Safeguarding the euro in times of crisis : the inside story of the ESM.
Date: 2019-05-15
Institutions: European Stability Mechanism
Subjects: Economic and Monetary Union, banking, banking policy, banking supervision, central bank, euro area, financial cooperation, financial market, financing, monetary cooperation, monetary crisis, monetary integration, monetary union, stability programme

SAFEGUARDING  
THE EURO  
IN TIMES OF CRISIS
The inside story of the ESM

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SAFEGUARDING  
THE EURO  
IN TIMES OF CRISIS
The inside story of the ESM

The description of the events in this book, and the opinions and recollections of the 
individuals quoted therein, represent the best efforts of the author, the ESM staff and 
other contributors, to depict an authentic and impartial version of the relevant period in 
the ESM’s history. None of the views expressed is necessarily that of the ESM itself, nor 
that of any of its governing bodies, and such bodies have not been asked to approve 
this work. Accordingly, the ESM takes no responsibility, express or implied, for any of the 
statements of fact or opinion made herein.

Neither the European Stability Mechanism nor any person acting on behalf of the 
European Stability Mechanism is responsible for the use that might be made of the 
following information.

Luxembourg: Publications Office of the European Union, 2019

Print 
PDF 

ISBN 978-92-95085-34-3 
ISBN 978-92-95085-33-6 

doi:10.2852/47298 
doi:10.2852/788601 

DW-06-16-056-EN-C
DW-06-16-056-EN-N

© European Stability Mechanism, 2019

Reproduction is authorised provided the source is acknowledged.

For any use or reproduction of photos or other material that is not under the copyright  
of the European Stability Mechanism, permission must be sought directly from the 
copyright holders.

Contents

Acknowledgements 

Foreword by Jean-Claude Juncker,  
President of the European Commission 

Foreword by Klaus Regling,  
ESM Managing Director 

CHAPTER 1
Defending a symbol: ‘the euro is here to stay’ 

CHAPTER 2
Lurching towards crisis: a ‘very fragile’ world 

CHAPTER 3
‘Runaway train’: Greece sounds the alarm 

CHAPTER 4
The €750 billion weekend: the EFSF is born 
Focus: The European Central Bank steps up 

CHAPTER 5
Enlisting Klaus Regling: ‘I have his number’ 

Focus: A life in public service  

CHAPTER 6
All eyes on Luxembourg: ‘let’s do this’ 

Focus: A role for the European Investment Bank? 

CHAPTER 7
Early days: the EFSF and its doubters 

CHAPTER 8
Enter the troika: the European Commission,  
the IMF, the ECB 

CHAPTER 9
Courting a top credit rating: preparing for the markets 

7

9

11

13

23

31

45
56

57
61

65
68

73

77

83

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

CHAPTER 10
Testing the EFSF: the case of Ireland 

CHAPTER 11
A phone, a laptop, and an espresso machine:  
start-up culture 

CHAPTER 12
‘Make sure the project flies’: the EFSF’s first bond 

Focus: A precedent-setting disbursement 

CHAPTER 13
The crisis spreads to Portugal: a second call for aid 

CHAPTER 14
Scaling up the fund: the ‘save Europe’ call  

CHAPTER 15
Towards the ESM: ‘a solid legal foundation’ 

CHAPTER 16
Expanding the EFSF toolkit: bonds, banks, and guarantees 

Focus: Bond-buying power 

CHAPTER 17
Meeting at the opera: the leverage debate 

CHAPTER 18
Rethinking rescue funding: the diversified strategy 

Focus: Transparent, flexible funding 
Focus: Awards for the ESM/EFSF funding team 

CHAPTER 19
From bailout to bail-in: towards a new programme  
for Greece 

CHAPTER 20
European ‘bazooka’: the $1 trillion question 

CHAPTER 21
The ESM takes shape: ‘something fresh’ 

CHAPTER 22
A ‘big mistake’: Greece’s second rescue stumbles 

Focus: €15 billion and 10 minutes to spare 

91

103

109
116

117

127

133

141
146

149

157
162
163

165

175

181

189
193 

  5

CHAPTER 23
Debt sustainability: revising the metrics 

CHAPTER 24
Breaking the doom loop: towards banking union 

CHAPTER 25
Spain’s banks: the ESM’s first programme 
Focus: When bonds are better than cash 

CHAPTER 26
The ESM on trial: green light from Germany 

CHAPTER 27
Financial milestone: the ESM starts operations 

CHAPTER 28
Corporate governance: the ESM’s operating manual 

CHAPTER 29
Capital backing: key to top ESM credit rating 

Focus: How do you solve a problem like a downgrade? 

CHAPTER 30
At home in Luxembourg: a look inside the ESM’s offices 

CHAPTER 31
Crisis in Cyprus: ‘no negotiating power, no credibility’ 

CHAPTER 32
Clean exit: Portugal wraps up its programme  

CHAPTER 33
Ensuring repayment: the ESM’s early warning system 

CHAPTER 34
‘Just in case’: the direct bank recapitalisation tool 

Focus: Carlo and Hugo 

CHAPTER 35
Safeguarding the capital: building a modern, strategic  
investment architecture 

Focus: Hedging against risk 

CHAPTER 36
Moving towards Grexit: at the cliff’s edge 

201

207

213
226

229

237

243

251
253

255

261

277

285

291
297

299
308

311

 
  
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

CHAPTER 37
Turning the corner: Greece’s third programme 
Focus: An unusual money market transaction 

CHAPTER 38
Debt relief: ‘real savings for Greece’  

CHAPTER 39
Beyond the troika: the ESM’s evolving role 

CHAPTER 40
The ESM: taking on new tasks 

Epilogue 

Annexes 

Biographies 
Timeline 
EFSF and ESM disbursements 
EFSF and ESM rating history 
Loan re-profiling for Greece, Ireland, and Portugal 
Acronyms and abbreviations 
Index 

321
334

337

345

355

365

369
371
378
397
404
406
411
413

Acknowledgements

It was at a weekly ESM management board meeting some years ago that  
the idea first emerged to write the story of the rescue funds. Our story is 
deeply intertwined with that of the euro crisis, and it therefore provides 
some important chapters in the history of the euro, whose 20-year 
anniversary we are celebrating this year. Since the rescue funds were created 
only recently, all the key players were still available to recount their part in 
the story. With this in mind, we interviewed many of those who contributed 
to setting up the temporary EFSF and permanent ESM so the tale could be 
told by those who first envisaged and then built the institutions.

We are deeply indebted to those who took the time to share their memories 
with us. They all played a role in shaping the euro area’s response to the 
crisis: as finance ministers, leaders and representatives of institutions, and 
programme country experts. We would like to thank those who spoke with 
us: Maria Luís Albuquerque, Benjamin Angel, Marco Buti, Alfred Camilleri, 
Kevin Cardiff, Mitsuhiro Furusawa, Vítor Gaspar, Timothy Geithner, Vittorio 
Grilli, Georges Heinrich, Deborah Henderson, Christine Lagarde, John 
Lipsky, David Lipton, George Papaconstantinou, Olli Rehn, Michael Sarris, 
Wolfgang Schäuble, Yannis Stournaras, Fernando Teixeira dos Santos, Jean-
Claude Trichet, Euclid Tsakalotos, Maarten Verwey, Thomas Weinberg, and 
Thomas Wieser. We would also like to thank those who provided written 
comments: Mário Centeno, Jeroen Dijsselbloem, Luis de Guindos, Mario 
Draghi, Jean-Claude Juncker, and Peter Kažimír.

But we could not have chronicled the creation of the institution without the 
first-hand accounts of those who were on the inside from day one, especially 
Klaus Regling, ESM managing director and the founder of the rescue funds. 
Chief Economist Rolf Strauch, Deputy Managing Director and Chief Finance 
Officer Christophe Frankel, and Secretary General Kalin Anev Janse were 
among the first to join Regling, as were a number of ESM colleagues from the 
various divisions and departments, from junior to senior level, many of whose 
voices you will hear throughout this book. A number of ESM colleagues were 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

also later involved in the daunting task of reviewing several drafts of the book 
and annexes, as well as contributing expert material. Without their admirable 
efforts, this book could not have been written.

We were fortunate to have Rebecca Christie as our lead author for this book. 
A former Bloomberg reporter in Brussels, she covered the crisis and its 
aftermath until 2016 when she established herself as an independent writer. 
We owe a great deal to her profound background knowledge, quick grasp of 
new information, compelling writing style, and ability to work under immense 
time pressure.

Special thanks go to Thomas Wieser, President of the Eurogroup Working 
Group until early 2018, who reviewed the final book manuscript and provided 
extremely valuable comments.

Safeguarding the euro in times of crisis: The inside story of the ESM could 
not have been published in its final form without the invaluable support of 
the Publications Office of the European Union in Luxembourg and its very 
dedicated staff. We are very grateful for their work on this book, their advice, 
and assistance. We would also like to thank Emma Vandore and James Neuger, 
whose expertise helped to transform this project into reality.

Most big undertakings have unsung heroes. For this publication there are two: 
one is Sharman Esarey, the ESM’s principal editor. Without her outstanding 
talent as an editor and her exceptional social skills there would simply not 
have been such a book. The same is true for Assistant Editor Rachel Calero. 
Her unparalleled organisational skills and her friendly insistence on deadlines 
and deliveries brought structure to a process that sometimes seemed too 
complex to master.

ESM management board 

Credit: Steve Eastwood/ESM

Foreword by  
Jean-Claude Juncker, 
President of the European Commission

At 20 years young, the euro has already come a long way. A generation ago, 
it would have been unthinkable for 340 million Europeans in 19 countries to 
share a currency. 

Our single currency has always been more than the notes and coins in our 
pockets and wallets. It is the symbol of unity and the promise of prosperity 
and protection. It allows us to enjoy stable prices, lower transaction costs, 
protected savings, more transparent markets and increased trade. It 
creates jobs at home and gives Europe more influence in an increasingly 
competitive world. 

It was not always easy – quite the opposite. As someone who was there 
from the start, I witnessed the ups, downs, and teething problems that our 
Economic and Monetary Union went through. The financial crisis that 
started in 2007 did not originate in Europe, but it hit us harder than any 
other event since World War II. Jobs were lost, economies shrank, and 
confidence was shaken.

Europe learned some hard lessons – and it had to act decisively to put 
right what had been exposed as being insufficient. Euro area countries had 
to stand up to better protect Europeans and their currency. Emergency 
measures were taken to provide new financial safeguards and support the 
countries most affected. 

As the president of the Eurogroup at the time, I was among the policymakers 
who decided to set up the European Financial Stability Facility (EFSF) and 
I was happy that we were able to recruit Klaus Regling to lead it. The EFSF 
and its permanent successor, the European Stability Mechanism (ESM), have 
played a decisive role in the stability of the euro area by serving as our firewall 
and supporting member states to regain or maintain access to sovereign bond 
markets. Let me pay tribute to all the ESM staff who contributed.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Thanks to the efforts of Europeans and resolute action at national and EU 
levels, the situation has turned: Europe’s economy has moved from recovery to 
expansion and unemployment is at record lows. Growth has spread to every 
part of Europe and more people are in work than ever before. Confidence and 
investment have returned. This shows that Europe is able to move forward 
when there is political will, unity, and determination. It is little wonder that 
popular support for the euro is now at record levels. 

Having said this, the crisis has had a far-reaching impact, and there is 
always a risk of downturns on the horizon, so there should be no room for 
complacency. While we have made important reforms in recent years, we must 
get on with the job of completing Europe’s Economic and Monetary Union 
and equipping our single currency with the tools it needs to thrive. 

As we look to the next chapter in the story of the euro, I believe the ESM 
should naturally graduate into a robust crisis management body, to be 
incorporated into EU law alongside other institutions. Having seen it grow 
since day one – and having worked closely with Klaus Regling and his team – 
I know that it will be more than up to the task. 

Foreword by  
Klaus Regling,  
ESM Managing Director

‘Europe will not be made all at once, or according to a single 
plan. It will be built through concrete achievement.’ 
Declaration by French Foreign Minister Robert Schuman, 9 May 1950

It took a half century after Schuman’s generation embarked on the project 
of European integration for one of the most concrete achievements of 
all, the single currency, to become reality. This year, we mark both the 
20th anniversary of the start of Economic and Monetary Union in 1999 and 
the 10th anniversary of the first signs of financial tumult in Greece in 2009 
and the onset of the euro crisis.

In the policy response to the crisis, there were traces of Schuman’s thinking. 
As the financial and economic crisis spread from Greece to Ireland, 
Portugal, Spain, and eventually Cyprus, European leaders acted in the 
spirit of incremental progress – with a healthy dose of improvisation – that 
animated the post-World War II generation. It was a matter of providing 
rapid, conditional relief for financially impaired governments while building 
institutions to make the euro area more robust and less vulnerable over the 
longer term.

Europe’s rescue funds – the temporary European Financial Stability Facility 
(EFSF) and its permanent successor, the European Stability Mechanism (ESM) 
– were one of the products of the deliberations, often into the wee hours of 
the morning, of policymakers confronted with this unprecedented challenge. 
This book is the story of the EFSF and ESM, from the high-stake summits and 
Eurogroup meetings and endless technical and brainstorming sessions to the 
design and creation of a new international financial institution, built from 
scratch through the recruitment of professional staff, renting of office space, 
and setting up of systems.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The EFSF and ESM grew up in the heat of the crisis, scrutinised by nervous 
financial markets, a worried public, and concerned euro area country 
governments. Unsurprisingly, the rescue funds didn’t emerge in their mature 
form overnight. The EFSF’s guarantee-based financing structure was the 
imperfect product of compromise, and when it began operations in mid-2010, 
its sole ambition was to lend to distressed governments. Over time, the EFSF 
was equipped with additional tools. These instruments were later transferred 
to the ESM, which rests on a sturdier, capital-backed foundation.

What pulled the monetary union back from the precipice was, ultimately, the 
willingness of the people of programme countries to support difficult policy 
choices for the sake of a better future, and the solidarity of the other member 
states of the euro area, even amid fierce domestic debate. But this account 
would be incomplete without the women and men of the EFSF and ESM. 
This is their history, too: how an international financial organisation, rooted 
in banking and the markets yet infused with a clear public sector mission, 
became an essential part of the euro area architecture over a few short years. 

This chronicle embeds the story of the two rescue mechanisms in the 
broader history of the crisis, drawing on first-hand insights from interviews 
with all the main actors, among them political leaders, finance ministers, 
and central bankers. It takes the reader inside the critical discussions, from 
Athens to Berlin, Dublin to Brussels, Washington DC, to Luxembourg – 
and many places in between. Restoring stability to the euro required hard 
work on multiple fronts, but one lesson that resonates in these pages is that 
everyone was working towards an identical goal: defending the currency, 
one step at a time.

The period between 2010, when the first rescue fund was established, and 
2018, when Greece became the last country to successfully exit its financial 
programme, was a defining phase in the history of European integration. I 
believe this will become increasingly clear as this period retreats into the past 
and is studied in greater detail by journalists, scholars, and the general public. 
I hope this book will be an informative contribution.

Defending a symbol: 
‘the euro is here to stay’

1

The creation of the EFSF and ESM was thanks 

to an unprecedented show of political will and 
innovation. 

Jean-Claude Juncker 
President of the European Commission (since November 2014), inaugural 
Chairman of the ESM’s Board of Governors (October 2012–January 2013) and 
President of the Eurogroup (January 2004–January 2013) 

In the first few years after its 1999 debut, the euro symbolised what 

the euro area member states had achieved together. Citizens could 
work, shop, and save across borders without having to convert their 

money into francs and marks. Enterprises could do business across 
all countries that used the euro without experiencing any exchange 
rate risk, and capital markets benefited from a larger pool of securities 
denominated in the same currency. Over time, markets began to trade 
euro area sovereign bonds more interchangeably. 

Ten years later, global financial turmoil caused tremors that would 
shake the new currency to its core. By 2010, the crisis that erupted in 
the United States (US) had triggered a sovereign debt crisis in Europe. 
Investors began to wonder if the groundbreaking common currency 
could withstand the rising debts and troubled banks that were plaguing 
several of its countries and threatening the rest. As doubts spread, 
conservative bond investors grew increasingly nervous and pressed 

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ever lower the prices at which they were willing to buy the sovereign 
debt of some euro countries. This forced up the interest rates on that 
debt to levels that crippled national budgets.

To meet this challenge, the euro area erected a firewall. Beginning with 
the European Financial Stability Facility (EFSF) and continuing with 
its permanent successor, the European Stability Mechanism (ESM), the 
countries that joined forces to build the euro made it clear that they 
would stand together. 

This collective action meant that during the worst of the crisis, the 
EFSF and ESM were able to tap financial markets to provide rescue 
funding to five of the euro area’s 19 member states. Because of this 
steady access to affordable financing amid the broader market turmoil, 
those five countries were able to undertake the reforms they needed 
to compete and thrive in the global economy. Moreover, thanks to the 
innovative way the firewalls were structured, the rescue programmes 
were financed with minimal risk and virtually no direct cost to 
taxpayers elsewhere in the currency union.

For Jean-Claude Juncker, who during the first years of the crisis was 
premier of Luxembourg and also led the finance ministers of the 
Eurogroup, the currency area has emerged stronger than ever. The euro 
was under serious threat when the sovereign debt crisis reached its 
peak in 2011 and 2012. At that moment, various doomsayers predicted 
the end of the single currency. ‘They were proven wrong,’ said Juncker, 
now president of the European Commission. ‘The euro is here to stay.’  

Historically, as part of the European Union’s (EU’s) founding treaties, 
fiscal policies were left up to each individual Member State. The euro 
area had adopted budget guidelines, known as the stability and growth 
pact, to try to keep all of its member states on the same page when 
it came to borrowing and spending. But those agreements had not 
held up in times of economic struggle. Germany and France had led a 
push in 2003 to avoid sanctions for their own higher deficits1, and in 
their shadow it was easy for other countries to postpone the fiscal day 
of reckoning. As long as bond yields stayed uniformly low across the 
region, there had been no pressing need to address the flouting of the 
budget rules. 

  All links were checked and worked correctly on 3 April 2019. 

1  Guardian (2003), ‘France and Germany evade deficit fines’, 25 November 2003. 

https://www.theguardian.com/business/2003/nov/25/theeuro.politics  

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Everything was made worse by the crisis that hit the world in 2007 
and 2008 after convulsions in the US financial system. Governments 
worldwide were under huge pressure as the worst recession since 
the 1930s shrank tax revenues and boosted welfare spending. 
The Group of 20 and the EU decided collectively to undertake 
expansionary fiscal actions in response. The subprime mortgage 
crisis, in which lenders around the globe took on too much exposure 
to risky US housing loans, also exposed huge flaws in the banking 
system. Countries were forced further into the red by providing 
recapitalisation to troubled banks. As a result, government balance 
sheets deteriorated and nervous investors looked for weaknesses. This 
pattern would repeat itself throughout the five years when the euro 
crisis was at its most threatening. 

In 2009, the market’s unfettered confidence abruptly evaporated after 
Greece elected a new government that came face to face with far higher 
budget deficits than had been reported. For too long, markets had 
ignored growing disparities in the economic fundamentals of euro 
area countries. When the true level of the Greek debt and deficit was 
revealed, investors overreacted in the opposite direction, withdrawing 
capital by selling off debt not only from Greece but also from countries 
across the region.

Some countries, such as Ireland, had independently run into trouble 
because of a bursting real estate bubble and subsequent difficulties 
in the banking sector. Others, such as Portugal, were in 2009 already 
up against the limits of what they could sustainably borrow following 
worsening current account imbalances. Throughout the currency area, 
the onslaught of uncertainty radiated from Greece to nearly every euro 
country active in the sovereign debt markets. 

In the euro area’s first years, the economic success of its strongest 
nations had spread throughout Europe. Now the trend was running 
the other way. Countries that had been seen as healthy lost the 
benefit of the doubt, while those that were facing challenges saw their 
tribulations increase almost overnight. This cycle of contagion, as 
trouble spread from one hotspot to another, meant the euro area was 
at risk of losing the longstanding ability of all its members to raise 
money on financial markets. The implications ranged from higher 
borrowing rates to a possible total loss of market access that would 
leave governments unable to raise funds.

 
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For example, after Greece’s deficits came to light, new questions arose 
about Ireland, whose government had promised to guarantee2 all bank 
debts in a bid to head off what had previously appeared to be a self-
contained financial shock. 

Difficulties in one country showed up in another as the crisis got 
worse. In January 2012, the credit-rating agency Standard & Poor’s 
highlighted the extent of the damage by downgrading nine euro area 
countries, including two countries previously AAA rated: France  
and Austria3. 

