Ireland’s euro-area assistance programme.

A supranational euro-area crisis-resolution and financial-stability mechanism rather than a commercial bank, consumer-facing financial brand or conventional investment fund.

• Sovereign crisis lending · 2010

  Financial-assistance loans

  Loans funded through EFSF capital-market issuance and extended to euro-area countries under agreed adjustment programmes. The facilities were intended to relieve market-financing pressure while recipient governments implemented fiscal, structural or financial-sector measures subject to programme monitoring.

• Capital-markets funding · 2010

  EFSF bonds and bills

  Debt instruments issued by the facility to obtain the resources used for programme lending. Their credit structure relied on guarantees and related protections provided by euro-area member states, allowing the EFSF to function as a central financing intermediary during the crisis.

• Financial-sector assistance · 2012

  Bank recapitalisation support

  A crisis-support channel through which euro-area resources could be used to address weaknesses in national banking systems. The best-known EFSF-linked operation was Spain’s 2012 programme for the recapitalisation and restructuring of financial institutions.

• 2012

  Transfer new programme responsibility to the ESMStrategy

  Background

  A temporary facility was not considered sufficient as the long-term institutional basis for euro-area crisis management.

  Action taken

  The permanent European Stability Mechanism began operations and took responsibility for new assistance programmes, while the EFSF retained existing commitments.

  Aftermath

  The EFSF became a legacy institution administered within the wider ESM framework.

  Source

• 2010

  Adopt a temporary euro-area rescue-facility modelStrategy

  Background

  The sovereign-debt crisis exposed the absence of a standing euro-area mechanism able to raise large amounts of money for member states facing market stress.

  Action taken

  Euro-area governments created the EFSF as a Luxembourg-based special-purpose facility funded through guaranteed capital-market issuance.

  Aftermath

  The mechanism became a core part of the initial euro-area crisis response and later served as the predecessor framework for the permanent ESM.

  Source

1. 1European Stability Mechanism: Historyesm.europa.eu
2. 2European Stability Mechanism: Financial assistanceesm.europa.eu
3. 3European Stability Mechanism: Irelandesm.europa.eu
4. 4European Stability Mechanism: Portugalesm.europa.eu
5. 5European Stability Mechanism: Greeceesm.europa.eu
6. 6European Stability Mechanism: Spainesm.europa.eu
7. 7European Stability Mechanism: Managementesm.europa.eu