Greece is set to lead the eurozone's first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €106bn over eight years. Here, we look at what the expanded EFSF is.
So what's the EFSF then?
The European Financial Stability Facility (EFSF) is the eurozone's temporary rescue fund, created in June last year with the ambitious mandate of safeguarding financial stability in the eurozone.
How?
By offering financial help to struggling member states. The plan was that it could issue bonds guaranteed by eurozone states for up to €440bn (£388bn) to raise money to loan to struggling countries. Technically, it is a Luxembourg-registered company owned by the eurozone states and has a staff of about a dozen.
Anything else?
The EFSF boasts the highest possible credit rating, AAA. There was a problem when everybody noticed that to keep that rating the fund could only lend €225bn, meaning it did not have the firepower markets anticipated. Its backers had to increase their guarantee commitments, with Germany putting up around €200bn. Now the fund can supposedly lend €440bn, although this has not yet been signed off by all the relevant national parliaments.
So the EFSF is Europe's rescue net?
Yes, but there are also loans of up €60bn from the European Financial Stabilisation Mechanism (EFSM), funds guaranteed by the EU budget. Then there is €250bn from the International Monetary Fund, the global lender. That has taken the total financial safety net up to €750bn. Of course, some of this has already been committed. The programmes for Ireland and Portugal were arranged using the EFSF. A second Greek bail-out would also be.
Is that it?
Don't forget the European Stability Mechanism (ESM) – not to be confused with the EFSM or EFSF. This is a permanent programme, which will replace the EFSF in 2013. The problem is that two years is a long time when the crisis is moving rapidly.
So what's changed?
The EFSF is about to enjoy a lot more "flexibility" – flexing some massively beefed-up powers – according to the draft agreement at the eurozone summit. It listed three steps. For the first time the rescue fund will be able to help states earlier, with precautionary loans, instead of waiting until countries are shut out of the debt markets. The EFSF will also be able to directly recapitalise banks, addressing the complaint that bailing out a government does not fix a shaky banking sector. Thirdly, the plan is for it to be able to intervene in the secondary bond market (buying the debt already out there, rather than directly from the governments issuing them). The fund will also offer longer and cheaper loans to distressed countries. All this will also apply to the ESM when it comes into being. President Sarkozy said it represented “the beginnings of a European Monetary Fund”.
Why?
The EFSF would be equipped with an arsenal of tools designed to keep a Greek default on its debt – which is looming in some form – from spreading further.
But what do they say about the best-laid plans?
Expanding the EFSF's role would have to be ratified by national parliaments, which may not fall in line – particularly in Finland and Germany. Some are already unhappy that voters' money has been used via "irrevocable and unconditional" guarantees to back the fund.
Source: www.telegraph.co.uk
So what's the EFSF then?
The European Financial Stability Facility (EFSF) is the eurozone's temporary rescue fund, created in June last year with the ambitious mandate of safeguarding financial stability in the eurozone.
How?
By offering financial help to struggling member states. The plan was that it could issue bonds guaranteed by eurozone states for up to €440bn (£388bn) to raise money to loan to struggling countries. Technically, it is a Luxembourg-registered company owned by the eurozone states and has a staff of about a dozen.
Anything else?
The EFSF boasts the highest possible credit rating, AAA. There was a problem when everybody noticed that to keep that rating the fund could only lend €225bn, meaning it did not have the firepower markets anticipated. Its backers had to increase their guarantee commitments, with Germany putting up around €200bn. Now the fund can supposedly lend €440bn, although this has not yet been signed off by all the relevant national parliaments.
So the EFSF is Europe's rescue net?
Yes, but there are also loans of up €60bn from the European Financial Stabilisation Mechanism (EFSM), funds guaranteed by the EU budget. Then there is €250bn from the International Monetary Fund, the global lender. That has taken the total financial safety net up to €750bn. Of course, some of this has already been committed. The programmes for Ireland and Portugal were arranged using the EFSF. A second Greek bail-out would also be.
Is that it?
Don't forget the European Stability Mechanism (ESM) – not to be confused with the EFSM or EFSF. This is a permanent programme, which will replace the EFSF in 2013. The problem is that two years is a long time when the crisis is moving rapidly.
So what's changed?
The EFSF is about to enjoy a lot more "flexibility" – flexing some massively beefed-up powers – according to the draft agreement at the eurozone summit. It listed three steps. For the first time the rescue fund will be able to help states earlier, with precautionary loans, instead of waiting until countries are shut out of the debt markets. The EFSF will also be able to directly recapitalise banks, addressing the complaint that bailing out a government does not fix a shaky banking sector. Thirdly, the plan is for it to be able to intervene in the secondary bond market (buying the debt already out there, rather than directly from the governments issuing them). The fund will also offer longer and cheaper loans to distressed countries. All this will also apply to the ESM when it comes into being. President Sarkozy said it represented “the beginnings of a European Monetary Fund”.
Why?
The EFSF would be equipped with an arsenal of tools designed to keep a Greek default on its debt – which is looming in some form – from spreading further.
But what do they say about the best-laid plans?
Expanding the EFSF's role would have to be ratified by national parliaments, which may not fall in line – particularly in Finland and Germany. Some are already unhappy that voters' money has been used via "irrevocable and unconditional" guarantees to back the fund.
Source: www.telegraph.co.uk
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