The euro area was vulnerable to these kinds of shocks because of 
the way its member states had bound themselves together. Often a 
financial crisis is followed by large currency movements, driven by 
the markets when investors perceive a risk of investing in a country’s 
currency, or driven by a decision by governments to devalue their 
currency. For euro area countries, this was not possible to do on a 
country-by-country basis. 

Once Europe’s greatest symbol of post-World War II unity, the 
common currency was under threat. In the years to come, the euro area 
would repeatedly be called upon to prove its mettle.

There was no mechanism to help distressed countries within the 
currency union before the global crisis hit. As conditions deteriorated, 
investors began to ask what would happen if governments ran out 
of money and couldn’t borrow more. What if Greece defaulted on its 
debts, and what if that in turn shut other countries out of financial 
markets so that they, too, would default? They feared Greece’s exit from 
the euro – Grexit – and the financial turmoil that could force others 
out. This pressure spread across the entire region. 

Policymakers across Europe fretted about how to stop the shockwaves 
from Greece, in order to avoid fracturing the euro area. But the 
contagion was already taking root. 

‘The fear of hanging sharpens a person’s mind,’ said Thomas Wieser, 
who throughout the crisis was chairman of the Eurogroup Working 
Group and the Economic and Financial Committee, the two most 

2 

Ireland, Houses of the Oireachtas (2008), Credit Institutions (Financial Support) Act 2008, 
2 October 2008. https://www.oireachtas.ie/en/bills/bill/2008/45/

3  Financial Times (2012), ‘S&P downgrades France and Austria’, 14 January 2012. 

https://www.ft.com/content/78bf6fb4-3df6-11e1-91f3-00144feabdc0

C H A P T E R   1   —   DE F E N D I N G   A   SyM B O L :  ‘ T H E   E U R O   I S   H E R E  T O   S TAy ’ 

  1 7

important economic committees of the euro area and the EU. In the 
Eurogroup Working Group, the euro area’s finance ministry deputies’ 
group, Wieser steered the detailed financial planning for the country 
programme rescues until he retired in January 2018. He put the 
euro’s problem succinctly: ‘When the Greek crisis struck, we had no 
instrument to tackle it – and specifically the contagion that concerned 
us all at the time.’ 

The common currency area was at a crossroads: would its leaders 
provide a safety net to defend the euro, or would they allow it 
to splinter into pieces? They had to find the will to act. ‘It had 
become apparent that we needed something to stabilise the euro,’ 
Wolfgang Schäuble, Germany’s former finance minister, said. ‘We 
had to take consistent and resolute action to shore up the euro area’s 
financial stability.’  

Euro area leaders sought assistance from the international financial 
system’s lender of last resort, the International Monetary Fund (IMF), 
but never depended upon it entirely. Because of the unique 
interconnections at the heart of monetary union, the euro area needed 
its own backstop alongside the IMF’s global prowess. Moreover, the 
IMF’s lending capacity would not have allowed it to provide all the 
money needed by those euro area countries that lost market access 
over the course of the crisis.

‘We needed to create our own European funds,’ said Klaus Regling, 
the EFSF’s chief executive and the ESM’s inaugural, and to date only, 
managing director. 

At the height of the crisis, Europe’s politics were divided among 
countries that needed aid, those that might, and those that did not 
think they ever would. The founding treaties of the EU barred the 
assumption of a country’s debts by another country or by the EU, and 
there were no tools immediately available for providing a helping hand 
on the scale needed. 

Against this backdrop, the euro area moved to tackle the financial 
crisis in a stepwise fashion. At every stage, member states pushed the 
boundaries of what was then politically possible, so that each move 
would be stronger than its precursor. The firewall that emerged would 
be a fundamentally European solution. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

In 2010, the first initiative was a bilateral loan programme for Greece, 
collectively managed by the Commission and named the Greek  
Loan Facility4. 

‘To avoid contagion to other members of the currency union, we 
quickly needed to come up with a convincing approach that could 
also be implemented in the short term,’ Schäuble said. ‘We knew that 
these solutions were only temporary and that we needed to work 
on creating a permanent crisis mechanism, which is where the ESM 
eventually came in.’ 

The first breakthrough came during a fateful weekend in May 2010, 
when the euro area worked round the clock to put together a crisis 
response to keep the monetary union together. Directed by European 
leaders, and backed by ECB, the European Commission, and the IMF, 
euro area finance ministers strove to find a solution that would calm 
financial markets: a fund able to borrow on global capital markets in 
order to lend to nations that could no longer borrow on their own.

The stakes were enormous, remembered Christine Lagarde, who was 
then France’s finance minister and would later become IMF managing 
director. ‘If we could not reach agreement, there would be no firewall and 
the crisis would spread to the point where the euro was under threat.’ 

That weekend gave birth to the temporary EFSF, which in turn was a 
bridge to the permanent ESM in terms of concept and politics. The 
interim fund, which became fully operational in August 2010 and 
issued its first bond in January 2011, had an immediate ability to tap 
financial markets at affordable rates, replacing the stopgap system 
of bilateral loans that had failed to contain the contagion. In just 
seven months, the EFSF went from a sketch on paper to a fully fledged, 
top-rated issuer in capital markets. 

The EFSF was backed by guarantees provided by its Members. At the 
time, that system was what made it attractive because it was a way 
around writing an upfront cheque, Wieser said. 

The EFSF was also designed to be temporary, and initially its aid 
loans were priced at a steep premium to typical market rates for stable 
countries. When a euro area rescue fund had first been floated, sceptics 

4  European Commission, Directorate-General for Economic and Financial Affairs (2010), ‘The 

Economic Adjustment Programme for Greece’, European Economy Occasional Papers 61, May 2010. 
http://ec.europa.eu/economy_finance/publications/occasional_paper/2010/pdf/ocp61_en.pdf

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had sought to limit its availability so it wouldn’t be over-relied upon. 
Euro area member states were understandably reluctant to provide 
funds to other countries for a lengthy period. At the same time, the 
fund proved essential in fighting back against euro area contagion. The 
EFSF’s success set the stage for its permanent successor, as the euro 
area became more comfortable with new ways of working together to 
help a country get back on its feet. 

As a permanent institution backed by a buffer of paid-in capital, the ESM 
took things to a new level when it began operations in October 2012. It 
offered a sturdier financing framework than the EFSF, which allowed it 
to respond faster to countries in need. The ESM, set up outside the EU 
treaties, has not only mobilised large amounts of money in markets, but 
it has also been a source of technical and practical advice to euro area 
member states in times of deep financial strain. 

‘The EFSF, and later the ESM, were crucial tools for dealing with the 
sovereign debt crisis in the euro area,’ said Mario Draghi, president of 
the European Central Bank (ECB) since November 2011. 

Operating with a single staff and office since the ESM’s 2012 inception, 
the two funds stood for action during a time when some feared the 
bloc that had taken so long to build could be ripped apart overnight. 

Timothy Geithner, former US Treasury secretary, said the crisis 
worsened in part because of ‘an external perception that Europe was 
not willing to put the resources’ into the type of policy response that 
was needed. The evolution of the ESM, along with parallel moves 
towards euro area banking union and stronger financial regulation, 
helped put these global fears to rest. 

Moving to a permanent euro area institution was of ‘paramount 
importance’, Alfred Camilleri, permanent secretary for budget and 
finance in the Maltese finance ministry, said. ‘There was a very strong 
suspicion that contagion would escalate, and that a number of other 
countries – especially those that were significantly more vulnerable 
– would be hit,’ he said. ‘Policy is often formulated and implemented 
in response to particular situations. The euro area is still a work in 
progress. These two institutions were created in response to, and in the 
context of, a crisis.’  

Overall, the two firewall funds were called on to assist first Ireland, 
and then Portugal, Greece, Spain, and Cyprus. In every case, the euro 
area made clear that its assistance would come in the form of loans, 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

not grants, and that countries would be required to strengthen their 
economies in return through macroeconomic, structural, and financial 
sector reforms, referred to as ‘conditionality’. That meant reining 
in debt, opening up internal markets, and taking action to regain 
competitiveness. Each loan came conditional upon specific reform 
requirements, including timetables for their enactment.

‘We don’t make any disbursements without conditionality. One can 
argue what is the best conditionality, but it’s always tough,’ Regling said. 

Regling was Juncker’s choice to lead the firewall from the beginning. 
The then-chief of the Eurogroup sought to tap into Regling’s 
experience at the German finance ministry, the IMF, and the 
Commission, as well as in the private sector. After such a career 
tour, with both policy experience and technical expertise, Regling 
was primed to shepherd a new institution at the intersection of 
governments and markets. His expertise was an essential part of the 
push to avoid the ‘grave danger’ posed by the euro area’s struggles and 
the threat of a worsening worldwide crisis, said Mitsuhiro Furusawa, 
former vice minister at the Japanese finance ministry and now deputy 
managing director at the IMF.

‘No one had any doubt when he was chosen to lead the EFSF and the 
ESM,’ Furusawa said. ‘He was a faithful advocate of a strong euro area, 
and he has a lot of credibility in the international financial community.’ 

The euro’s firewall funds were set up in Luxembourg, well regarded 
for its corporate statutes and recognised as a financial centre. Already 
home to EU institutions such as the European Investment Bank (EIB) 
and the Court of Justice of the European Union, the Grand Duchy 
welcomed the EFSF and provided its start-up funds and its first – and, 
for one month, sole – director, Georges Heinrich. Then treasurer-
general at Luxembourg’s finance ministry, he said there was never any 
question whether or not Luxembourg would lend its support to its 
peers as the crisis erupted. 

In short order, the firewalls went from being bond market unknowns 
to reliable and extensive issuers of euro-denominated securities, and 
in 2017 the ESM completed its first non-euro bond sale in dollars. With 
issuance ranging from short-term bills to very long-term bonds, the 
rescue funds have together proven their ability to work with investors 
and programme countries to ensure that there is always ready market 
access for the euro region. 

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The ESM’s solid capital structure is the lynchpin of this financial 
security. The ESM holds over €80 billion in paid-in capital – far 
more than any other international financial institution – and has the 
possibility of calling up an additional €624 billion from its Members, 
the euro area member states. Building this capital base was a huge 
achievement for the currency union, where there has always been 
strong political resistance to creating a common borrowing authority 
that would have joint liability for all funds raised.

In October 2017, the ESM marked its fifth anniversary. From the 
outset, Regling sought to create an institution that emulated the best 
qualities of its many influences, without becoming hidebound to a 
single tradition. The staff of the firewall was drawn not only from the 
familiar hunting grounds of central banks, finance ministries, and 
international institutions, but also from private sector investment 
banks and technology companies. With a total workforce now of under 
200, the ESM has consciously created lean and flexible structures, while 
also translating that culture into a public service mission befitting an 
international financial institution. 

‘We didn’t have any template to look at. Everything we’re doing here 
we had to build from scratch,’ said Cosimo Pacciani, the ESM’s chief 
risk officer.

Up until 2015, the ESM was a true start-up. This is no longer the case, 
said Jeroen Dijsselbloem, former Dutch finance minister, who was 
Eurogroup president and chairman of the ESM Board of Governors 
through the later part of the crisis. ‘With its upgraded risk framework, 
its robust internal controls, its early warning system, its programme 
evaluation, and its staffing, the ESM is now a fully mature institution,’ 
he said. 

One by one, the five countries that received aid have exited their rescue 
programmes and returned to affordable market access. Each remains 
in close contact with the ESM through the firewall’s early warning 
system, so that any future financial difficulties can be identified and 
addressed early on. Most recently, in August 2018, Greece exited its 
ESM programme, after far-reaching macroeconomic, financial, and 
structural reforms. 

There are three major lessons to be learned from the euro’s trials, said 
the IMF’s Lagarde. First, it is crucial to move quickly – both in raising 
the alarm and in providing a remedy – to identify when trouble is 
brewing and get started on solutions early on. Second, the countries 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

that are in the toughest spots need to take political ownership of 
the reforms necessary to get their economies back on track. Third, 
it’s critical to have the right data – the case of Greece in particular 
shows that, when economic statistics aren’t accurate, the fallout can 
be devastating5. The ESM’s arrival is emblematic of the euro area’s 
advances in these areas, and of its commitment to combat future crises 
and sustain its single currency. 

With the ESM, the euro has emerged strengthened from what 
could have been its undoing. Question marks about the euro area’s 
willingness and ability to act have been put to rest. This book is a 
reflection of that journey, of the lessons learned along the way, and of 
Europe’s historic show of solidarity during a time of great crisis. 

5  Financial Times (2010), ‘Greece condemned for falsifying data’, 12 January 2010. 

https://www.ft.com/content/33b0a48c-ff7e-11de-8f53-00144feabdc0

Lurching towards crisis: 
a ‘very fragile’ world

2

The idea that we had a systemic problem  
was there. The Greek loss of competitiveness  
was not that different from the Irish loss  
of competitiveness.

Jean-Claude Trichet 
ECB President (November 2003–October 2011)

When the euro area made its historic decision to create 

a common firewall, it had been buffeted by two major 
crises, each of which had been building for years. First, 

Europe was sent reeling by the US subprime mortgage debacle and the 
shockwaves caused by the collapse of the investment bank Lehman 
Brothers in 2008. This fed into a second crisis, when the euro area 
was forced to deal with its heavy sovereign debt load as well as real 
estate bubbles in some member states, amid unprecedented turmoil 
in the markets.

Alarm bells started ringing in the euro area as soon as the subprime 
mortgage market storm began to brew in the US, said Vítor Gaspar, 
former Portuguese finance minister and now head of the IMF’s fiscal 
affairs department. From 2007 to 2010, Gaspar led the European 
Commission’s in-house economic policy think tank, the Bureau of 
European Policy Advisers.

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‘When the global financial crisis started in the summer of 2007, my 
main concern was: what if the turmoil in financial markets, given 
the fragility of some financial institutions, migrates to the sovereign?’ 
Gaspar said. ‘My perception at the time was that Europe did not have 
the institutional infrastructure to manage this. It was a vague fear at 
that point, but it became increasingly more pressing.’

Fallout from the subprime collapse spread quickly across the Atlantic. 
The US investment bank Bear Stearns liquidated two of its hedge 
funds on 31 July 2007, and in early August the French bank BNP 
Paribas halted redemptions on three investment funds. In September, 
the Bank of England stepped in to support Northern Rock6, the UK’s 
fifth-largest mortgage lender. By February 2008, Northern Rock had to 
be nationalised, and in March the US moved to shore up Bear Stearns 
with a bridge loan and helped it merge with JPMorgan Chase.

In the following months, the flames of the US crisis would rise to 
new heights. The mortgage giants Fannie Mae and Freddie Mac ran 
into trouble and were nationalised in September 2008. A week later, 
Lehman Brothers filed for bankruptcy. Its failure was a calculated move 
to let market forces act in place of taxpayer bailouts, but the explosive 
strength of the market reaction caught policymakers off guard in 
the US and around the world. The US had to backpedal immediately, 
offering government support to the insurance giant AIG, and then to a 
large swathe of its biggest financial institutions via the Troubled Asset 
Relief Program7. 

A series of crises tumbled over one another even before the  
troubles in Greece erupted, prompting Europe’s sovereign debt 
problems, according to Wieser, former chairman of the Eurogroup 
Working Group. ‘Lehman did not lead to the Greek crisis; Lehman 
led to a succession of five or six crises before it morphed into the 
Greek crisis.’ 

The euro area faced its own challenges. Because countries shared 
an exchange rate and a central banking system, those that had lost 
competitiveness couldn’t devalue their currencies, and economic 
conditions were more likely to deteriorate. The most direct way 

6  United Kingdom, National Audit Office (2009), HM Treasury: The nationalisation of Northern 

Rock, Report by Comptroller and Auditor General (HC: 298 2008-09), 20 March 2009.  
https://www.nao.org.uk/wp-content/uploads/2009/03/0809298es.pdf

7  US, Department of the Treasury (2016), ‘TARP programs’, 15 November 2016.  

https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx

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authorities in a monetary union can respond to growing imbalances 
between countries is to cut wages, salaries, and pensions, in what is 
known as an ‘internal devaluation’. Understandably, this isn’t popular 
with voters.

‘We can blame the US for the first crisis. That’s where it was triggered. 
But the second crisis was our own problem,’ said Regling, ESM 
Managing Director. ‘Problems accumulated for more than a decade, 
with countries losing competitiveness because they increased their 
wages and salaries too quickly, more than productivity gains allowed. 
Some ran overly large fiscal deficits so their debt was too high, while 
others experienced huge real estate bubbles.’ 

When times were good, euro area member states had little incentive 
to curb bubbles that were propelling growth because of the generous 
borrowing conditions enjoyed by every country in the bloc.

‘The euro, in a way, allowed these imbalances to get bigger than they 
would have become otherwise,’ Regling said. ‘The view that was out 
there was that financing would always be automatic, whatever the 
current account situation.’

For years, banks had invested heavily in euro area government bonds 
because the perceived risk of sovereign default was low. When investors 
began to question this logic, large exposures to sovereign debt already 
tied banks and governments together – and the bank-sovereign link 
was set to tighten further. Not only could banks founder by investing 
too heavily in sovereign debt, but governments suffered if they had to 
rescue struggling banks. During the boom years, banks across the euro 
area offered easy credit to homebuyers and business owners, only to 
later discover those loans might not be repaid.

As September drew to a close, the Benelux bank Fortis was seeking 
taxpayer help, soon followed by Dexia, Royal Bank of Scotland, HBOS, 
and Lloyds TSB. The costs of handling multiple banking emergencies 
would add to an already difficult fiscal and economic environment 
for many European countries. Towards the end of 2008, the euro area 
entered a deep recession8 that would last for five consecutive quarters.

8 

Independent (2008), ‘Eurozone enters recession’, 14 November 2008.  
https://www.independent.co.uk/news/business/news/eurozone-enters-recession-1018629.html

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

In Ireland, the banking sector was headed towards systemic collapse. 
In addition to low interest rates and a roaring real estate market, 
Ireland had experimented with banking oversight changes that didn’t 
keep close enough tabs on what the banks were up to. The supervisors 
not only failed to rein the banks in soon enough; they also didn’t have 
sufficient information to act. 

The day after Fortis sought aid, Ireland announced a blanket two-year 
guarantee for its banks in the hope of reassuring investors that the 
banks would not default. But the gambit would not succeed. The Irish 
government later forced fresh capital into two of its biggest banks 
and nationalised a third. The moves illustrated the challenge of trying 
to protect both the economy and financial stability. Ireland would 
become the first euro area country to succumb to the bank-sovereign 
doom loop: the cross-contamination between bank balance sheets and 
government finances would push the euro area to its limits.

On the one hand, Ireland set a dangerous precedent by merging 
its bank debts with its national finances. On the other, the country 
was under tremendous pressure to protect senior investors in bank 
debt, who in Europe had historically been shielded from losses. At a 
summit held in October 2008, euro area leaders pledged to consider 
coordinated guarantees of senior bank debt for up to five years as part 
of a ‘concerted European action plan’ in response to the crisis9. 

Regling, at the time a consultant in the private sector, and the 
economist Max Watson, a former senior staff member at the IMF and 
the Commission, were tasked with assessing the Irish banking crisis in 
its aftermath. ‘In euro area members, fiscal and prudential policies must 
take into account, and seek to mitigate, a mismatch between monetary 
conditions and the national business cycle,’ they wrote in A preliminary 
report on the sources of Ireland’s banking crisis10. This was particularly 
important during the transition to the common currency, as several 
countries shifted from their traditionally higher interest rate levels to 
the lower rates prevailing in the euro area. Lacking proper oversight, 
banks faced a huge temptation to make far too many risky loans.

9  Summit of the euro area countries – Declaration on a concerted European action plan of the euro 

area countries, No. 14239/08, 14 October 2008.  
http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2014239%202008%20INIT

10  Regling, K., Watson, M. (2010), A preliminary report on the sources of Ireland’s banking crisis, p. 43, 

Government Publications Office, Dublin.  
http://www.bankinginquiry.gov.ie/Preliminary%20Report%20into%20Ireland%27s%20
Banking%20Crisis%2031%20May%202010.pdf

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Regling and Watson’s advice to Ireland held for the euro area in 
general, and underscored the importance of healthy banks to a 
healthy economy. Banking difficulties would be a central component 
of every assistance package the euro area considered, taking centre 
stage in Spain and Cyprus and playing significant roles in Portugal 
and Greece. As a remedy, Regling and Watson called for the kind of 
coordinated banking supervision that would later emerge in the shape 
of the Single Supervisory Mechanism11, 2014’s breakthrough in the 
euro area’s move to banking union. 

