What is the European Stability Mechanism?
7 July 2015
Greece is seeking financial support from the European Stability Mechanism (ESM), the eurozone's permanent bailout fund for struggling economies. It was launched back in October 2012 as one of the key elements in the eurozone's defences against a deepening debt crisis. But what exactly is the ESM and how does it work? The European Stability Mechanism is a European Union agency that provides financial assistance, in the form of loans, to eurozone countries or as new capital to banks in difficulty. It is a permanent agency, based in Luxembourg, and has replaced the temporary European Financial Stability Facility (EFSF). The ESM has a maximum lending capacity of  EUR500bn ($550bn; PS360bn). It  borrows in the financial markets, by selling bonds, the same method that governments use for most of their borrowing needs. The financial foundation of the ESM is capital provided by the eurozone governments. They have committed in principle to a total of EUR700bn, although they have actually paid in just EUR80bn. The additional capital can be called in if it is needed. The capital is NOT the money used for providing assistance. It absorbs any losses if countries receiving help fail to repay it. It provides a reassurance to investors in the financial markets that they can lend to the ESM (by buying its bonds) and be confident of being repaid.  That confidence is vital for keeping the ESM's credit rating high and its borrowing costs low. Germany provides 27% of the capital, France 20% and Italy 18%. No. The UK does, however, indirectly contribute to eurozone bailouts where there is a contribution from the IMF. It also made a bilateral contribution in the case of the Republic of Ireland.  The UK is, also indirectly, potentially affected by any losses incurred by yet another bailout agency - called the European Financial Stabilisation Mechanism (EFSM). It contributed to the bailouts of Ireland and Portugal. The ESM can lend directly to governments. It can also buy their debts (bonds) either directly when they are first issued or in the financial markets. In addition, the ESM can support banks directly. This support would be "recapitalisation", usually by providing funds in return for a shareholding. The ESM's first programme was a loan to Spain to help strengthen the country's banks.  The ESM paid a total of EUR41.3 billion in December 2012 and February the following year. The final repayment is due at the end of 2027. The ESM's only other programme so far was for Cyprus. The total available is just under EUR9 billion. So far EUR5.7 has been paid.  The money is to support the government's financial needs and for the recapitalisation of the financial sector. Yes. The policies that the borrowing country is required to follow are negotiated on a case-by-case basis. In the case of Spain the conditions were focused on the banks. With Cyprus the conditions were more wide ranging and covered tax, government spending, and healthcare and pension reform.
The European Stability Mechanism is a European Union agency that provides financial assistance, in the form of loans, to eurozone countries or as new capital to banks in difficulty. It is a permanent agency, based in Luxembourg, and has replaced the temporary European Financial Stability Facility (EFSF).
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What is the ESM?
The ESM has a maximum lending capacity of  EUR500bn ($550bn; PS360bn).
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How much financial help can it provide?
It  borrows in the financial markets, by selling bonds, the same method that governments use for most of their borrowing needs.
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How does the ESM get the money?
The financial foundation of the ESM is capital provided by the eurozone governments. They have committed in principle to a total of EUR700bn, although they have actually paid in just EUR80bn. The additional capital can be called in if it is needed. The capital is NOT the money used for providing assistance. It absorbs any losses if countries receiving help fail to repay it. It provides a reassurance to investors in the financial markets that they can lend to the ESM (by buying its bonds) and be confident of being repaid.  That confidence is vital for keeping the ESM's credit rating high and its borrowing costs low.
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Is there a contribution from governments?
No. The UK does, however, indirectly contribute to eurozone bailouts where there is a contribution from the IMF. It also made a bilateral contribution in the case of the Republic of Ireland.  The UK is, also indirectly, potentially affected by any losses incurred by yet another bailout agency - called the European Financial Stabilisation Mechanism (EFSM). It contributed to the bailouts of Ireland and Portugal.
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Anything from the UK?
Yes. The policies that the borrowing country is required to follow are negotiated on a case-by-case basis. In the case of Spain the conditions were focused on the banks. With Cyprus the conditions were more wide ranging and covered tax, government spending, and healthcare and pension reform.
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Are there conditions attached to financial assistance?