The European Stability Mechanism in the context of the sovereign debt crisis
Luxembourg, 21 January 2016
Dr. Ulrich Forsthoff is doctor in Law, senior legal officer at the European Stability Mechanism (ESM), after having worked more than ten years as legal counsel in a leading law firm and at the European Court of Justice. Dr. Forsthoff accepted to present to our members the ESM, its programmes and its strategy and to provide us with a very clear and detailed overview on the sovereign debt crisis which currently affects the euro area.
The exciting presentation of Dr. Forsthoff lasted about one hour and half and was followed by a dynamic question and answer session reflecting the deep interest of the audience for this topic and the needs that the listeners had to understand better the current complex situtation of the sovereign debt market.
You will find below a brief summary of the discussions and attached the slides that Dr. Forsthoff kindly shared with us.
The 2007-2008 financial and sovereign debt crisis led to the establishment of the European Financial Stability Mechanism (EFSM) on the 32 May 2010 as well as the European Financial Stability Fund (ESF) on 7 June 2000. The EFSF is a temporary private company established under Luxembourg law. The European Stability Mechanism (ESM) is a permanent inter-governmental institution established under international law. The ESM Treaty was signed on 2 February 2012.
Five countries have already received assistance from the EFSF/ESM programmes so far : Portugal, Greece, Ireland, Cyprus and Spain. Three of them have sucessfully exited their progammes (namely Spain, Portugal and Ireland). Concerning Greece, three different programmes have been set up. The last one (2015-2018) is still in force and basically consists of a facility of up to EUR 86bn granted to Greece, out of which EUR 21.4bn have been disbursed.
The ESM strategy is the granting of low interest loans subject to certain conditions of structural administrative reforms to be implemented by the borrowers (necessarily being a Member State). Member States are then led to achieve the loan counterpart requirements so that they should be more competitive and regain trust by investors. The final goal being that the borrowers can access again to the normal capital markets and therefore refinance themselves.
As a result of the ESM strategy, there has been an improvement in the fiscal balances of the ESM programmes’ beneficiaries and also in the Euro area as a whole. In all programme countries, GDP growth has picked up (see diagrams on slides 17, 18 and 19). Another positive effect is that all Member States remained in the Euro area.
The ESM is the biggest international financial institution in terms of capital and balance sheet with a maximum lending capacity of EUR 500bn and a AAA credit rating. On the other hand the ESM is a lean institution, having only 151 staff members including non EU citizens.
The ESM is based in Luxembourg. More information about the sovereign debt crisis and the answers brought by the ESM to such crisis are provided in the slides attached.