Although problems such as weak banks, high government debt, 
and inefficient labour markets were visible in 2008, the former ECB 
President Jean-Claude Trichet said that they were not yet appreciated: 
‘It was absolutely clear that many countries had no understanding of 
the loss of competitiveness incurred by a large number of countries 
during the first decade of Economic and Monetary Union,’ he said. 

While the euro area grappled with how to help members in trouble, 
a financial storm was hitting countries in central and eastern Europe. 
Banks with large exposures to this region came under significant 
market pressure, and, to prevent them fleeing these economies en 
masse, the ‘Vienna Initiative’12 was assembled in 2009 by a consortium 
of the Commission, the European Bank for Reconstruction and 
Development, the IMF, and the World Bank. These institutions worked 
together to coordinate crisis management proposals and to encourage 
parent banks to recapitalise their subsidiaries in eastern Europe, as 
well as to facilitate talks between debtors and creditors on how to 
navigate cross-border banking difficulties.

Latvia provided a foreshadowing of the troubles to come. In 
December 2008, it secured a €1.68 billion aid package from the 
IMF to help it through its economic and financial crisis13. However, 
to avoid disrupting its path to monetary union, Latvia chose to 
maintain the fixed exchange rate of the lats to the euro. The  

11  ECB (n.d.), ‘Single Supervisory Mechanism’.  

https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html 
12  European Bank Coordination (n.d.), ‘Vienna Initiative’. http://vienna-initiative.com
13  IMF (2008), ‘IMF executive board approves €1.68 billion (US$2.35 billion) stand-by arrangement 

for Latvia’, Press release, 23 December 2008.  
https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr08345 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

resulting downward pressures on wages and pensions were followed 
by protests and, in early 2009, the collapse of the government14. 

From there, the turmoil continued to spread. To Gaspar, who 
was monitoring developments from his analytical post at the 
Commission, the euro crisis seemed fundamentally different from 
previous regional flare-ups in Europe and elsewhere because of its 
focus on sovereign market access instead of currency fluctuations. 
‘I didn’t see the development in financial markets and the sovereign 
debt crisis as analogous to an exchange rate crisis,’ he said. ‘I saw it 
instead as a crisis that affected the credit standing of sovereigns, in 
particular sovereigns that were perceived as fragile. So the issue was 
not only that of sustainability, but also the standing of sovereigns in 
the market.’

Credit-rating agencies, which should have been monitoring bank 
lending practices and sovereign debt risks, failed to do so. ‘In the run-
up to the financial crisis, we now know, they were over-optimistic 
with their ratings, but once the crisis hit, their ratings went into a 
very fast downward spiral’,15 the European Parliament said in a 2016 
report on how the credit assessment firms performed before and 
during the crisis. 

As the crisis built, markets targeted more countries, said Schäuble, 
former German finance minister. ‘At first, the pressure from the 
markets was limited to Greece. But it soon became clear that there 
was a risk of contagion.’ 

Maria Luís Albuquerque was watching the bond markets from 
her post at the time in the Portuguese debt management office. 
Albuquerque, who later became the country’s finance minister, said: 
‘Leading up to the crisis, we saw that spreads on sovereigns were 
really crushed to a minimum, which was not consistent with the 
fundamental differences between different economies.’ Portuguese 
10-year government bond yields were close to Germany’s, and in 
early 2005 even dipped marginally below, because investors were 

14  Reuters (2009), ‘Latvia government falls, president seeks new PM’, 20 February 2009.  

https://www.reuters.com/article/us-latvia-government/latvian-government-falls-president-
seeks-new-pm-idUSTRE51J4G920090220 

15  European Parliamentary Research Service (2016), ‘The case for a European public credit 
rating agency’, Brussels, October 2016. http://www.europarl.europa.eu/RegData/etudes/
BRIE/2016/589865/EPRS_BRI(2016)589865_EN.pdf 

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lumping together the risk of euro area countries. Later on, the trend 
would go the other way and spreads would widen to dangerous levels.

As the crisis heated up, investors pulled back, eventually preferring 
just one euro area country over the others. An initial ‘flight to security’ 
drove investors into a range of safer assets, namely sovereign debt, 
which later evolved into ‘a flight to Germany’, Albuquerque said. ‘They 
were basically the only ones that could really attract money because 
investors were so craving safety.’

At the same time, the risk to global markets was mounting. Geithner, 
former US Treasury secretary, said: ‘The world was very fragile at that 
point. I was deeply concerned with the risk that this would get out 
of control and the contagion would spread – it would have adverse 
implications for us, not just in Europe.’

The Commission began to lay the groundwork for a collective 
solution, without knowing where it would lead. In December 2009, 
planning began on a potential rescue package for Greece, whose 
fiscal deficit kept getting revised upwards – ‘it exploded three times 
in three months,’ said Olli Rehn, former European commissioner for 
economic and monetary affairs and the euro. These aid preparations 
continued through the Christmas break and into January. Instead 
of the planned 3.7% deficit for 2009, Eurostat put the fiscal deficit 
at 13.6% in its April 2010 report16, making one further final upward 
revision to 15.4% that November17. 

In February, the new Commission took office, headed by José Manuel 
Barroso in his second term as president, with Rehn taking up his 
new economic commissioner post18. ‘From that moment on, the 
Commission started to persuade Germany and France and then  
the other countries, especially the AAA ones, to agree on a stability 
fund. We didn’t know exactly what form it should take, or could take,’ 
Rehn said.

16  Eurostat (2010), ‘Provision of deficit and debt data for 2009 – first notification’, Press release, 

22 April 2010. http://europa.eu/rapid/press-release_STAT-10-55_en.pdf 

17  Eurostat (2010), ‘Provision of deficit and debt data for 2009 – second notification’, Press release, 

15 November 2010. https://ec.europa.eu/eurostat/documents/2995521/5051930/2-15112010-AP-
EN.PDF/6704b50f-d771-4c98-889e-261a5f74396d

18  European Parliament (2010), ‘Parliament approves new European Commission’, Press release, 

9 February 2010. http://www.europarl.europa.eu/sides/getDoc.do?language=en&type=IM-PRESS
&reference=20100209IPR68680 

 
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It was now evident that several countries were facing serious banking, 
macroeconomic, and/or market access issues – but how to deal with 
them was far from clear. Before Europe could move ahead to control 
the damage, it would need to agree on what kind of joint action made 
political sense. Some countries felt too strong a backstop would create 
‘moral hazard’ and discourage countries from confronting their 
problems and taking necessary action. At the same time, others feared 
that asking private investors in sovereign debt to shoulder losses could 
destabilise the European bond market. Finding a balance between 
curbing contagion and encouraging reforms would be the euro area’s 
central challenge over the coming years.

‘Runaway train’:  
Greece sounds  
the alarm

3

The Greek drama was a perfect storm.  
It was foreshadowed by many other crises.

Thomas Wieser 
Chairman of the EU’s Economic and Financial Committee 
(February 2009–March 2011 and January 2012–January 2018) and of 
the Eurogroup Working Group (October 2011–January 2018)

The euro’s prospects darkened in October 2009, when a newly 

elected Greek government led by George Papandreou announced 
that the country’s budget deficit was a lot higher than initially 

reported. When the incoming administration reviewed the figures, they 
saw that the country’s budgetary gap, or the shortfall between revenues 
and spending, was projected to be around 12.5% of gross domestic 
product (GDP)19. That contrasted with the 3.7% of GDP projection 
submitted by the previous government and was four times the maximum 
threshold of 3% set out in the euro area’s budget guidelines.

Given the exceptional circumstances surrounding the global 
financial turmoil, these budget targets had been relaxed, but they 
still offered a gauge of how far off the mark Greece had fallen. 
The huge fiscal deficit raised questions about the sustainability of 

19  European Commission (2010), ‘Report on Greek government deficit and debt statistics’, 

COM(2010), 8 January 2010, p. 3. http://ec.europa.eu/eurostat/documents/4187653/6404656/
COM_2010_report_greek/c8523cfa-d3c1-4954-8ea1-64bb11e59b3a

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1 January 
Greece adopts the euro.

Government spending and borrowing increase but tax revenues 
weaken. Period sees rising wages, low productivity, and structural 
problems.

14 January 
Standard & Poor’s downgrade: Greece to A- from A, the first in a 
series of downgrades leading to its eventual loss of investment 
grade.

21 October 
Greece announces that the government deficit is much worse than 
previously reported. The 2008 deficit was 7.7%, not 5%, and in 2009 
the deficit was planned to be 12.5%, not 3.7%.

2 February 
Greece announces measures to cut the fiscal deficit, including wage 
freezes.

11 February 
EU leaders declare that they ‘will take determined and coordinated 
action, if needed, to safeguard financial stability in the euro area’.

5 March 
Parliament passes a package of measures that freeze pensions, cut 
civil servant salaries, and raise taxes.  

15 April 
Talks requested with EU governments and the IMF on a financial 
programme, and assistance officially requested on 23 April.

22 April 
Eurostat revises the Greek 2009 deficit up to 13.6%, with a final 
upward revision to 15.4% on 15 November.

2 May 
Eurogroup approves a three-year, €80 billion bilateral loan 
programme as part of a €110 billion international aid package, 
including the €30 billion that the IMF committed to on 9 May.

6 May 
Parliament passes economic and financial legislation.

18 May 
The euro area disbursed the first instalment of €14.5 billion, 
following a €5.5 billion disbursement from the IMF.

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Greece’s high and growing public debt – already in excess of a year’s 
GDP. Fragile markets didn’t receive the news well. Greek 10-year 
bond yield spreads to Germany widened to 238 basis points by the 
end of December from 138 basis points in early October, putting 
Greek borrowing costs at 5.49%, or 2.38 percentage points higher 
than Germany’s and suggesting growing market concern about the 
country’s finances. 

‘From that moment on it was clear there was a big problem,’ said 
Maarten Verwey, at the time a senior Dutch finance ministry official, 
who would move to the European Commission in September 2011. 
‘There were a few months during which we could see that something 
coordinated needed to happen for Greece. But this was very  
difficult politically.’

In Greece, the revised figures also came as a shock. George 
Papaconstantinou, the new government’s finance minister, remembers 
getting updated figures from his country’s central bank just days after 
taking office. ‘Before the election we had some idea that the numbers 
were wrong. But we just had no idea how wrong they were,’ he said. ‘That 
was the critical moment when we realised that it was a runaway train.’

Two days after the budget revisions came out, Fitch downgraded 
Greece’s rating for long-term debt to A- from A. Greece’s new figures 
showed ‘weaknesses in fiscal reporting and planning’ that cast  
doubt on the country’s economic path, the credit-rating agency 
wrote in a 22 October 2009 press release. ‘These ongoing deficiencies 
materially undermine the credibility of medium-term fiscal 
consolidation plans’20. 

On 8 December, Fitch downgraded Greece again, this time to BBB+ 
with a negative outlook – pushing the ratings down to two notches 
below where they had started the crisis. Standard & Poor’s21 and 
Moody’s22 followed suit later in the month. Investors had lost 
confidence in the Greek government’s ability to right its finances in 
the foreseeable future. As Fitch wrote: ‘Present government proposals 
rely more heavily on revenue-raising measures, particularly moves to 
counter tax evasion – where the pay-off is highly uncertain –  

20  FitchRatings (2009), ‘Fitch downgrades Greece to “A-” from “A”; Outlook negative’, Press release, 

22 October 2009. https://www.fitchratings.com/site/pr/521696

21  TradingEconomics (n.d.), ‘Greece – credit rating’. https://tradingeconomics.com/greece/rating 
22  Moody’s (2009), ‘Moody’s downgrades Greece to “A2” from “A1”’, 22 December 2009. https://www.

moodys.com/research/Moodys-downgrades-Greece-to-A2-from-A1--PR_192460

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

rather than current spending where structural fiscal weaknesses 
are most acute’23.

The euro fell about 6% against the dollar in December, and declined 
against the currencies of the EU’s major trading partners. EU leaders 
grew impatient with the government in Athens, and the rest of the 
world waited to see if Greece’s problems would spread. Geithner, who 
helped spearhead the US response to its worst financial crisis since 
the Great Depression, was one of the earliest voices calling on Europe 
to avert a Greek default in order to protect the euro as a whole. 

In early February 2010, Greece attempted to tame its deficit with 
measures such as wage freezes24. Meanwhile, Geithner, then-German 
Finance Minister Schäuble, and the finance ministers of the other 
Group of Seven largest advanced economies met in Iqaluit, Canada, 
near the Arctic Circle. Geithner said he was beginning to fear that 
European reluctance to intervene would break the euro apart25. 
International financial markets were panicking: if one euro area 
member state’s statistics couldn’t be trusted then all euro members 
were vulnerable. The EU political consensus was that Greece was 
to blame for its own problems. Geithner feared that relying only on 
budget cuts and what he called ‘Old Testament’-style retribution 
could push the Greek economy over the brink. If the euro area would 
allow one of its own to default, financial markets might pull out of 
the currency bloc en masse, selling euro area government bonds or 
demanding punishingly high interest rates to hold on to them. 

To many in the US, the EU seemed to be limiting its options. ‘The 
initial proposals for creating a collective funding mechanism were 
small, relative to the scale of the challenge,’ Geithner said. The risk 
of a just-big-enough safety net is that, if the market doesn’t like 
your plan, investors will continue selling Greek debt, he said. Then 
‘you’ve accelerated the run, fuelling the fire because it looked so 
small’ relative to the potential size of the problem. ‘This is all about 
breaking the psychology of the run.’ 

23  FitchRatings (2009), ‘Fitch downgrades Greece to “BBB+”; Outlook negative’, 8 December 2009. 

https://www.fitchratings.com/site/pr/544018

24  European Commission (2010), ‘Commission assesses stability programme of Greece; makes 
recommendations to correct the excessive budget deficit, improve competitiveness through 
structural reforms and provide reliable statistics’, Press release, 3 February 2010.  
http://europa.eu/rapid/press-release_IP-10-116_en.htm

25  Geithner, T.F. (2014), Stress test: Reflections on the financial crisis, Random House Business, 

New York. 

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  3 5

Shortly after the Iqaluit talks, euro area leaders on 11 February 2010 
held the first of a series of summits in Brussels to get to grips with 
Greece’s financial woes and the consequences for the wider economy. 
They pledged ‘determined and coordinated action, if needed, to 
safeguard financial stability in the euro area as a whole’, but pointed out 
that Greece had yet to request support26. 

In that first top-level crisis discussion, the consensus was that  
it was up to Greece to put things right. Euro leaders leaned on  
the Greek government ‘to do whatever is necessary’ to tame the 
deficit and ‘to implement all these measures in a rigorous and 
determined manner’27.

An EU finance ministers meeting in mid-February set a deficit target 
for Greece of 8.7% of GDP28 for 2010 and below 3% by 2012, in line 
with the stability and growth pact rules29. The Greek government 
drew up a reform package designed to meet these goals, which the 
EU approved. On 5 March, the Greek parliament passed a package 
of measures that froze pensions, cut civil servant salaries, and raised 
taxes30. The cuts caused nationwide protests, yet the EU insisted 
that more needed to be done. At their March meeting, the finance 
ministers welcomed Greece’s actions, while calling for implementation 
of the full slate of promised economic reforms ‘effectively, fully and  
in a timely manner’31. 

At a summit a week later, on 25 March, EU leaders reiterated 
assurances that euro area member states were planning to act together 
if needed. While again stressing that Greece hadn’t asked for assistance, 
the leaders pledged to offer a package of loans to Greece alongside an 
IMF programme, should it be required: ‘As part of a package involving 

26  Statement by the Heads of State or Government of the European Union, 11 February 2010.  

http://www.consilium.europa.eu/media/20485/112856.pdf

27  Ibid. 
28  Greece, Ministry of Finance (2010), ‘Update of the Hellenic stability and growth programme, 

including an updated reform programme’, Athens, 15 January 2010.  
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2009-10/01_
programme/el_2010-01-15_sp_en.pdf 

29  European Commission (2010), ‘Memo on the Eurogroup and ECOFIN ministers meetings 
of 15 and 16 February 2010’. http://ec.europa.eu/economy_finance/articles/eu_economic_
situation/2010-02-16-eurogroup_ecofin_en.htm

30  European Commission (2010), ‘Communication from the Commission to the Council: Follow-up 
to the Council Decision of 16 February 2010, giving notice to Greece to take measures for the 
deficit reduction judged necessary in order to remedy the situation of excessive debt’, COM (2010), 
9 March 2010. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52010DC0091
31  Economic and Financial Affairs (2010), ‘Main results of the Council’, Press release, 16 March 2010. 

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/113398.pdf

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

substantial International Monetary Fund financing and a majority of 
European financing, euro area member states are ready to contribute 
to coordinated bilateral loans’32.

European financial support wasn’t a given. Papaconstantinou said 
Schäuble was blunt when the two first met in Berlin in late 2009. ‘He 
used this phrase: “There is no Plan B, George. You have to handle it 
yourself.”’ France’s Finance Minister Lagarde was similarly firm at the 
time, while acknowledging that there might be a need to reconsider 
as events unfolded, he said. Subsequent trips by Papandreou to Berlin 
and Paris yielded similar answers. 

Papaconstantinou said he and Papandreou approached Dominique 
Strauss-Kahn, then IMF chief, during the World Economic Forum in 
Davos, Switzerland, in January 2010. Meeting in a kitchen so as not 
to attract undue attention, the trio had a frank talk about how much 
money might be needed and how the Washington-based lender could 
coordinate with EU authorities. According to Papaconstantinou, 
Strauss-Kahn said the IMF would help persuade the rest of Europe to 
find a way of helping Greece.

In March 2010, Verwey was appointed chairman of a group of 
national finance ministry experts tasked with looking into the 
complexities of the issues before the leaders’ March summit. ‘I did  
a first presentation about how the loan facility could be set up  
when I was chairman of the Task Force on Coordinated Action.  
This was a few weeks, about three, after we’d received the mandate 
from the leaders.’

Verwey’s project was setting up what would become the Greek 
Loan Facility, a bundle of bilateral loans that would be pooled 
at the EU level and managed by the Commission. Some of the 
brainstorming from March and April 2010 would lead to many of 
the design features that ended up in the EFSF and the ESM, Verwey 
recalls. At the same time, there were some key differences. As a 
one-off arrangement encompassing 15 separate bilateral loans, the 
Greek Loan Facility was cumbersome and inflexible. Lending terms 
were also purposely less favourable than those the rescue funds 
introduced later. 

32  Statement by the Heads of State and Government of the euro area, 25 March 2010.  

http://www.consilium.europa.eu/media/21429/20100325-statement-of-the-heads-of-state-or-
government-of-the-euro-area-en.pdf

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  3 7

Euro area leaders phrased it as tough-minded encouragement  
for Greece to get its financial act together, going out of their  
way to say it wouldn’t be cheap money. The 25 March statement  
said: ‘The objective of this mechanism will not be to provide 
financing at average euro area interest rates, but to set incentives 
to return to market financing as soon as possible by risk adequate 
pricing. Interest rates will be non-concessional, i.e. not contain any 
subsidy element’33. 

The leaders said the loan offer ‘has to be considered ultima ratio, 
meaning […] market financing is insufficient.’ Greece would have  
to be on the brink of default, with no other option but this last- 
resort, condition-laden lifeboat. Economic reform conditions 
would have to be negotiated, monitored, and agreed on before any 
disbursements would be possible. The March statement made it  
clear that the whole euro area – at that point, 16 countries – would  
be expected to participate.

Greece continued not asking for assistance – but the need was 
becoming palpable. At an 11 April meeting, euro area finance 
ministers hashed out a plan, while underlining that the rescue would 
include no subsidies. The starting point for pricing on the proposed 
bilateral loans would be the IMF’s formula, with adjustments from 
there. The terms applied rates based on the three-month Euribor rate, 
plus a charge of 300 basis points, with a further 100 basis points for 
amounts outstanding for more than three years. A further charge of 
50 basis points would cover operational costs34. 

These charges eventually proved counterproductive. With a 
worsening situation, there was no way Greece could stabilise its 
finances, mend its economy, and quickly repay loans with interest 
rates a full three percentage points or more above the ‘normal’ 
market rate for stable countries. These rates would be cut several 
times as Greece sank into recession and fell further behind on its 
commitments. For its EFSF-funded second rescue and ESM-funded 
third rescue, the euro area would help Greece with financing at cost. 
But, in the beginning, the goal was to make sure any lifeline came 
with expensive financing terms.

33  Ibid.
34  Statement on the support to Greece by euro area Members [sic] States, 11 April 2010.  
https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113686.pdf

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

10-year government bond yield — Greece 
in %, monthly average

30

25

20

15

10

5

0

35

Revelations of Greece’s 
fiscal woes led markets 
to push up Greek interest 
rates, with a debilitating 
effect on the economy. It 
took years for confidence 
to be fully restored. 
ESM crisis experience 
shows that rates beyond 
6% suggest significant 
sovereign stress and 
imminent loss of market 
access35.

Source: European  
Central Bank

March 2010: 
Greek borrowing costs begin 
to rise to unsustainable levels

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
y
r
a
u
n
a
J

0
1
0
2
y
r
a
u
n
a
J

1
1
0
2
y
r
a
u
n
a
J

2
1
0
2
y
r
a
u
n
a
J

3
1
0
2
y
r
a
u
n
a
J

4
1
0
2
y
r
a
u
n
a
J

5
1
0
2
y
r
a
u
n
a
J

6
1
0
2
y
r
a
u
n
a
J

7
1
0
2
y
r
a
u
n
a
J

8
1
0
2
y
r
a
u
n
a
J

9
1
0
2
y
r
a
u
n
a
J

On 15 April, the Greek government asked the Commission, the ECB, 
and the IMF to start talks about a multi-year assistance programme. 
The IMF’s Strauss-Kahn agreed to send a team to Athens the following 
week, to prepare ‘in the case that the authorities decide to ask for such 
assistance’36. On 22 April 2010, Eurostat reported a Greek 2009 deficit 
of 13.6%37, and bond yields soared to an average 7.8% in April from 
already unsustainable borrowing levels in March. A day later, the Greek 
government finally applied for help38. The estimates for Greece’s 2009 
deficit would later top 15%, with Eurostat in November 2010 putting it 
at 15.4% of GDP39.

35  ESM (2018), ESM annual report 2017, p. 41, 21 June 2018, Publications Office of the European 

Union (Publications Office), Luxembourg.  
https://www.esm.europa.eu/publications/esm-annual-report-2017 

36  IMF (2010), ‘IMF statement on Greece’, Press release, No. 10/152, 15 April 2010.  

https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr10152

37  Eurostat (2010), ‘Provision of deficit and debt data for 2009 – first notification’, Press release, 

22 April 2010. https://ec.europa.eu/eurostat/documents/2995521/5046142/2-22042010-BP-EN.
PDF/0ff48307-d545-4fd6-8281-a621cbda385d 

38  European Commission, Directorate-General for Economic and Financial Affairs (2010), ‘The 

Economic Adjustment Programme for Greece’, European Economy Occasional Papers 61, May 2010.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2010/pdf/ocp61_en.pdf 
39  Eurostat (2010), ‘Provision of deficit and debt data for 2009 – second notification’, Press release, 

15 November 2010. https://ec.europa.eu/eurostat/documents/2995521/5051930/2-15112010-AP-
EN.PDF/6704b50f-d771-4c98-889e-261a5f74396d  

 
 
 
 
 
 
 
 
 
 
 
 
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  3 9

General government fiscal balance — Greece 
in % of GDP

2

0

-2

-4

-6

-8

-10

-12

-14

-16

In 2009, the Greek deficit 
ballooned to 15.4%. Greece 
continued to struggle with 
deficits throughout the 
crisis, finally moving into 
surplus in 2016 during its 
third programme. 

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: Eurostat

The need to act together was becoming clear, even in countries critical 
of Greece.  The fervour of German tabloids was widely reported40, 
with their stark headlines, such as: ‘The Greeks want even more of our 
billions!’ There were many sympathetic voices, too. In a 3 May 2010 
article headlined ‘We’re buying Greek government bonds!’, the editor of 
the German economic daily Handelsblatt asked readers to demonstrate 
trust in Greece by buying Greek government bonds and said that 
he himself had bought €5,000 worth41. The Dutch business daily 
Financieele Dagblad on 30 April 2010 said ‘The moment has come to 
support Greece’42. But, capturing the mood in Germany, the usually 
reserved Die Zeit cried, ‘Greece has violated all the rules of economic 
rationality’43. 

40  Guardian (2010), ‘EU debt crisis: German papers whip up anti-Greece fury’, 29 April 2010. 

https://www.theguardian.com/business/2010/apr/29/eu-debt-crisis-german-papers-whip-up-anti-
greek-fury

41  Handelsblatt (2010), ‘Wir kaufen griechische Staatsanleihen!’ (‘We’re buying Greek government 

bonds!’ (ESM translation)), 3 May 2010.  
http://www.handelsblatt.com/politik/deutschland/handelsblatt-aktion-wir-kaufen-griechische-
staatsanleihen/3426508.html 

42  Financieele Dagblad (2010), ‘Zware kritiek op Duitse regering’ (‘Serious criticism of German 
government’ (ESM translation)), 30 April 2010. https://fd.nl/frontpage/Print/krant/Pagina/
Economie___Politiek/700583/zware-kritiek-op-duitse-regering

43  Die Zeit (2010), ‘Genug, Athen!‘ (‘Enough, Athens!’ (ESM translation)), 4 February 2010.  

https://www.zeit.de/2010/06/Kommentar-Griechenland

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Prime Minister George 
Papandreou announces 
Greece’s request for 
financial aid, in a seaside 
press briefing on the 
southeastern Mediterranean 
island of Kastelorizo on 
23 April 2010. 

Credit: Tatiana Bolari/AFP

After the Greek request, the aid talks moved quickly. On 2 May 2010, 
the Eurogroup agreed to provide bilateral loans managed collectively 
by the Commission in the Greek Loan Facility up to a total amount 
of €80 billion, to be released over the period May 2010 to June 201344. 
Germany committed the largest share of any euro area member  
state, pledging to offer up to €22 billion. But, unlike other member 
states, which funded the Greek loans directly, Germany delegated  
the credit line to its state-backed development bank, KfW45. 
Alongside the euro area, the IMF put up an additional €30 billion 
under a stand-by arrangement.

Subsequent to the May 2010 deal, the headline amount in the Greek 
Loan Facility was reduced by €2.7 billion, in part because Slovakia 
decided later in 2010 not to participate, and in part because Ireland 
and Portugal stepped out once they requested financial assistance 

44  Statement by the Eurogroup, 2 May 2010.  

https://www.consilium.europa.eu/media/25673/20100502-eurogroup_statement_greece.pdf
45  KfW (2010), ‘Involvement of KfW Bankengruppe in financial support measures for Greece’, 

20 May 2010. https://www.kfw.de/KfW-Konzern/Investor-Relations/Die-KfW-als-Emittentin/
Publikationen/Newsletter-Kapitalmarkt/Update-2010/20.05.2010/index.html 

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  4 1

themselves46. Overall, the difficult shared effort to make individual 
loans to Greece underlined the need for an alternative approach. 

‘In principle, it would have been preferable to calculate the fiscal 
needs on the basis of a debt sustainability analysis. But, in practice, the 
spending limit of the Greek Loan Facility created a ceiling that could 
be used for the fiscal rescue of Greece,’ said Rehn, who was then the 
European commissioner for economic and monetary affairs and the 
euro. He credits Strauss-Kahn with making efforts to ensure the IMF’s 
contribution was as high as it was. 

Even though the initial design was far from ideal, the euro area and 
its allies had come together to protect the currency union. ‘The idea 
behind the Greek Loan Facility was: we’ll do something for Greece 
now quickly,’ Verwey said. ‘Because people feared there would be 
contagion if we didn’t take action. They were especially afraid of 
contagion through the financial channel, through bank exposures  
to Greece – in countries other than Greece – so something needed  
to happen.’

The worries were justified. EU banks held around €95 billion in Greek 
government bonds, according to a May 2011 report by Moody’s47, 
which noted ‘above-average’ exposures in Belgium, Germany, France, 
Cyprus, and Luxembourg. At the time, however, the prevailing wisdom 
in Germany and elsewhere was that Greek profligacy was to blame for 
the crisis. 

To access the Greek Loan Facility funds, Greece agreed to a new wave 
of fiscal consolidation, on top of the cuts that were already underway, 
to prune its deficit to 2.6% by 201448. There were revenue-raising 
measures worth about 4% of GDP over the programme period, 
mostly by increasing the value added tax, for example on luxury 
items, tobacco, and alcohol49. The programme aimed to modernise 

46  European Commission (n.d.), ‘Financial assistance to Greece’.  

https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-
financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-greece_en 

47  Moody’s Investors Service (2011), ‘Weekly credit outlook’, p. 14, 16 May 2011.  

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_133114
48  European Commission, Directorate-General for Economic and Financial Affairs (2010),  

‘The Economic Adjustment Programme for Greece’, European Economy Occasional Papers 61, p. 12, 
May 2010.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2010/pdf/ocp61_en.pdf

49  Ibid., p. 14. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

public administration, sell off state-owned enterprises, and slash 
defence spending while building a rational social safety net. It also set 
aside funds to shore up the banks and set up a structure to deal with 
financial stability.

Wage and pension cuts were at the heart of the efforts. The 
programme called for reductions in government entitlement and 
retirement programmes across society. ‘Selected social security 
benefits will be cut while maintaining benefits for the most 
vulnerable,’ the IMF said. ‘Comprehensive pension reform is 
proposed, including by curtailing provisions for early retirement’50. 
The public sector was further targeted. Its administrative apparatus 
‘was way less advanced than many would have thought,’ for example 
lacking a common registry for state employees so it was impossible to 
know how many there were, according to the euro area rescue fund’s 
Chief Economist Rolf Strauch. 

The plan called on Greece to reduce and freeze pensions and wages 
for government workers, and it abolished the workers’ Christmas, 
Easter, and summer bonuses. The freezes would be in effect for 
three years, and the total effort included a wide range of measures. 
For example, it was designed to slash 5.25% of GDP in government 
spending through 2013, while raising 4% of GDP through various 
revenue measures. There were protections for the lowest-paid 
workers, and Greece was also supposed to strengthen its tax 
collection and budget controls to gradually recoup savings of 1.8% of 
GDP through structural reforms51. ‘A significant real devaluation – 
in other words a cut in real income – was unavoidable not only to 
reduce the fiscal deficit but also to improve competitiveness quickly,’ 
Regling said.

50  IMF (2010), ‘IMF survey: Europe and IMF agree €110 billion financing plan with Greece’, 

2 May 2010.  
https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar050210a

51  Ibid. 

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  4 3

First Greek programme (2010–2012)

Initial programme amount: €110 billion

Total amount disbursed: €73 billion, of which the Greek Loan Facility 
disbursed €52.9 billion

Lenders: Greek Loan Facility (euro area, except Slovakia), IMF

Final weighted average maturity: not available, as not an EFSF or ESM 
programme

Key legislated reforms: pension system, health system, public financial 
management, state budget, public sector benefits, labour market, 
closed professions

The scope of the plan reflected the limits of what the euro area was 
able to offer Greece at the time, coupled with optimistic expectations 
about what Greece would be able to accomplish. This would eventually 
require the euro area to create its own aid fund, rather than stick with 
the loan facilities set up in Greece’s first rescue.

‘Perhaps we were too naïve about the Greek authorities’ willingness 
and ability to implement the structural reforms that were called for 
in that first programme,’ said John Lipsky, then the IMF’s first deputy 
managing director. ‘Long story short, very few of the agreed structural 
actions were implemented, and in total, the few that were undertaken 
were largely ineffective.’

The continued market volatility made it ‘obvious that some kind of 
funding mechanism was needed,’ Lipsky said. ‘It was only at the last 
minute, in the face of impending disaster, that agreement on the EFSF 
was reached.’

Its own budget efforts notwithstanding, Greece became increasingly 
unable to quieten market fears on its own, Papaconstantinou recalled. 
‘The markets were not just looking for a fiscal consolidation attempt,’ 
he said. ‘The markets were looking for a backstop. They were looking 
for a guarantee of no default. And that was beyond us. This was not 
something we could do. This had to do with the collective response 
from the rest of the Union.’

 
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In the week after the euro area signed off on the first Greek 
programme, the package made its way through national approval 
procedures and became ready to deploy. But there was no time to 
celebrate. ‘Eventually, the Greek Loan Facility was approved by the 
parliaments,’ Verwey said. 

‘The last approval was received on 7 May, a Friday. But on that same 
day, the contagion was already there,’ he said. ‘By then it was clear we 
needed heavier ammunition.’

Greek programme history continues in Chapters 19, 22, 36, 37, and 38.

The €750 billion 
weekend:  
the EFSF is born

4

It was a weekend of drama. The feeling that  
we were really walking on a tightrope, without  
a net below actually, the risk of imminent death 
was very palpable.

Marco Buti 
European Commission Director-General for Economic  
and Financial Affairs (since December 2008) 

By the time the Greek Loan Facility was agreed, contagion – the 

spread of financial instability across national borders – was 
on everyone’s mind. The European Council President Herman 

Van Rompuy, the former Belgian premier who led summits of EU 
leaders, expressed confidence that the new programme would allow 
Greece ‘to put right its economic and financial situation as well 
as its competitiveness’52. But he also laid out immediate plans for 
reinforcement of euro area governance, announcing a summit for 
7 May ‘to conclude the whole process and to draw the first conclusions 
of this crisis for the governance of the euro area’.

Van Rompuy’s hope to ‘conclude the whole process’ was a bit 
optimistic. The events of that first May weekend would instead become 
one of the pivotal moments in a crisis that would propel five euro 

52  Statement by President Van Rompuy following the Eurogroup agreement on Greece, PCE 80/10, 

2 May 2010. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/114128.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

area member states to seek help and force the ECB to unprecedented 
measures. Even before the leaders arrived in Brussels, it was clear that 
things were looking grim. ‘The Greek Loan Facility only calmed things 
for a few days in May,’ said Rehn, then the European commissioner for 
economic and monetary affairs and the euro. ‘Then all hell broke loose 
again on financial markets.’

European markets were imploding. There was almost no interbank 
lending, meaning the financial system’s usual ebb and flow had been 
replaced by huge traffic jams. The whole thing seemed on the brink 
of an acute crisis. ‘We had to cope with this intensification of the 
sovereign risk crisis in the euro area with Greece in a very dramatic 
situation – experiencing a sudden halt in financing. Global investors 
also considered that Ireland and Portugal were in situations of extreme 
danger and very close to a sudden stop,’ said Trichet, the ECB chief at 
the time. 

Euro area leaders recognised that contagion threatened to undermine 
the common currency as a whole, but translating that insight into aid 
for individual countries was a fraught political enterprise. Verwey, a 
senior European Commission official who was with the Dutch finance 
ministry at the outbreak of the crisis, recalls the ‘mood music’ in the 
Netherlands. At the time, he said, a common attitude towards the 
Greeks was ‘let them sort out their own problems.’

It was a ‘very traumatic period,’ remembers Papaconstantinou, former 
Greek finance minister. When Greece finished negotiations for its first 
aid package, it had rekindled a brief feeling of hope. But then came 
‘that awful week between the first bailout and the creation of the EFSF, 
where we all realised that we hadn’t solved the problem,’ he said. 

One day before the summit, journalists had grilled Trichet over 
whether the euro area needed a procedure for sovereign defaults and 
whether the central bank would consider purchasing government 
bonds to prevent a financial collapse. ‘Default is out of the question. It 
is as simple as that,’53 he said during the ECB’s 6 May press conference, 
sticking to the central bank line that forcing losses on euro area 
government bond investors would destroy credibility for the currency 
area as a whole.

53  ECB (2010), ‘Introductory statement with Q&A’, Transcript, 6 May 2010.  
https://www.ecb.europa.eu/press/pressconf/2010/html/is100506.en.html

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When he arrived in Brussels to meet with leaders, a pivotal moment 
approached. ‘It was Friday afternoon, very dramatic,’ Trichet 
recalled. ‘I did not hesitate to say that we had a dramatic situation in 
several countries in the euro area, as well as in the euro area itself. I 
had stressed the gravity of this situation every month since 2005 in 
the Eurogroup.’

Arguing that the euro area’s persistent divergences in labour costs, 
productivity, and competitiveness were a recipe for catastrophe, the 
central banker called on the leaders to set up new frameworks for the 
monitoring, governance, and bulwarking of the common currency. 
As Trichet made the case that Europe had an obligation to put its 
economic house in order, the leaders initially resisted. But Trichet 
pressed his point: ‘I was very, very strong.’

By the end of the evening, the euro area leaders had come around. As 
midnight closed in, the leaders agreed that Greece would receive the 
first cash infusion from its new rescue programme by 19 May. And 
they acknowledged that the problem went beyond Greece and would 
require a much broader approach. The 7 May statement called for 
stronger financial regulation and supervision, particularly regarding 
derivatives and ratings agencies. The leaders also pledged to ‘broaden 
and strengthen economic surveillance and policy coordination in 
the euro area’54, by watching debt levels and structural measures that 
influence competitiveness, with stronger rules and tougher sanctions 
for those that didn’t keep up. Finally, they agreed to ‘create a robust 
framework for crisis management, respecting the principle of member 
states’ own budgetary responsibility.’

This new crisis-fighting framework would require a central anchor, 
of which the leaders had only a hazy idea at first. But they knew 
something had to happen by the Monday morning Asian market 
opening. They gave the Commission and the euro area finance 
ministers a very short timeline to come up with the details. ‘Taking 
into account the exceptional circumstances, the Commission will 
propose a European stabilisation mechanism to preserve financial 
stability in Europe,’ the leaders said in the statement, adding that euro 
area finance ministers would consider this proposal two days later, on 
Sunday 9 May. 

54  Statement by the Heads of State or Government of the euro area, PCE 86/10, 7 May 2010.  

http://www.consilium.europa.eu/media/27818/114296.pdf

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

That put the Commission in the crosshairs. While Barroso, the 
Commission’s president, was attending the leaders’ summit in Brussels’ 
blocky, brown Justus Lipsius building, on the other side of the Rue 
de la Loi, Rehn and his team were at work in the Berlaymont, the EU 
executive branch’s glass and steel headquarters. 

‘The euro zone summit was on Friday and we had been preparing 
for it the entire week in the Berlaymont building,’ Rehn recalled. ‘We 
knew only very late that Friday night that we had a mandate from the 
euro area summit – not a very specific mandate – to come up with 
a proposal for a European stability fund by Sunday. So I had a brief 
sleep, took a quick shower, went back to Berlaymont early on Saturday 
morning and started to work with my team. We began looking at what 
policy initiatives could be economically viable and politically palatable 
in this dangerous situation.’

For the Commission’s Benjamin Angel, then a head of unit in the 
economic and financial affairs directorate-general, there wasn’t even 
time for a nap. ‘On Friday evening, it was just before midnight and I 
was about to go to bed. Instead, my director-general called me and 
told me to go immediately to the Berlaymont. So I got dressed, went 
to the Berlaymont, and met until more or less 1.30 with my director-
general, the secretary-general of the Commission, the director-general 
of the legal service, and the head of cabinet of the president’s office. We 
needed to launch an initiative.’

Rehn was keenly aware of the political constraints that would shape 
any technical solution on offer. The summit statement was ambiguous 
on whether the crisis-fighting framework would be housed within the 
EU institutions or set up as an intergovernmental arrangement among 
euro area member states. The French president, Nicolas Sarkozy, and 
the German chancellor, Angela Merkel, had clearly reached some sort 
of understanding on what would be possible, but they hadn’t shared 
publicly how far their governments were ready to go. ‘We did not know 
what could have been agreed, or had been agreed, between Germany 
and France on the scale and size of the future fund,’ Rehn said. ‘We 
didn’t know, and we couldn’t find out.’ 

In the end, Rehn and his team didn’t want to put the matter entirely 
in the hands of the member states from the outset, so they decided to 
look for a ‘community method’ solution that would make use of the EU 
budget framework. ‘It was a very short proposal in the end, although 
it required a lot of work,’ Rehn said. Angel worked into the morning 
for four hours, from 2.00 until 6.00, on the proposal for a Commission 

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emergency fund backed by the EU budget, which would become the 
European Financial Stabilisation Mechanism (EFSM)55. He went to 
bed and on Saturday met briefly with Rehn and other colleagues. By 
Sunday, the Commission was braced to move ahead with the EFSM 
proposal while the finance ministers gathered for the bruising political 
battle to follow56. 

Angel remembers the Commission’s top officials holding a longer-
than-expected Sunday morning meeting before approving the draft, 
while the finance ministers were already waiting in the Justus Lipsius 
building for the negotiations to start on a text that no one had yet seen. 
‘It was really a unique situation,’ he said.

The Sunday night finance ministers’ meeting, chaired by Spain’s Elena 
Salgado, turned into an all-nighter as Europe raced to put a firewall 
together before Monday morning trading began in Asia. As it turned 
out, the Commission’s proposed EFSM vehicle, which Angel had 
drafted in the wee hours of Saturday morning, would not be enough on 
its own. A second marathon effort would be needed.

‘I remember the night when the decision was reached to set up the 
EFSF,’ recalled Wieser, former chairman of the Eurogroup Working 
Group. ‘It was the night when German Finance Minister Wolfgang 
Schäuble fell ill when landing in Brussels on the aeroplane, so his 
deputy Jörg Asmussen had to step in until they could fly in the Interior 
Minister Thomas de Maizière. On the sidelines, again and again, I saw 
Christine Lagarde, then the French finance minister, standing by the 
window on the phone, and Asmussen on the phone as well, and there 
were interventions by the US president to both the French and the 
German leaders that night.’ 

As French finance minister, Lagarde was braced for the fight. She had 
been trying to enjoy a weekend break with her family at her country 
home in Normandy, but that was not to be. ‘That Saturday pretty much 
all day long we had conversations with Wolfgang Schäuble, Olli Rehn, 
and Jean-Claude Trichet,’ she said. ‘It was supposed to have been a 
family weekend and there was no family time at all. And eventually, a 
decision was made. We all had to get together in Brussels on Sunday.’

55  Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial 

stabilisation mechanism, OJ L118/1, 11 May 2010.  
http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1484663483987&uri=CELEX:32010R0407

56  Extraordinary Council meeting (2010), Press release, 9 and 10 May 2010.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/114324.pdf

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

So Lagarde threw on her suede jacket and took off for Brussels. The 
other players also began to gather. With Schäuble heading to hospital 
instead of the meeting, his deputy, Asmussen, was stalling for time 
until reinforcements could arrive: de Maizière, a close ally of Merkel. 
From Athens, Finance Minister Papaconstantinou also got the call. 
For once, Greece was not centre stage, having finished talks on its own 
programme a week earlier. The threat was clear, even if the solution 
was not. ‘Everybody realises you cannot have another Greek Loan 
Facility. So you cannot have coordinated bilateral loans. You need an 
instrument,’ Papaconstantinou said. ‘But nobody’s ready to create a 
fully fledged permanent ESM yet. We’re not there.’

Despite the sense of impending doom, the deal was not coming 
together. The Commission’s full plan for the EFSM ran aground when 
it went before the finance ministers on Sunday, on objections from 
Germany and other fiscally conservative states. As originally designed, 
it had two elements. Under the first rung of the plan, the EU would be 
able to borrow on financial markets, up to a limit determined by the 
bloc’s budget payment ceilings. That turned out to be about €60 billion 
and required the assent of all EU Member States, including countries 
outside the euro area. 

Since €60 billion wasn’t going to build a firewall on the scale required, 
the Commission also proposed a second rung. When triggered, the 
Commission would still borrow on financial markets, but with direct 
guarantees from Member States instead of the EU budget. This was a 
tricky sell to the Council’s legal service, which almost immediately called 
for separating this second leg from the first and creating it outside the 
EU framework on the basis of an intergovernmental agreement. 

‘Then the discussion became instantly extremely messy,’ Angel said. 
Germany and like-minded countries were backing a bilateral loan 
arrangement instead of the second EFSM tier, but other countries 
didn’t want a repeat of the Greek Loan Facility’s complexities. The 
Commission suggested an intergovernmental framework to provide 
guarantees to the Commission, but the Germans weren’t having it. 
‘We were completely blocked,’ he said. The Germans, Angel recalls, saw 
difficulties with the Commission’s role, an erosion of trust in its ability 
to enforce strict rules. 

Rehn said he met with Barroso and his economic advisor on Saturday 
afternoon and Sunday morning to discuss the options. ‘Based on our 
teamwork, I proposed we would present a combination of (a) using 
the EU budget as collateral to the own resources ceiling, which gave 

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€60 billion, and (b) beyond that, as needed and separately decided, 
asking the EU/euro area member states to provide joint and several 
guarantees to the EFSM.’ He added: ‘The latter part was regarded as a 
critical element to create a truly convincing “big bazooka”. Yes, it would 
have created eurobonds of some sort. Barroso first, and then after a 
lengthy debate, the commissioners endorsed the proposal on Sunday. 
However, the finance ministers did not endorse the latter part.’ 

With agreement on only the smaller component of the EFSM plan, 
talks were stalled. Rehn said he made a last-ditch proposal, offering to 
let the countries choose between guarantees and bilateral loans. But 
no luck. ‘Nothing seemed to fly that night, so we were fairly desperate 
and looking for some way out,’ Rehn said. ‘We had to have a convincing 
solution – or at least a convincing-looking solution – before those 
Asian markets opened.’ 

At this point, Lagarde told colleagues that they still had time, but not 
much. The Asian stock markets would be opening in quick succession 
soon and she warned that it was important to reach an agreement; 
they could not afford to throw in the towel. She predicted havoc in the 
markets if the EU was not able to come up with a convincing rescue 
package. She appealed for ministers to stay at least another 30 minutes: 
‘I was constantly watching the opening of the Sydney stock market, 
then the Tokyo stock market. I mean, the clock was ticking.’

Verwey, who was mentally running through possible options for a 
firewall, in his capacity as chairman of the Task Force on Coordinated 
Action, also remembers asking Asmussen what the key concern was. 
‘The problem was not the guarantee instrument,’ Verwey recalled. ‘The 
point was that Germany didn’t want to guarantee the Commission, 
because for them this was a big shift in the institutional balance 
between the Commission and the Council. The real question was: who 
controls the mechanism?’ 

As the clock ran out, Rehn called Verwey to a meeting. Midnight had 
already passed, but there was still no solution for setting up a new crisis 
mechanism. Besides Rehn and Verwey, only a few Commission staff 
were in the room. ‘We brainstormed. Why was it stuck and how could 
we solve that? Then I came up with the idea: why don’t we set up a 
special purpose vehicle? They liked the idea,’ said Verwey. 

Rehn said he asked Verwey to check with the German delegation, if 
this would be okay for them. Verwey went, returning quickly with an 
affirmative from de Maizière, which ended the deadlock.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The special purpose vehicle concept was well suited to assuage the 
concerns of the fiscally more conservative countries that had come 
up during the debate, as a special purpose vehicle is usually created to 
solve targeted, and temporary, problems. It offered the added benefit 
of being relatively easy to set up and get running. Not only would it be 
out of the Commission’s hands, it had a three-year time limit. It also 
bore no resemblance to anything that would sell common euro area 
debt, which was taboo for many countries. Instead, liability would be 
shared on a proportional basis among the euro countries. 

For the rest of the euro area, the appeal was that the bigger rescue 
mechanism came with a guarantee system. The key feature was that 
the member states would guarantee not the loans to the programme 
countries, just the bonds sold on the market to finance them. This 
was particularly important for those economies that were themselves 
having problems accessing capital in the markets; they didn’t want to 
be too closely linked to countries in worse shape than they were. They 
wanted to support the new framework with less damage to their own 
budget and debt statistics, and they wanted a system that they might 
actually be able to use if the contagion came their way.

Although the Commission backed the idea, its representatives were 
reluctant to present it to the Germans, given the evening’s dynamic. So 
Verwey went instead. ‘I asked them: ‘Would you be able to accept this?’ 
They did, and this then became the EFSF.’ 

The signing ceremony 
establishing the EFSF on 
7 June 2010 in Luxembourg.

Credit: George Gobet/AFP

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Looking back, Commission President Juncker called the decision 
‘historic’, adding: ‘Thanks to the political courage and ingenuity of a 
few of the people present, we took bold steps to defend the stability  
of the euro.’

It was a momentous achievement for the euro area, and for its 
leaders. Lagarde, recalling the early morning press conference that 
followed, said: ‘We were all completely shattered, and probably looked 
terrible, but we were so proud to announce that we had finally put 
this thing to bed.’

For Schäuble, the creation of the EFSF, as a forerunner of the ESM, 
was proof that despite differences of opinion the euro area could act 
when it needed to and display solidarity, if there was the necessary 
conditionality. ‘That is very encouraging. All those involved were 
willing to work on reaching compromises that were necessary and in 
everyone’s interest.’

At this point, the official plan was still that the firewall would never 
be used. It would just be put in place, and put in place quickly, to 
calm the markets. 

10-year sovereign bond yield spreads to Germany 
in basis points, daily frequency

1,000

800

600

400

200

0

Spain
Portugal
Ireland
Greece

9 May 2010: EFSF established

0
1
0
2
/
4
0
/
5
1

0
1
0
2
/
4
0
/
9
1

0
1
0
2
/
4
0
/
1
2

0
1
0
2
/
4
0
/
3
2

0
1
0
2
/
4
0
/
7
2

0
1
0
2
/
4
0
/
9
2

0
1
0
2
/
5
0
/
3
0

0
1
0
2
/
5
0
/
5
0

0
1
0
2
/
5
0
/
7
0

0
1
0
2
/
5
0
/
1
1

0
1
0
2
/
5
0
/
3
1

0
1
0
2
/
5
0
/
7
1

0
1
0
2
/
5
0
/
9
1

0
1
0
2
/
5
0
/
1
2

0
1
0
2
/
5
0
/
5
2

Bond yields of financially 
stressed countries 
moved higher despite the 
announcement of the first 
Greek programme. The 
creation of the EFSF on 
9 May calmed the markets, 
briefly.

Source: Bloomberg

 
5 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The next question for the new fund was: how big? Wieser felt the 
number had to be hefty enough to impress the markets or they would 
never calm down. ‘I figured that €200 billion would be enough, but 
I also figured that certain member states would bargain me down by 
50%, so I put in €400 billion. To my surprise, nobody bargained it 
down,’ Wieser said. ‘Then in order to make it a round figure, with the 
EFSM at €60 billion, we just tacked on another €40 billion to the EFSF, 
and that’s how the €440 billion of the EFSF came into existence. It was 
not by design, it was a mixture of arithmetic and accident.’ 

At the end of that overnight marathon, the EU ministers announced 
that they had approved a total €500 billion euro area rescue fund. 
This would include a rapid-reaction EFSM of €60 billion and a special 
purpose vehicle that the euro area member states would guarantee. The 
vehicle would have a volume of up to €440 billion and would expire 
after three years, according to the finance ministers’ statement of 9 and 
10 May 201057.

With some diplomatic finesse, the euro area managed to convince the 
financial markets that it had an even bigger bazooka because the IMF 
would kick in another €250 billion. The IMF never put such a specific 
figure on it publicly, but its then-Managing Director Strauss-Kahn 
indicated as much after the meeting. 

‘The IMF will play its part, in the interests of the international 
community, in addressing the current challenges. In particular, we 
stand ready to support our European members’ individual adjustment 
and recovery programmes through the design and monitoring of 
economic measures as well as through financial assistance, when 
requested,’ Strauss-Kahn said. ‘Our contribution will be on a country-
by-country basis, through the whole range of instruments we already 
have at our disposal. We expect our financial assistance to be broadly 
in proportion to our recent European arrangements’58. In that 
ballpark, the EU figured it could count on the IMF to pick up roughly 
a third of any new programme, with the other two thirds coming from 
the new firewall. 

57  Ibid. 
58  IMF (2010), ‘Agreed EU support model boosts confidence, says IMF’, 11 May 2010.  

http://www.imf.org/external/pubs/ft/survey/so/2010/NEW051110A.htm/external/comments/
index.aspx?type=rea

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In this way, the €750 billion first bulwark came into existence. The 
headline figure helped calm markets. To quell uneasiness at the EU 
level, the Commission still had a €50 billion balance-of-payments 
mechanism, available to help distressed non-euro countries, such 
as Latvia, Hungary, and Romania, with funds raised using the EU 
budget as collateral. Combined with the EFSM’s €60 billion, a total of 
€110 billion in rescue financing was possible through Commission-
administered funds – a point emphasised in communications with the 
European Parliament, which kept a close eye on euro area doings while 
representing the entire EU. The EU’s entire budget for 2010 was an 
only slightly larger €122.9 billion, but the rescue mechanisms wouldn’t 
touch that59. 

Central bankers and finance ministers around the world had been 
watching the EU’s sleepless Sunday night. As the talks dragged on, 
there was a simultaneous conference call of finance ministers and 
central bankers from the Group of Seven major countries. And in 
Washington the IMF was on full alert. 

‘We were on the phone in Washington with the staff. This all was 
happening in the context of an endless conference call that went on 
for hours, and hours, and hours, between Brussels, the central bankers 
in Basel, plus participants in Washington, and who knows where else,’ 
said the IMF’s Lipsky, at the time Strauss-Kahn’s number two. ‘At least 
something concrete finally was agreed. The EFSF was announced only 
after markets had already opened in Asia. And, the ECB was ready to 
act in markets immediately, if needed.’ 

The euro area’s cash could now be counted on. And although the 
permanent ESM didn’t yet exist, its foundation had been laid. ‘When 
the EFSF was founded on 9 May 2010, it was already clear to everyone 
that a European crisis mechanism could not, in the long term, be 
based on a guarantee-backed special purpose vehicle headquartered in 
Luxembourg,’ Schäuble said. ‘Nobody denied the need for a European 
crisis mechanism based on international law.’

59  European Commission (2009), ‘EU budget 2010: Investing to restore jobs and growth’, Press 

release, 17 December 2009. http://europa.eu/rapid/press-release_IP-09-1958_en.htm?locale=en 

 
5 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Focus  
The European Central Bank steps up

To give the new euro firewall time to get started, the ECB provided some 
much-needed breathing room. With the Securities Markets Programme, 
in operation through September 2012, the ECB aimed to preserve liquidity 
in euro area public and private sector markets through bond purchases60. 
Under the programme, the ECB bought government bonds of Ireland, Greece, 
Spain, Italy, and Portugal. The scheme would improve the performance of 
malfunctioning segments of the euro area debt securities markets.

Shortly before the press conference announcing the new EFSF firewall, 
Rehn let the cat out of the bag that the ECB was moving simultaneously 
to reassure markets. Rehn had been told that the ECB would go public 
at midnight. So, thinking the ECB had already announced the move, he 
confirmed the action to the Financial Times Deutschland. ‘I thought that, 
because it was 1.30 or 2.00 and I didn’t want to look stupid, I said: “Yes, I’m 
aware the ECB has been acting.” Because I was told they would go public 
at midnight,’ Rehn said. ‘So I revealed their Securities Markets Programme 
scheme, because I mistakenly thought they had already gone out, and also 
because I instinctively wanted to give the correct impression that the euro 
area now had a big bazooka to contain contagion in the financial markets. 
But they only did so later.’

The ECB’s goal was to preserve financial stability by heading off breakdowns 
in trading and to strengthen the monetary policy transmission mechanism61. 
Some countries, however, were concerned that such operations could spark 
inflation by loosening the central bank’s monetary policy stance. To prevent 
this, the impact of all operations was sterilised with technical measures that 
re-absorbed liquidity.

‘I had enormous resistance from the governments on direct intervention in 
the secondary market, which was the only way to deter speculation,’ said 
Trichet. ‘We had the capacity to intervene immediately and the governments 
had to set up their own capacity.’

60  ECB (2010), ‘ECB decides on measures to address severe tensions in financial markets’, Press 
release, 10 May 2010. https://www.ecb.europa.eu/press/pr/date/2010/html/pr100510.en.html 

61  ECB (n.d.), ‘Asset purchase programmes.’  

https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html 

Enlisting Klaus Regling: 
‘I have his number’

5

[Klaus Regling] is an experienced  

policymaker who played an important role  
in the European integration process in recent 
decades and has a very good knowledge  
of how markets function. 

Mario Draghi 
ECB President (since November 2011)

When the euro area agreed to start a rescue fund, it needed 

someone to run it. In June 2010, during meetings in 
Luxembourg, finance ministers began kicking around the 

names of potential candidates. Several rose to the top, but Juncker, then 
chief of the Eurogroup, had a clear idea about whom to recruit.

‘Klaus Regling is a leading expert in international and European 
finance. With him as CEO, the company’s quality and credibility were 
secured from the start,’ said Juncker, now European Commission 
president. ‘It was only natural for me to insist on his nomination.’

Behind the scenes, the recruitment process was a little bumpier. Wieser, 
Eurogroup Working Group chairman during the crisis, was dispatched 
to run the search, alongside the finance ministers of Belgium and Malta. 
According to Wieser, when the time came for the three initial candidates 
to be interviewed, Juncker was furious that Regling wasn’t on the list. 

5 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Klaus Regling, chief 
executive of the EFSF and 
managing director of the 
ESM, giving an interview 
in his Luxembourg office 
in 2018.

Credit: Steve Eastwood/ESM

‘He said, “Why haven’t you chosen one already?”’ Wieser recalled. ‘I 
said, “Well, first comes the closing of the call for candidates, then we 
arrange for interviews,” and he replied, “I’m not interested in that, I 
want everything to be done by tomorrow. And incidentally, I hope that 
Klaus Regling has been nominated by the German government.” I said, 
“No, Klaus is working together with Max Watson on some analysis for 
the Irish government, and he has not put forward an application”. 
Juncker was hopping mad, I’ve never seen him that way – “This is 
intolerable” – and then he turned to the Germans and asked, “Why the 
heck didn’t you propose Klaus?”’

It emerged that, on the day Wieser’s group of finance ministry 
deputies announced the search for chief executive candidates, the 
German representative hadn’t passed on the information to his home 
base. This oversight set off a scramble to track Regling down. ‘People 
were taking out their mobile phones and saying “I have his number 
somewhere,”’ recalled Heinrich, then a senior finance ministry official 
for Luxembourg. 

Regling had just returned to Brussels after taking a fellowship at 
the Lee Kuan Yew School of Public Policy in Singapore to research 
financial and monetary integration in Asia. From his academic perch 
in the tropics – and the window of his high-rise apartment – Regling 
had tangible evidence of how the market turmoil was affecting the 

 
C H A P T E R   5   —   EN L I S T I N G   k L A U S   RE G L I N G :  ‘ I   H AvE   H I S   N U M B E R ’ 

  5 9

world economy. ‘Every day, I saw the number of idle ships in the port 
increasing. World trade was coming to a standstill towards the final 
months of 2008. It was fascinating to see – and scary.’ 

As director-general for economic and financial affairs of the 
Commission from 2001 to 2008, Regling had become well known in 
every European finance ministry. In that position, he had attended all 
the monthly Eurogroup meetings of finance ministers, where he got 
to know Juncker, who started chairing the meetings in January 2005. 
There was an initial positive reaction from several ministers who knew 
Regling from this time and could vouch for his willingness to take a 
tough line with countries that were reluctant to follow through on their 
economic recommendations. 

Regling had the level head and ‘sound technical understanding 
of what was happening’ to do the job, plus he was sufficiently 
accomplished in the policy arena with his Eurogroup experience, 
yet he wasn’t seen as a politician, Heinrich said. But he wasn’t sure 
Regling would want the job. 

‘I had met him a few months earlier and he was all excited about his 
consultancy work,’ Heinrich recalled. Contacted at the last minute, 
Regling fortuitously happened to be in Belgium. Heinrich said that, 
when the EFSF call came, ‘to my surprise,’ Regling responded positively.

As a believer in the euro, Regling hoped that the proposed firewall 
fund would not be needed in the end, even if that meant any potential 
new job would be slow-paced. But he agreed to interview the next 
morning, and like the other candidates made his case in person. The 
choice was clear. ‘I reported back to a special and short Eurogroup 
meeting after that on the findings of the panel, which had decided on 
Klaus. It was incredible,’ Wieser said.

‘I never got a job so quickly,’ Regling said.

Lagarde, now IMF managing director who was French finance minister 
when Regling was chosen, credited ‘a fascinating combination of 
professional experience’ with making him perfect for the role. ‘He 
combines the layers of an internationally minded person, as a former 
IMF staff member, and a true and very deeply convinced European.’

 
6 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Regling’s good relations with all of his former employers, including 
the IMF, the German finance ministry, and the European Commission 
were an essential part of how the EFSF and ESM joined an already 
crowded group of negotiators.

The Commission’s Angel said: ‘For some of my colleagues it was not 
always easy to get used to the fact that there was another player in 
town whose needs and views we needed to take into account. That 
is over now. The fact that it was Klaus helped considerably because 
Klaus knew everyone. He managed to have the EFSF invited into the 
Eurogroup Working Group of deputy finance ministers and to the 
Eurogroup of finance ministers immediately. I’m not sure anyone else 
would have secured that so easily and so quickly.’

The goodwill lasted throughout Regling’s first five-year term at the 
ESM, which followed his initial EFSF appointment, and has reached 
into a second, announced in February 2017. ‘His appointment for 
a second term in office was very welcome,’ said the ECB’s President 
Draghi. ‘His broad knowledge and experience have been very beneficial 
for the functioning of the ESM and cooperation with the ECB.’

C H A P T E R   5   —   EN L I S T I N G   k L A U S   RE G L I N G :  ‘ I   H AvE   H I S   N U M B E R ’ 

  6 1

Focus  
A life in public service 

Klaus Regling was born on 3 October 1950, in Lübeck, West Germany,  
right at the border with East Germany. He was the son of a master 
carpenter, who ran his own carpentry business and sat in the German 
parliament, the Bundestag, for the Social Democrats from 1953 to 
1969. Politics and economic issues were the order of the day in the 
Regling household. 

Regling studied economics in Germany, earning a bachelor’s degree from 
the University of Hamburg in 1971 followed by a master’s degree at the 
University of Regensburg in 1975. He began his professional career at the 
IMF in Washington DC – the start of a 40-year journey in public service  
that would take him around the world. 

From 1980 to 1981, Regling worked for the Association of German Banks 
before taking up his first post at the German finance ministry, where  
he would remain until 1985. Then it was back to the IMF: first at the 
international capital markets unit in Washington, and then as the IMF 
representative for Indonesia in Jakarta, furnishing the start to what would 
become a rich experience dealing with crises.

During the 1990s, Regling rose through the ranks of Germany’s finance 
ministry, serving first as chief of the international monetary affairs division, 
and then becoming deputy director-general for international monetary and 
financial relations. He was a key contributor to the effort to build a European 
Economic and Monetary Union, experience that would stand him in good 
stead when the time came to build up the EFSF and ESM.

In 1995, the same year ‘euro’ was chosen as the name for the new  
currency, Regling became the German ministry’s director-general for 
European and international financial relations, taking an active role 
in negotiations within the EU and the Group of Seven industrialised 
democracies, and playing an important role in preparing for the euro’s 
1 January 1999 debut. 

His role meant he attended meetings of the Group of Seven countries at the 
height of the 1997 Asian financial crisis. This complemented his earlier IMF 
assignments, on which he had seen the aftermath of the mid-1980s Latin 
American debt crisis up close. At that time he had been involved in designing 
instruments – such as the Brady bonds, designed to help developing 

 
6 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

countries turn bank debt into bonds with backing from the US Treasury – 
and, in turn, aid banks in coping with the losses from the episode. Because of 
that experience and his work as an IMF representative a few years earlier, the 
Indonesian government invited Regling to come to Jakarta several times in 
1998 – the height of the Asian crisis – to help design a solution for the public 
debt crisis.

To understand Regling’s thinking, it is worth looking at the Asian crisis, which 
he witnessed at first hand. The financial crisis offered some lessons for 
the EU. The three economies that were hit worst – Indonesia, South Korea, 
and Thailand – had continued to link their currencies to the dollar as the US 
currency depreciated. These export-focused east Asian economies thrived 
on the low dollar, but, when the currency began recovering in 1996, their 
competitiveness rapidly evaporated. The Asian crisis was triggered by that 
loss of competitiveness, aggravated by high public debt and, in some cases, 
by banking problems.

The crisis took off in July 1997 when Thailand allowed the baht to float 
because it was running out of foreign currency to defend its peg to the dollar 
against speculative attacks. The baht collapsed, sparking contagion across 
the region: Malaysia, the Philippines, and Indonesia were caught up in the 
turmoil and even Singapore’s dollar began to decline. The upheaval led a 
spate of countries to seek support from the IMF, which in turn fostered public 
ire at what was perceived as harsh austerity imposed from the outside. It 
also prompted discussion of an Asian Monetary Fund. 

An Asian Monetary Fund did not come to pass at the time. But a group 
of neighbouring countries did in fact turn to regional tools to address 
the unfolding crisis in East Asia. Before their crisis, members of the 
Association of Southeast Asian Nations and their ‘Plus Three’ partners 
– China (including Hong Kong), Japan, and South Korea – had already 
devised a series of bilateral swap arrangements as a way to address 
short-term dollar liquidity crunches, a small first step in creating a regional 
mechanism for managing a financial crisis. The Chiang Mai Initiative has 
since expanded into a multilateral currency swap arrangement among  
the participants, the so-called CMI Multilateralisation with a pool of 
$240 billion in foreign reserves. 

C H A P T E R   5   —   EN L I S T I N G   k L A U S   RE G L I N G :  ‘ I   H AvE   H I S   N U M B E R ’ 

  6 3

The EU didn’t heed these lessons when it designed the euro, failing to pay 
sufficient attention to developments in competitiveness, and it had no 
internal buffers against capital market headwinds, Regling said. ‘We didn’t 
have rescue mechanisms. We needed some of these tools but they did not 
exist, even though the lessons might have been learned from Asia in 1997.’

As well as demonstrating how fast contagion can spread, Asia’s travails 
had other lessons for the EU, namely the limitations of using floating 
exchange rates to tackle deeper structural imbalances. ‘An exchange 
rate can be very useful sometimes but it can also be very risky on other 
occasions,’ Regling remembers. ‘Indonesia tried everything in 1997–1998 
to stop the depreciation of their currency but they were not able to do so. 
In the end, the Indonesian rupiah depreciated by almost 90%, which meant 
that everybody with foreign currency debt – the sovereigns and companies 
– went bankrupt.’ 

Of course, euro area countries no longer had currencies of their own to 
devalue in nominal terms. Even so, real exchange rates move in a monetary 
union and should be monitored closely. ‘Every crisis is different, but it is good 
to try to remember what happened in other crises,’ Regling said.

In 1998, Germany elected a new government, leading Regling to take a break 
from the public sector. The incoming finance minister, Oskar Lafontaine, felt 
that the country’s economic difficulties were mostly due to weak demand. 
Regling pushed back, saying the country needed structural reforms and not 
just more spending. ‘After five minutes, he realised I was a hopeless case,’ 
Regling recalled, noting that he left the ministry on friendly terms. 

Seeking a new perspective on the financial world, Regling joined a London-
based hedge fund, Moore Capital Strategy Group, serving as managing 
director from 1999 to 2001. ‘It was a good experience, but after two years I 
was ready to move on,’ he said. 

Opportunely, Regling’s ‘dream job’ opened up at the European Commission in 
Brussels. From 2001 to 2008, he served as director-general for economic and 
financial affairs, one of the institution’s most important civil service posts. 
While there, he was instrumental in implementing the new framework of 
oversight and guidance that came in with the common currency, and he won 
the lasting respect of his colleagues. 

 
6 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Regling left the Commission not because he was tired of his job, but 
because the EU’s strict institutional rules meant he could keep the same 
post for only seven years and he couldn’t think of anything else he’d rather 
do there. He accepted a year-long academic fellowship in Singapore, 
then returned to Europe in late 2009 to open an economic and financial 
consultancy in Brussels, where he was content until Europe came calling 
with the next opportunity.

Shortly after Regling left, the Commission produced a retrospective62 on 
10 years of the euro, and its authors awarded him a signal honour. Gaspar, 
former finance minister of Portugal, who was one of the co-editors alongside 
Buti, Regling’s successor as the Commission’s director-general for economic 
and financial affairs, said: ‘This book is dedicated to Klaus Regling. And that 
is not a coincidence.’

62  European Commission (2010), The euro: The first decade, eds: Buti, M., Deroose, S., Gaspar, V., and 

Nogueria Martins, J., Cambridge University Press, Cambridge.  
https://publications.europa.eu/en/publication-detail/-/publication/befd33a4-e826-4e6e-b5f5-
f625fe849b7a

All eyes  
on Luxembourg:  
‘let’s do this’

6

We all were willing to go all the way  
in the beginning. We gave up weekends,  
gave up holidays.

Kalin Anev Janse 
ESM/EFSF Secretary General

a three-year lifespan. First, it needed a home. 

The EFSF had to move quickly: the euro area’s new fund had only 

Luxembourg was the consensus choice. Tucked away between Belgium, 
France, and Germany, the Grand Duchy is known for its financial savvy 
and stalwart support for the European project. In addition to being the 
home country of Juncker, the current European Commission president 
who was then the premier of Luxembourg and head of the euro area 
finance ministers’ group, the Grand Duchy was also recognised as a 
financial industry hub. Luxembourg is home to many banks, pension 
funds, and wealth managers, given its regulatory and legal framework 
and its status as the second-largest investment fund centre in the 
world. One of Europe’s smallest countries, with a population now 
around 600,000, it was already home to such EU institutions as the EIB, 
the Court of Justice of the European Union, and the European  
Court of Auditors.

On 7 June, less than a month after the go-ahead for the new 
mechanism, the EFSF was legally established by the Eurogroup. When 

6 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

the time came to put the paperwork in order, its birth a few weeks 
later was both prosaic and momentous. Its founding chief executive, 
Regling; its director, Heinrich, who was also Luxembourg’s treasurer-
general; and Luc Frieden, then Luxembourg’s finance minister, 
assembled in a meeting room on the third floor of the finance 
ministry with a local notary, Maître Jacques Delvaux. There had  
been some talk of an even more ad hoc operation, but Delvaux  
found the occasion significant enough to hold an impromptu 
ceremony. ‘He said “oh, for something like that, for a historical event 
like that, I’m going to come down myself to the ministry,”’ Heinrich 
remembered. ‘Then he was reading out the acte notarié to us and 
setting up the company.’

For the first few weeks, Luxembourg would be the EFSF’s sole 
shareholder after it was incorporated as a company under  
Luxembourg law. Hosting the temporary firewall prompted little 
domestic controversy. ‘In other countries, that could have led to  
drawn-out parliamentary discussions. Here in Luxembourg, we 
decided expeditiously: “Let’s do this,” and we did,’ said Heinrich. To 
get the EFSF operational, Luxembourg furnished €31,000 as start-up 
capital and provided a loan for initial operating expenses. 

The EFSF had a public service mandate from its inception, and it 
would grow into an international financial institution in the form of its 
permanent successor, the ESM. 

The first EFSF meetings were an awakening for the finance ministry 
deputies who made up its board, many of whom were economists 
used to analysing data and solving thorny political problems – not 
running a company. In those initial weeks, Heinrich was the lone 
director of the EFSF until all the euro area states had joined. Later, 
from December 2011 to March 2014, he would serve as chairman of 
the EFSF’s governing body, the Board of Directors.

This corporate structure had some interesting requirements. For 
example, Heinrich remembers having to read speaking notes prepared 
by the EFSF’s legal advisors at the start of every meeting or conference 
call, and he said he became an overnight expert in Luxembourg’s 
corporate law.

Then there was the question of personal liability. Italy, which has a 
history of public officials serving on private boards in their official 
capacity, determined that EFSF directors might have personal liability 
if the firewall ever defaulted on one of its bonds. So, just in case, the 

C H A P T E R   6   —   AL L   EyE S   O N   L UxE M B O U R G :  ‘ L E T ’ S   D O  T H I S ’     

  6 7

Italians arranged to insure their representative for the princely sum 
of about €2 billion. Heinrich said that, paradoxically, the out-of-
this-world figure took the pressure off other countries to provide 
similar insurance, and put him at ease about taking on personal 
responsibility for the fledgling fund. ‘If it were €1 million or €250,000, 
maybe I would be worried,’ Heinrich said. ‘But if it’s €2 billion, we’re 
done for anyway, so stop worrying about it. This €2 billion is an 
amount that is too big to rationalise,’ he said, adding: ‘We shelved  
that discussion.’

For legal corporate governance reasons, member states were not 
allowed to designate alternates but instead needed to issue proxies to 
each other’s representatives for meetings when their representative 
could not attend. Because of the urgency of the crisis, the EFSF board 
meetings contacted participants no matter where they were, or what 
the time of day.

‘Today, when I travel, I still remember all of the various places from 
which I’ve chaired EFSF Board of Directors conference calls: in the 
departure or arrivals halls of airports all over Europe, and the TGV 
to Luxembourg, on the beach in Borneo where there was a huge 
thunderstorm,’ Heinrich said. ‘We were having these conference calls, 
all of us, in the most unlikely places, just all over the world.’

Regling had been shepherding the new organisation from its 
inception, and on 1 July he officially stepped into the role of chief 
executive officer. On taking the helm, Regling had to deploy all of his 
considerable connections and management skills. Everything from 
trading software to the most mundane office materials needed to be 
bought and installed.

‘Building up the two institutions from scratch under considerable 
pressure is not easy work. But he did a terrific job,’ said Furusawa, 
deputy managing director at the IMF, who knew Regling from his 
early IMF days. 

Regling drew on the EU’s existing expertise to set up the fund as 
quickly as possible. The Commission, the ECB, and the EIB all 
promised to lend aid and sent over one staff member each. ‘They all 
knew this would create a lot of work initially to set it up. They all 
promised to help,’ Regling said. ‘I had nothing – there was no office, no 
staff, no telephone number, no email address.’ 

 
6 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The EIB was a first port of call in getting the new organisation off 
the ground. The EIB hadn’t wanted to take on the rescue mission in 
addition to its existing portfolio, but it was willing to lend a hand 
in the build-up phase. Regling recalls his first meeting with his new 
neighbours, at which about 15 EIB staffers briefed him on what 
needed to be done. ‘Each one explained to me what I needed to do in a 
different area – from recruiting staff to organising an office. And then 
on substance, it was rating agencies, preparing for issuing bonds and 
bills. It was amazing,’ he recalled. 

Focus  
A role for the European Investment Bank?

Early in the euro area’s crisis-fighting brainstorming, the EIB popped up as a 
potential vehicle for providing third-party, market-oriented aid. However, taking 
on an ambitious new mission would have required new capital for the EIB to 
ensure its hold on its essential AAA credit rating. A further complication was 
that the EIB is an EU institution that represents all EU Member States and 
operates around the world, whereas the EFSF would be designed to target 
the single currency area alone. The EIB’s Members were not looking for the 
investment bank to take on greater exposure to the euro area. 

In the end, Member States decided that crisis-fighting powers weren’t a good 
fit with the EIB’s traditional role of financing development projects in Europe 
and around the world. But the EIB could offer advice, staff, and office space. 

‘We had a lot of long crisis meetings with EIB risk, legal, finance, and 
corporate governance to decide how best to handle it. The uncertainty of 
the EFSF rating was a big issue for the EIB. There was a fear that the EIB’s 
rating could deteriorate. At the same time, the EIB wanted to help, in the end 
deciding to do so at arm’s length,’ recalls Secretary General Kalin Anev Janse, 
who worked at the EIB at the time and was coordinating the EIB’s support for 
setting up the EFSF. 

C H A P T E R   6   —   AL L   EyE S   O N   L UxE M B O U R G :  ‘ L E T ’ S   D O  T H I S ’     

  6 9

As his second-in-command and chief finance officer (CFO), Regling 
hired Christophe Frankel, a Frenchman who had served in senior 
positions at the French government debt agency and in private sector 
finance. Strauch, who had been at the ECB, also joined immediately as 
chief economist.

Starting with a blank slate was intimidating but also offered 
opportunities. ‘It was a challenge but at the same time very positive,’ 
Frankel said. ‘We could build something that was really adapted to 
our needs.’ 

Regling outsourced whatever he could. For example, market borrowing 
operations would be carried out by the German Finance Agency and 
the EIB would handle accounting and information technology. He also 
turned to Anev Janse. 

Only a few years out of university, where he had been active in Dutch 
politics, Anev Janse was working at McKinsey & Company and 
then moved to the EIB for a one-year secondment during the crisis. 
He was then assigned to the EFSF project, where he would begin 
building the EFSF’s internal structure while Regling, Frankel, and 
Strauch focused on winning over the policymakers and markets. As it 
happened, Anev Janse was wheeling his suitcase out the door for a trip 
to Amsterdam, but his supervisor stopped him: plans had changed. The 
call had come in to work on the EFSF, and that would be Anev Janse’s 
job. The temporary assignment became permanent when Anev Janse 
was appointed the firewall’s secretary general starting in 2011. He was 
impressed by Regling from the start.

‘As a boss he is great,’ Anev Janse said. ‘He trusts his staff. He can be 
tough and very challenging at the same time; he’s very clear about what 
he wants delivered.’

The EFSF was originally conceived of as a 12-person shop, as shown by 
the institution’s founding organisational chart. This staffing framework 
was one of the first data points Regling could show to a curious yet 
cautious global investor base as part of the long process of building 
confidence. In July 2010 – before the firewall was fully up and running 
– Regling took the chart to an Asian investors’ conference in Beijing 
hosted by Singapore’s sovereign wealth fund. 

 
7 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

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C H A P T E R   6   —   AL L   EyE S   O N   L UxE M B O U R G :  ‘ L E T ’ S   D O  T H I S ’     

  7 1

The organisational chart was never an exact model. From the very 
beginning, new hires took on multiple roles and dedicated their waking 
hours to getting the firewall off to a good start, and functions were 
expanded or absorbed as the organisation grew. Conceptually, however, 
the organisational chart was instrumental. The first step for the new 
firewall was literally centring itself in order to get organised.

‘When Kalin did the first organigram with me, he wanted to put 
the EIB in the centre and the EFSF was on one side. I said “No, no. We 
should change this around. The EFSF is at the centre and the EIB is on 
the side, alongside the German Finance Agency,”’ Regling said. 

A dozen people was a lean concept for an organisation as ambitious 
as the EFSF, and even that number did not assemble overnight. 
‘The concept of having 12 was not stupid; it was possible to do this,’ 
Regling said. One can do a lot with just a few people, who work  
very hard. And we had the support of the German Finance Agency 
and the EIB.’

The early team was extraordinarily dedicated – as they needed to be. 
The crisis was turning so many lives upside down, and everyone who 
signed up was motivated to do as much as they could. It certainly 

The EFSF’s first office had 
a makeshift feel, in keeping 
with the rescue fund’s hasty 
set-up and a determination 
to hold down costs.

Credit: EFSF archives

 
7 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

couldn’t be only for the money. ‘We never spent in an exaggerated 
fashion,’ said Ralf Jansen, the firewall’s first general counsel. ‘There was 
always this sense of soberness. Being down to earth. Not overdoing 
it. How would you talk to a Greek pensioner absorbing a cut if Klaus 
lived a life of luxury?’

Jansen welcomed the prospect of joining a team with a purpose 
larger than itself. It was a unique opportunity to do something that 
people might one day consider historic. There was no roadmap, no 
time to worry about what would happen if something went wrong. 
‘We joined for the project. It’s amazing looking back – the amount 
of money and risk we dealt with. Coordination basically took place 
while we were doing it.’

As the EFSF started operations and the euro area began expanding 
the facility’s duties while planning for a permanent fund, it became 
clear that the firewall would have to be beefed up. Shareholders would 
expect the rescue fund to have ironclad risk management and auditing 
abilities, given the amount of money at stake. 

Recruiting letters went out to other international financial and private 
sector institutions. ‘It was a call for help – we are trying to manage 
this crisis, we need help and we need your people,’ Anev Janse said. 
‘The way we came together was a bit of coincidence, but that made us 
extremely strong.’

Early days:  
the EFSF and  
its doubters

7

The €750 billion comes about and you have the 
birth of the EFSF. And it worked. I mean, the next 
morning papers were jubilant. This was seen as a 
bazooka – finally the Eurogroup is ahead of the 
curve, finally no longer water pistols.

George Papaconstantinou  
Greek Finance Minister (October 2009–June 2011)

Outside Europe, the establishment of the rescue fund was seen 

as a key turning point. In late June 2010, leaders from the 
Group of 20 major industrialised countries met in Toronto to 
take stock of the global economic outlook. The group, which comprises 
20 of the biggest economies in the world, classified the creation of the 
EFSF, the European Financial Stabilisation Mechanism, as well as the 
stress testing of EU banks, as ‘substantial contributions to our collective 
well-being’63. 

But inside the EU the firewall had critics. For some countries, the 
very existence of a crisis-fighting mechanism created the risk that 
politicians might rely on it, instead of facing up to hard choices at 
home. It would take time for detractors to build trust in this new 

63  The G-20 Toronto Summit Declaration, 26 and 27 June 2010, Paris.  
https://www.oecd.org/g20/summits/toronto/g20-declaration.pdf

7 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

instrument – even though no one saw an immediate alternative to the 
temporary firewall. 

For countries in economic distress, the EFSF’s chief downside was 
that the granting of financial aid was by unanimity, a requirement 
that could frustrate quick decision-making, or block any decision-
making at all. For better-off countries that would underwrite rescue 
programmes, the fund was unthinkable without this veto power. 

As the economically weightiest euro area member state, Germany was 
often seen at the forefront of an alliance of countries seeking to limit 
the use of the new firewall. From the outset, one of Regling’s biggest 
tasks as EFSF chief executive would be to bridge the gap between 
public sentiment in the north and in the south, making sure the rescue 
fund was attuned to the needs of all of its stakeholders.

‘Often it was not Germany alone; it was a group of five or six countries,’ 
Regling said. ‘Another 12 countries wanted to be more generous. That’s 
our situation. We cannot say that one half of our members are right 
and the others are wrong.’

Scepticism had its roots in the EU Treaty, which prohibits the assumption 
of an afflicted country’s debts by another country or by the EU64. This 
no-bailout clause put each country in charge of its financial fate, and the 
stability and growth pact prevented countries from amassing destabilising 
debts – or so the theory went. It took time, and the experience of cross-
border market turmoil, for European public opinion to warm to the 
notion of collective responsibility for monetary union. 

‘That is why it was so difficult,’ said Verwey, a senior Commission 
official who had been one of the EFSF’s main architects. ‘That had been 
the story in the Netherlands and Germany for a long time: “We have 
the no-bailout clause and the stability and growth pact, so a crisis just 
won’t happen.”’ 

The EFSF’s untried legal basis didn’t help matters. Legal challenges to 
the rescue fund would be filed – and eventually defeated – in Germany, 
Estonia, and Ireland.

64  Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the 

European Community, OJ C306/1, Article 125, 17 December 2007.  
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12007L%2FTXT

C H A P T E R   7   —   EA R L y   D Ay S : T H E   E F S F   A N D   I T S   D O U B T E R S      

  7 5

Owing to the political sensitivities, the EFSF came into being with an 
unspoken understanding that it wouldn’t be called upon, at least in 
the short term. Strauch, its chief economist, said the new institution 
was part of an EU-wide learning process. ‘From a Dutch, Finnish, or 
German point of view, it needed to be crystal clear at that point in time 
that rescue loans could only be used as a very last resort,’ Strauch said. 
‘Giving easier access would have been impossible to sell politically and 
subject to legal challenge in parts of northern Europe.’

These built-in restrictions posed a dilemma for crisis management. 
Without them, there would be no EFSF; but with them, there was a risk 
that aid would be delayed or denied. Buti, the Commission’s director-
general for economic and financial affairs, said this hamstrung the 
euro area’s ability to get ahead of the contagion. Financial rescues, he 
said, would be mounted only as an ‘ultima ratio’ ‘to collectively make 
unprecedented decisions and cross no-go lines only in those types of 
conditions where you are backed against the wall and there is no way 
to go back.’

It was a costly trade-off, as the next set of rescue programmes would 
show. ‘It meant procrastinating until you were staring into the abyss,’ 
Buti said.

To move forward, the EFSF would need approval from all euro area 
governments. Some countries saw an immediate benefit in preparing 
a common defence against future market disruption. Although Malta 
wasn’t directly in the line of fire, it felt a sense of urgency about the 
looming crisis, said Camilleri, permanent secretary for budget and 
finance in the Maltese finance ministry.

‘We are a very small, open economy. Whatever happens elsewhere is 
bound to hit us,’ Camilleri said. ‘It was not perceived as somebody else’s 
problem. If there is a problem, it’s also our problem.’

As the crisis rippled through Europe, political alignments started to 
shift in the more financially solid countries. Anti-bailout movements 
emerged in Germany, in Finland, and elsewhere. The electoral 
consequences were first felt in Slovakia, which having joined in 2009 
was then the euro area’s newest member – and its poorest, with real per 
capita GDP of €11,900, compared with €21,500 for Greece65.

65  Eurostat (2019), ‘GDP and main aggregates – selected international annual data’.  
http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=naida_10_gdp&lang=en

 
7 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Slovakia had done its homework to adopt the euro, imposing discipline 
on its public accounts and posting a debt-to-GDP ratio of 36.3% in 
200966, well below the euro area average of 78.5%. These fiscal exertions 
coloured Slovaks’ attitudes towards contributing to what they saw as 
the high cost of rescuing a wealthier country whose own irresponsible 
fiscal behaviour had led to its crisis.

Slovak voters picked a centre-right governing coalition in June 2010 
elections. Iveta Radičová, a critic of financial assistance for Greece, 
became prime minister. Radičová’s government sought to balance EU 
and domestic pressures by positioning itself as a champion of reform, 
pushing for a tough stance against countries that break the debt and 
deficit rules underpinning the euro.

Under the EFSF’s original design, Slovakia’s share of the guarantees 
for the temporary firewall was around €4.4 billion, on top of the 
€816 million it had been asked to make available to Greece as part of 
the Greek Loan Facility67. In Bratislava, the twin commitments weren’t 
politically reconcilable. Slovakia decided that its precondition for 
approving the EFSF was to pull out of the bilateral loan framework.

On 15 July, Radičová’s government ratified the creation of the EFSF 
as one of the last countries to do so, while declining to take part in 
the bilateral Greek programme. The price it exacted for endorsing the 
rescue fund foreshadowed bigger fights as the crisis deepened and the 
euro area was forced to increase its response capacity.

For Rehn, then the European commissioner for economic and 
monetary affairs and the euro, Slovakia’s refusal to extend loans to 
Greece constituted ‘a breach of solidarity,’ he stated at the time68. The 
move wouldn’t hamper disbursements of Greece’s loan package, but 
he said it undermined ‘a crucial act at a critical moment to safeguard 
financial stability of the euro area as a whole, including Slovakia.’ 

Even as they managed to create innovative solutions to the crisis, the 
episode showed how trust among European countries was fraying. 

66  Eurostat (n.d.), ‘General government gross debt – % of GDP and million EUR’.  https://ec.europa.

eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=sdg_17_40&plugin=1 

67  Euobserver (2010), ‘Brussels rebukes Slovakia over Greek u-turn’, 12 August 2010.  

https://euobserver.com/economic/30610 

68  European Commission (2010), ‘Statement by Commissioner Olli Rehn on today’s vote by Slovakia’s 

Parliament rejecting the participation in the loan for Greece’, 11 August 2010.  
http://europa.eu/rapid/press-release_MEMO-10-368_en.htm

Enter the troika:  
the European Commission, 
the IMF, the ECB

8

In 2010, the monitoring role under the 

first Greek programme was something new for the 
European institutions. Not only was the technical 
support from the IMF important but also its 
financial involvement.

Jeroen Dijsselbloem 
Dutch Finance Minister (November 2012–October 2017),  
President of the Eurogroup (January 2013–January 2018) and  
Chairman of the ESM Board of Governors (February 2013–January 2018) 

Amid the political tremors, it fell to three institutions – the 

European Commission, the ECB, and the IMF – to engineer, 
administer, and monitor aid packages, in an informal alliance 

dubbed the ‘troika’.

While government leaders and finance ministers took overall charge 
of the policy response, and the euro area rescue fund played an 
increasingly prominent part, the troika emerged as the public face of 
the crisis management – and as the target of often vehement criticism 
in programme countries.

The troika’s origins lay in the circumstances surrounding the ad hoc 
Greek loan package and the birth of the EFSF. While the Commission 
and IMF worked out and oversaw economic reforms, and the IMF 

7 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

co-financed the emergency loans, the ECB focused on banking system 
stability while keeping an eye on macro-critical developments.

It was natural for the Commission and ECB as EU institutions to 
share in the crisis management, but the idea of bringing in the IMF 
took some getting used to. For one thing, the Washington-based 
lender specialised in rehabilitating less developed economies, not the 
advanced economies of the euro area. 

Some also feared that falling back on outside aid would represent 
an admission of defeat and further sap confidence in the euro. The 
counterargument was that euro area stability was a global concern 
that required global action, and the IMF’s technical expertise was 
universally recognised.

‘I had conversations with senior officials in the EU, notably my 
good friend [then ECB President] Jean-Claude Trichet, who if you 
remember was very outspoken about keeping the IMF out of Greece,’ 
recalled Lipsky, the IMF’s deputy managing director and then 
acting managing director during the first years of the crisis. ‘As he 
said, it wasn’t that he was against the IMF; he wanted the European 
governments to accept their responsibility.’ In Trichet’s view, the worst 
possible situation would have been for the Europeans to ask the IMF to 
do everything, so as to avoid taking on any responsibility or putting up 
any money themselves.

In the run-up to the crisis, Europe was already on the IMF’s radar 
screen. ‘Early warning’ exercises starting in September 2008 flagged 
the euro area as a potential trouble spot, Lipsky said. The IMF had 
concerns that ‘a financial crisis in one of the peripheral countries, 
small countries – perhaps Greece – would rapidly infect the  
major financial markets through commercial banks’ balance  
sheet exposures.’ 

As early as the spring of 2009, the IMF began making overtures to 
Ireland, remembers Kevin Cardiff, a senior Irish finance ministry 
official at the height of the crisis. Ireland then declined IMF assistance, 
for a number of reasons. One concern was that to seek IMF assistance 
in isolation would break ranks with the rest of the euro area. ‘We 
couldn’t afford to deal with the IMF and alienate the rest of Europe,’ 
Cardiff said. ‘We didn’t want to move ahead of European policy.’

The IMF had experience in the non-euro EU, most recently coming to 
the rescue of Hungary in 2008 with loans and a negotiated debt freeze 

 C H A P T E R   8   —   EN T E R  T H E  T R O IkA :  T H E   EU R O P E A N   CO M M I S S I O N ,  T H E   I M F,  T H E   E C B    

  7 9

from commercial banks – but that didn’t make its European welcome 
any warmer when problems in Greece began69.

‘I was very hopeful that the message would have been learnt that a 
rapid and credible response was essential,’ Lipsky said. ‘Instead, as Greek 
markets began to collapse, the decision was taken to keep the IMF out. 
The Commission was going to handle the situation all by itself without 
any mechanism, without a backstop, and with no financial backing. It 
was very distressing, as it seemed a hugely high-risk strategy was being 
followed, when better alternatives were available readily.’ 

Reform programmes designed to regain market access and foster 
economic recovery are the IMF’s core duties, and it offers the added 
bonus that its refinancing is managed by central bankers and doesn’t 
wind up on the balance sheets of individual member states. 

For the first Greek programme, the IMF brought crisis management 
expertise that, at the time, was in short supply at the EU level, and 
it provided one third of the rescue loans. The arrangement was 
transactional, on the expectation that the Greek rescue would be a 
one-off event.

‘At the beginning, the Commission was not equipped to do this job, but 
they learned very rapidly to do it well,’ said Wieser, former chairman of 
the Eurogroup Working Group.

Debate over the institutional line-up intensified when plummeting 
markets forced the establishment of the temporary EFSF, and European 
officials began thinking out loud about a permanent successor. Schäuble, 
then German finance minister, was initially sceptical about outsourcing 
some of the crisis management, but was swayed in part by doubts 
within Germany about the Commission’s capacity to impose adjustment 
programmes along the lines of the IMF’s work in Asia or Latin America.

‘My own view was that we Europeans should be able to manage this 
ourselves. But there were certain reservations in Germany,’ Schäuble 
said. ‘We came to the conclusion that it would be better if the IMF was 
involved. After all, people trusted the IMF – it was seen as responsible, 
reliable, and neutral in the way it interpreted the figures. We wanted to 
have the IMF on board because its expertise in helping highly indebted 

69  IMF (2008), ‘IMF survey: IMF agrees $15.7 billion loan to bolster Hungary’s finances’, 

6 November 2008. https://www.imf.org/en/News/Articles/2015/09/28/04/53/socar110608a 

8 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

countries is unrivalled, and because it does not pull its punches when it 
comes to exposing the need for reforms in these countries.’ 

The US, the IMF’s largest shareholder, understood the euro area’s 
effort to keep things in-house. Geithner, former US Treasury secretary, 
said turning to outside funding sources ‘seemed to me deeply 
counterproductive to the strategy, which was fundamentally a lack of 
confidence in Europe’s ability and willingness to solve this.’ A former 
director of the IMF’s policy development and review department, 
Geithner said there was an abundance of reasons for Europe to take 
the lead. ‘Germany’s understandable reluctance to be the sole provider 
of fiscal resources was not a sufficient reason for the world to deploy 
resources and to limit Germany’s exposure,’ he said.

Lagarde experienced both sides of the question, as French finance 
minister at the outbreak of the crisis and then from mid-2011 as the 
IMF’s managing director. From her perspective, Europe could have 
contained the crisis independently, had it recognised early on what was 
brewing and been able to get ahead of the curve. 

‘Had we taken that view and convinced [others] a year earlier, the crisis 
could probably have been solved amongst Europeans and the IMF 
might have been unnecessary,’ Lagarde said. ‘But where we were, where 
the markets had pushed Greece, and with the new numbers coming 
out almost on a monthly basis from Greece, there’s no doubt in my 
mind that the IMF actually helped address the issue.’ 

Working within the euro area meant that the Washington-based 
lender would need to work closely with its European partners. It was a 
learning experience for all involved, said David Lipton, the first deputy 
managing director of the IMF. Each institution had decision makers 
back in its base that it, in turn, would need to work with. For example, 
the Commission and the ECB had no previous track record with 
rescue programmes, ‘so there was a process of them gearing up, staffing 
up and getting experience, and then of course of the different partners 
learning how to interact with each other,’ he said. 

‘It was clear that the rest of the currency zone was going to be playing an 
important role of support,’ Lipton added. ‘If the troika hadn’t existed we’d 
have had to invent it – it meant that we had to do business in a different 
way. It was clear that there was going to need to be a lot of consultation.’

EU policymakers took steps to enshrine the institutional arrangements 
in setting up the EFSF, stating in the framework agreement that it 

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is ‘envisaged that aid from the temporary fund would be provided 
‘in conjunction with the IMF’70. While the European leadership 
couldn’t speak for the IMF, it became all the more critical to define 
the institutional division of labour as the discussion shifted to the 
permanent fund.

On the European side, the objective was to incorporate the IMF’s 
institutional knowledge while avoiding too many constraints on future 
policies. ‘There were some member states in the euro area that very 
much wanted the IMF to be on board,’ said Alexander den Ruijter, an 
ESM risk officer who was working at the Dutch finance ministry when 
the crisis struck. ‘At the same time they said: “If the ESM is going to 
be a permanent vehicle, then do we really want the IMF to be always 
there?” That’s a big question. Always means forever.’

Supporters made the case that the IMF would bring objectivity, a crucial 
selling point given splits among EU policymakers. Because of its global 
perspective, the IMF was seen as insulated from the kind of political 
trade-offs that often played a role in European economic policy. 

‘The participation of the IMF has been quite instrumental in keeping 
us all on our toes,’ Wieser said. ‘The design and implementation of a 
decent adjustment programme simply needs an outside, neutral, and 
more or less independent institution.’

On the other hand, inviting in outside help raised the concern that 
the euro area would be giving up some of its autonomy. At one point, 
the IMF debate became a distraction. During discussions in 2011 over 
adding to the rescue resources, the European conversation veered 
towards expanding the IMF’s lending capacity, fuelling a perception 
that euro area leaders were unwilling to confront the crisis head-on.

As the troika took shape, the new institutional landscape wasn’t always 
easy to navigate. Unlike the IMF, endowed with a narrowly defined 
global mission, the Commission’s mandates go far beyond economic 
policy. It also serves as guardian of the EU treaties, initiator of EU 
legislation, supervisor of the EU’s foreign aid budget, steward of 
agriculture policy, negotiator of trade agreements, and arbiter of cross-
border mergers and acquisitions – to give a far from exhaustive list.

70  EFSF Framework Agreement (as amended with effect from the Effective Date of the 

Amendments), Consolidated version, p. 1, 6 July 2010.  
https://www.esm.europa.eu/sites/default/files/20111019_efsf_framework_agreement_en.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Not all of the Commission’s responsibilities coexist smoothly. It treads 
a complex economic, legislative, and institutional path in applying 
state aid rules to some governments’ capital injections in banks, for 
example. And, in European policymaking, the Commission often plays 
a peacemaker role that sits uneasily with a duty to call out and, in some 
cases, impose sanctions on governments that stray from common 
European priorities.

Within the troika, the Commission provided economic policy 
oversight and in-depth analysis on fiscal issues, structural reforms, 
and macroeconomic imbalances as part of its daily duties. ‘We have a 
long and competent tradition of economic policy surveillance of the 
countries,’ said Rehn, the former European commissioner for economic 
and monetary affairs and the euro.

Enforcement, however, often runs into political barriers. Under the 
EU’s stability and growth pact, the Commission monitors national 
adherence to fiscal limits and it can call on a government to correct 
excessive deficits and debt. But its ability to insist – or impose sanctions 
if ignored – depends in large part on EU Member States’ voluntary 
submission to the rules. In 2005, EU governments amended the rules, 
after Germany and France had surpassed the limits in earlier years.

Because of that history, some member states questioned if the EU 
policy apparatus as it was then constituted would be able to impose 
sufficient discipline on programme countries. These sensitivities were 
a major reason why the euro area created an independent firewall, 
instead of entrusting the Commission with the powers to run a large 
crisis-fighting budget. 

As a result, the Commission was always in the middle of the action, 
but with its authority circumscribed. In the first Greek programme, the 
Commission coordinated the bilateral loans that made up the Greek 
Loan Facility yet worked alongside the IMF. 

As Wieser put it: ‘I’ve got great sympathy for this uncomfortable dual 
role that the Commission has been thrust into, especially in the case of 
Greece. It simply should not be the role of the Commission to be the 
sometimes punitive surveying institution, which has to ram through a 
programme against political opposition in a member state.’

In the end, that responsibility rested with the troika, as directed by the 
Eurogroup. It wasn’t long before the three institutions, yoked together 
by economic necessity, began to feel the political heat themselves.

Courting a top credit 
rating: preparing for  
the markets

9

We spent three months of our lives working  

with the rating agencies.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

With the creation of the EFSF, euro area member states 

found an innovative way to support one another, despite 
the dents in mutual trust. However, before the fledgling 

EFSF could raise a cent on the capital markets, it needed the 
endorsements of three large credit-rating companies that advise on 
what much of the market is willing to buy, sell, and hold: Moody’s, 
Standard & Poor’s, and Fitch.

Heading into the second half of 2010, getting the debut credit ratings 
for the new euro area fund would be the priority for EFSF CEO 
Regling and Chief Economist Strauch. A top rating was essential  
to keep issuing costs as low as possible – and to establish a good  
global reputation.

The rating agencies, which act as a go-between to help investors 
assess the risks of different issuers, were the central players in this 
process. For the new and untested EFSF, investors needed the external 
assurance that only a top rating from the three big agencies would 
afford. Banks, pension funds, and insurance companies have internal 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

rules that often forbid investing in debt unless it meets strict rating 
requirements. 

‘It was essential that the EFSF have a good credit rating,’ said den Ruijter, 
then an officer in the Dutch finance ministry and now one of the ESM’s 
risk officers. ‘Because the EFSF was going into the market to lend to 
countries no one else would, it needed to be absolutely credible.’ 

Obtaining a gold-standard rating, generally known as AAA, is difficult 
for any borrower because it certifies an issuer as one of the lowest-risk 
investment propositions. In general, a AAA grade is associated with 
fiscally sound sovereigns seen as virtually default-proof. Investors who 
buy highly rated securities receive a promise of safety, and in exchange 
they accept lower interest returns than they would get by entrusting 
their cash to riskier endeavours. If the EFSF were to secure a top rating, 
it could borrow from the markets at low rates. 

On the other hand, in creating the firewall, the euro area had set up a 
new kind of financial structure. Nothing like it had existed before: a 
private company, with public guarantees from several governments, that 
issues debt on capital markets to provide loans to countries that had 
lost market access. The EFSF’s closest equivalent is the EU’s EIB, which 
also turns to the capital markets to raise funds, but unlike the EFSF has 
both subscribed and paid-in capital to stand behind its bonds. The EFSF 
would be borrowing strictly on the strength of euro area guarantees.

‘It was very hard for the rating agencies to understand,’ Strauch said. 
‘Also for investors, it took quite some education to get there because it 
was completely new.’

The novelty meant the rating agencies could not rely on benchmarking 
against other such organisations, part of their traditional toolkit. 
They needed to commit time and resources to analysing the new 
EFSF, which in turn had to explain itself in painstaking detail. It fell 
to Regling and Strauch to ensure the rating firms understood the 
mechanism so that the EFSF could get the AAA it sought. 

‘Neither Klaus nor I had any primary rating experience, so getting a 
rating for a new unknown institution that has a complex structure was 
a challenge,’ Strauch said. The German Finance Agency, which would 
handle the EFSF’s initial borrowing operations, sent reinforcements. 
The duo then turned to a US investment bank for advice as they set 

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about trying to convince the big three rating agencies that the EFSF 
would be a worthy borrower. 

But good advice wasn’t enough to get a high-quality rating overnight. 
‘We went out and tried to get it. We didn’t get it in the first round,’ 
Strauch said.

As he and Strauch went back to the drawing board, Regling was  
fully aware that the EFSF faced more than the usual challenges.  
And he needed no reminding of the delicate nature of the credit 
rating situation, having just wrapped up his analysis of the causes 
of the Irish crisis and the global financial crisis more generally, in 
which he found fault with the rating agencies for taking a sometimes 
cavalier approach. 

In A preliminary report on the sources of Ireland’s banking crisis, Regling 
and Watson, his co-author, spoke plainly: ‘[…] rating agencies, the 
custodians of security assessment, dropped their guard, at best.’ They 
added that the core problem was ‘their readiness to classify as Triple-A, 
or close to Triple-A, complex securities based on re-packaged assets’71. 
In other words, Regling and Watson had accused the agencies of giving 
away the AAA rating lightly. 

This put the new, untried EFSF in an uncomfortable position when 
pursuing that same rating. ‘That was particularly tricky, because we 
wanted a AAA after criticising them for two years that they had given 
away the AAA too easily. They had promised to become stricter, but 
now we came along saying: “But we are different. We want a AAA,”’ 
Regling said.

The process had two stages: the EFSF had to gain a provisional issuer 
rating first, and then secure a final rating with the specifics of the 
security due to be sold. This required an elaborate presentation, along 
with draft documentation, explanations of the fund’s guarantees, and 
other details of how the programme would work. 

71  Regling, K., Watson, M. (2010), A preliminary report on the sources of Ireland’s banking crisis, 
Government Publications Office, Dublin. http://www.bankinginquiry.gov.ie/Preliminary%20
Report%20into%20Ireland%27s%20Banking%20Crisis%2031%20May%202010.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Each rating company had its own procedures. Moody’s, for example, 
outlines a nine-step process that kicks off with a meeting to collect 
data72. This is analysed and condensed into a recommendation 
made to an internal review board, whose decision is then made 
public. Follow-up monitoring is continuous. Standard & Poor’s 
has requirements including quantitative and qualitative data, 
ranging from historical and projected financial information, peer 
comparisons, governance framework, financial strategy, to the 
experience and credibility of management73. Fitch carries out yet 
another approach, looking at the big picture and running various due 
diligence checks74.

As the process got underway, questions poured in from analysts 
across the rating agencies’ departments – structured finance, banking, 
sovereign ratings, and of course international financial institutions. All 
sought assurances that requirements in their areas would be met.

‘I remember, for example, they would put out the standards for us, the 
structures for the guarantee mechanism that would be in line with 
their requirements for some structured finance products,’ Strauch said. 
‘You had to go detail by detail to make it work from their perspective.’

The analysts wanted to know how the EFSF’s capital call mechanism 
would work, the possible time periods involved, each country’s 
individual requirements for being informed, and who should pay 
what if the capital got called in. It was also important to sort out to 
whom bond investors could turn in a default and when the money 
could be collected.

‘All that was completely new and had to be reviewed,’ Strauch said. 
The combined effect of negotiating each small detail could get ‘very 
tedious’. 

72  Moody’s (n.d.), ‘Ratings process: Moody’s process’. https://www.moodys.com/Pages/amr002001.aspx
73  Standard & Poor’s Global Ratings (2018), ‘General description of the credit rating 
process, as of May 16 2018’. https://www.standardandpoors.com/ru_RU/delegate/
getPDF?articleId=2053416&type=COMMENTS&subType=REGULATORY
74  FitchRatings (n.d.), ‘Rating criteria’. https://www.fitchratings.com/site/criteria 

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In particular, the agencies wanted to understand the guarantees from 
euro area member states that support the EFSF. These guarantees 
provide assurance to investors that the fund is underpinned by 
credible sovereign issuers with a long history of reliable public 
borrowing. The EFSF has no capital of its own – a key compromise in 
the temporary fund’s design. Instead, euro area member states back 
the bonds the EFSF issues. And because the member states don’t put 
up any cash – with the exception of a small start-up contribution – 
the structure protects euro area taxpayers from direct exposure to the 
programme countries. 

Under the EFSF’s initial design, it had €440 billion in guarantees, equal 
to its intended lending capacity. This structure paved the way for the 
EFSF to win approval from euro area governments: the guarantees 
backed the EFSF’s marketable borrowing, not the loans to the 
programme countries. It represented a diplomatic coup at a moment 
when the euro area needed urgent action. 

However, as the EFSF approached the markets, the guarantees went 
under the microscope. Regling explains: ‘The rating agencies wanted to 
know how strong the legal certainty is. Because if a government after 
an election in 10 years says, ‘I don’t care what my predecessors did a 
decade ago. We will ignore these guarantees,’ then the system would 
collapse. It’s set up in a way that this cannot happen. These guarantees 
cannot be withdrawn. They are watertight. But this had to be proven, 
so lawyers from the different rating agencies had to look into the legal 
systems of each euro area country.’

The initial plan was that all euro area countries would pool their 
reputations, with the reasoning that any group on this scale, and 
including so many wealthy countries, would be enough to impress 
the markets. 

But not so fast. Investors quickly deduced that if, say, Portugal was 
having trouble borrowing on its own, its share of the guarantees 
wouldn’t count for much. This was one of the first hurdles in the quest 
for a top rating, which became more of an odyssey than expected.

8 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘It became clear relatively soon that what we aimed for – AAA – would 
not fly,’ Strauch said. Under the EFSF’s original design, the initial 
feedback was not even good enough for an AA-range rating, and that 
certainly wasn’t going to cut it for the firewall’s debut. At that point, the 
give-and-take kicked into a higher gear. ‘They give you feedback and 
say if you want to get an AAA then you need to do these things – and 
eventually that is what we did,’ Strauch said. 

A key problem was that rating agencies would not count guarantees 
from countries whose sovereign debt was not itself rated AAA 
towards the EFSF’s AAA borrowing capacity. At the time the EFSF 
was set up, about 60% of member states had ratings lower than AAA.

‘We had to rethink the structure,’ Strauch said. ‘It all boiled down to  
the need to get some cash in the box, some assets somewhere to back 
our issuance.’ 

The first step to shore up the EFSF’s creditworthiness was for euro area 
members to increase the size of the guarantees. The countries therefore 
agreed in June 2010 to guarantee up to 120% of each bond issuance 
instead of just the face value75. This additional guarantee was a step in 
the right direction but wasn’t enough to satisfy the questions from the 
rating agencies.

The next step was to add a cash cushion created by extra borrowing, on 
top of what was needed for programme disbursements. This scheme 
effectively led to the EFSF retaining about 27% of the cash receipts 
from the bonds issued. Alongside the member state guarantees, the 
cash buffer would reassure the markets and act as an effective credit 
enhancement of the issued bond. 

In practical terms, this meant higher costs for countries that entered 
programmes during this period. The first two countries with EFSF 
programmes – Ireland and Portugal – had to pay fees and interest on 
all the cash borrowed on their behalf, not just the amount available 
to them in disbursement76. But, at the same time, the overguarantee 
structure made it possible for EFSF loans to go ahead. 

75  Terms of reference of the Eurogroup European Financial Stability Facility (2010), 7 June 2010. 
https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/114977.pdf 

76  Cash from the overborrowing (cash reserve) was invested in high-quality liquid debt instruments 

while retained. The investments and profit and loss results were reimbursed to Ireland and 
Portugal following the maturity of bonds that funded those loans. 

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‘It was expensive for the programme countries because you needed to 
over-issue a lot,’ Strauch said. Nonetheless, an EFSF programme using 
this approach was still cheaper than the alternative of foregoing the 
AAA rating, because it allowed the EFSF to tap the market at a lower 
cost of funding.

As the team put these plans into practice, different models were 
considered in hopes of finding a technical solution that would meet  
all of the varied requirements.

Something had to give, and that turned out to be the EFSF’s 
€440 billion total capacity. The overguarantees would work, but the 
trade-off was that they reduced the EFSF’s lending capacity to around 
€250 billion, a lot less than the initial EFSF topline. 

‘We amended the structure but at the expense of the volume,’ Strauch 
said. Only when the member states opted in 2011 to increase the 
overall guarantees to €780 billion and the overguarantee to 165%77 of 
the issued amount, up from the 120% agreed in 2010, would the fund’s 
full €440 billion capacity become available.

Former German Finance Minister Schäuble said the guarantee increase 
became possible after EFSF Members accepted the ‘basic idea’ that 
Members with an AAA rating assumed some responsibility for the 
other guarantors. ‘As a result, it was possible to pass on favourable 
interest rates to the programme countries, which were largely 
disconnected from the capital markets. This gave them the time they 
needed to carry out reforms. In that respect, we backed the EFSF 
model,’ Schäuble said. 

As the EFSF evolved, it became less reliant on maintaining a top 
rating at all times, and the euro area was able to lower the interest 
rates charged to programme countries. But in the early days, the 
negotiations to map out the full extension of the guarantee system  
were needed to start the fund off on the right footing. Later on, the 
ESM, with its paid-in capital structure, would do away with some of 

77  EFSF Framework Agreement (as amended with effect from the Effective Date of the 

Amendments), Consolidated version, p. 7, 6 July 2010.  
https://www.esm.europa.eu/sites/default/files/20111019_efsf_framework_agreement_en.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

the limitations inherent in the EFSF’s guarantee structure. However, 
the initial system served its purpose, allowing the EFSF to achieve the 
rating – and the reputation – it needed to fulfil its mission. 

Political and technical compromises in hand, in September 2010 
Regling and Strauch secured the best possible provisional first-time 
credit rating for the EFSF from each of the top three: AAA from 
Standard & Poor’s, Aaa from Moody’s, and AAA from Fitch. 

Credit rating history continues in Chapter 29.

For the EFSF’s complete rating history, 
see Annex – ‘EFSF and ESM rating history’.

Testing the EFSF:  
the case of Ireland

10

At some points, we were having a crisis every 
single day. If you’re sick, you can’t be. You cannot 
be absent. Once your banks start to get rocky, it’s 
like a waterlogged boat. Just small little waves 
might sink you. 

Kevin Cardiff 
Senior Irish Finance Ministry official (2006–2010)

A potent mix of recession and banking crisis had pushed Irish 

government finances to the edge. With better bank governance 
and an eye towards fending off the worst excesses of a 

boom-bust cycle, Ireland might have been able to avert the debacle. 
Instead, policymakers not only struggled to tame the excesses, they 
overextended government finances to rescue the banks amid concerns 
that failure to support them would have had its own extensive costs. 

When Ireland turned to Europe’s brand-new firewall, it had already spent 
two years trying to curb its housing boom and pull its banks onto a more 
even keel. It was an uphill battle; Irish culture strongly favours home 
buying, and Ireland had never experienced a widespread real estate bust. 
On top of that, aggressive banking practices encouraged borrowers to 
take on ever more credit, in turn saddling the banks with life-threatening 
levels of bad loans. When the US financial crisis hit in 2008 and sparked 
global banking turmoil, the Irish banks were especially vulnerable.

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1 January 
Ireland adopts the euro.

Strong economic expansion driven by construction sector; economy 
overheats and loses competitiveness.

Construction boom ends and property prices start falling, exposing 
severe vulnerabilities in the Irish banking system.

30 September 
Government issues guarantee for banks’ liabilities.

21 December 
Finance Minister Brian Lenihan announces plan to recapitalise three 
main banks: Allied Irish Bank, Bank of Ireland, and Anglo Irish Bank.

15 January  
Government announces nationalisation of Anglo Irish Bank after 
determining recapitalisation is insufficient.

30 March 
Standard & Poor’s downgrade: AA+ from AAA, the first in a series of 
downgrades resulting in the July 2011 loss of investment grade.

22 November 
National Asset Management Agency Act 2009 becomes law, 
creating a ‘bad bank’ that becomes operational in December.

30 September 
Lenihan says that banking sector support will cause a ‘substantial 
spike’ in the fiscal deficit.

21 November
• Ireland requests financial assistance from the EU, euro area 

countries, and the IMF. 

• EU finance ministers agree to provide assistance through what 

will become the EFSF’s first programme. The €85 billion package 
– financed by the EFSM with bilateral contributions from Denmark, 
Sweden, and the UK, including €22.5 billion from the IMF – is 
formally agreed in December. 

1 February 
First EFSF loan tranche disbursement (€3.6 billion). 

26 July 
Ireland returns to international capital markets with 5-year bond 
sale, raising €500 million.

8 December 
Ireland successfully exits financial assistance programme.

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  9 3

House price index — Ireland 
(2015=100)

160

140

120

100

80

60

0
0
0
2

1
0
0
2

2
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

9
0
0
2

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

From boom to bust: 
house prices told the tale 
of Ireland’s economic 
fortunes.

Source: Eurostat

In September 2008, in a bid to preserve financial stability the Irish 
government offered a sovereign guarantee of bank liabilities78. 
The Irish Times said that covering up to €440 billion of customer 
deposits and banks’ own lending was ‘the biggest financial gamble, 
and arguably the biggest policy decision, ever taken by an Irish 
government’79. Brian Lenihan, then-finance minister, said the Irish 
banking sector support would lead to a ‘very substantial spike’ in the 
fiscal deficit80.

The move made the Irish taxpayer responsible for losses, but even 
that wasn’t enough. In December 2008, the government announced a 
bank recapitalisation programme, and in January 2009 it nationalised 
Anglo Irish Bank81. That November, it rolled out the National Asset 

78  European Commission, Directorate-General for Economic and Financial Affairs (2011), ‘The 
Economic Adjustment Programme for Ireland’, European Economy Occasional Papers 76, p. 5, 
February 2011.

79  Irish Times (2010), ‘The big gamble: The inside story of the bank guarantee’, September 2010. 

https://www.irishtimes.com/news/the-big-gamble-the-inside-story-of-the-bank-guarantee-1.655629

80  Ireland, Department of Finance (2010), ‘Minister’s statement on banking 30 September 2010’,  
Press release, 30 September 2010. https://www.finance.gov.ie/updates/ministers-statement-on-
banking-30-september-2010/

81  Irish Times (2010), ‘Anglo Irish Bank – a timeline’, 30 September 2010.  

https://www.irishtimes.com/news/anglo-irish-bank-a-timeline-1.864923;  
Guardian (2009), ‘Anglo Irish Bank nationalised’, 15 January 2009.  
https://www.theguardian.com/business/2009/jan/15/anglo-irish-bank-nationalisation

 
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Management Agency82 to tackle the bad-loan backlog and remove 
the riskiest land and property development loans from the banks’ 
balance sheets. 

Ireland’s situation triggered debates on when and how governments 
should step in and who should pay the price for failure. Throughout 
the crisis, Ireland was under heavy pressure from the ECB and others 
in the EU to protect senior bank bondholders, who enjoy a privileged 
position in the payout order in the event of a default. The senior 
bondholders maintained that advantage even later on, when losses 
could be imposed on junior creditors as part of the clean-up efforts. 
Although the ECB had supported the Irish bank guarantees in an 
October 2008 statement83, Ireland’s national guarantee on its banks’ 
obligations came to be seen as a mistake. 

Regling and Watson’s joint analysis of Ireland’s crisis, published in 
June 2010, found a number of ‘home-made’ factors that aggravated 
the impact of the crisis. ‘Official policies and banking practices in 
some cases added fuel to the fire,’ the report said. ‘Fiscal policy, bank 
governance and financial supervision left the economy vulnerable to a 
deep crisis’84.

In early May 2010, heading into the crucible weekend that forged 
the EFSF, markets were requiring high-risk premiums on Irish, 
Greek, Spanish, and Portuguese debt. Ireland was further slammed 
by a virtual shutdown in interbank lending among European banks, 
another sign of a looming systemic crisis. By August 2010, the two-
year sovereign bank guarantee was scheduled to expire and bond yields 
were heading up, while economic growth was slowing. In September, 
spreads reached a high of 449 basis points, meaning Ireland faced 
borrowing costs 4.49 percentage points higher than its top-rated euro 
area peers. Shortly thereafter, new estimates put its total expected bank 
rescue bill at €45 billion85.

82  National Asset Management Agency Act 2009, 22 November 2009.  
http://www.irishstatutebook.ie/eli/2009/act/34/enacted/en/html

83  ECB (2008), Recommendations of the Governing Council of the European Central Bank on 

government guarantees for bank debt, Frankfurt, 20 October 2008.  
http://www.ecb.europa.eu/pub/pdf/other/recommendations_on_guaranteesen.pdf

84  Regling, K., Watson, M. (2010), A preliminary report on the sources of Ireland’s banking crisis, p. 43, 
Government Publications Office, Dublin. http://www.bankinginquiry.gov.ie/Preliminary%20
Report%20into%20Ireland%27s%20Banking%20Crisis%2031%20May%202010.pdf

85  BBC (2010), ‘Irish deficit balloons after new bank bail-out’, 30 September 2010.  

https://www.bbc.com/news/business-11441473

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Then, on 18 October 2010, German Chancellor Merkel and French 
President Sarkozy took a walk on the beach in Deauville, France, and 
emerged with a handshake agreement that private investors shouldn’t 
be immune from losses in future sovereign debt crises. This meant that 
losses for creditors and investors, often called ‘haircuts’, could become 
de rigueur if euro area countries found themselves with unsustainable 
debt and in need of aid. The deal was struck as part of a broader 
agreement86 between France and Germany that aimed to improve the 
bloc’s budget rules as well as its rescue mechanisms.

The idea of enshrining debt restructuring in perpetuity sent 
shockwaves across the world’s bond markets, which have traditionally 
treated sovereign debt from developed countries as low-risk, or even 
risk-free, investments. In a 27 October speech to the Bundestag, 
Merkel explained that the Deauville compromise included plans to 
make bondholders, such as banks and hedge funds, share some of the 
costs of risky lending by sharing responsibility for coming to the rescue 
of states on the brink of insolvency. For France, the subject of an EU 
‘excessive deficit’ procedure from 2009 to 201887, agreeing to ‘adequate 
participation of private investors’ – that is to say, writedowns – was the 
price of securing a German retreat from a proposal to apply automatic 
sanctions to countries that flouted the rules of the stability and growth 
pact, according to observers88. 

‘The compromise was an awkward one: France agreed to start 
discussions on a German demand for a permanent crisis resolution 
framework ensuring that private creditors would share the burden 
of debt restructuring. In exchange, Germany renounced the idea of 
automatic sanctions for countries in violation of the fiscal discipline 
provisions of the stability and growth pact,’ wrote Jean Pisani-Ferry, 
a former policy advisor to the French government, in his 2014 book, 
The euro crisis and its aftermath89. 

86  France, Germany (2010), ‘Franco-German declaration: Statement for the France-Germany-Russia 

Summit’, 18 October 2010.  
https://www.eu.dk/~/media/files/eu/franco_german_declaration.ashx?la=da

87  European Commission (2018), Recommendation for a Council Decision abrogating Decision 

2009/414/EC on the existence of an excessive deficit in France, COM(2018) 433 final, 23 May 2018. 
https://ec.europa.eu/info/sites/info/files/economy-finance/com_2018_433_en.pdf

88  See, for example, Spiegel Online (2010), ‘EU agrees to Merkel’s controversial euro reforms’, 

29 October 2010. http://www.spiegel.de/international/europe/brussels-summit-eu-agrees-to-
merkel-s-controversial-euro-reforms-a-726103.html; or Financial Times (2010), ‘Franco-German 
bail-out pact divides EU’, 24 October 2010. https://www.ft.com/content/56984290-df96-11df-bed9-
00144feabdc0; or Brunnermeier, M., James, H., and Landau, J-P. (2016), The euro and the battle of 
ideas, Princeton University Press, p. 1. https://press.princeton.edu/titles/10828.html 

89  Pisani-Ferry, J. (2014), The euro crisis and its aftermath, p. 10, Oxford University Press, Oxford. 

 
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Financial markets were jolted by the debt-restructuring element of 
the deal. Some policymakers said it added to contagion woes in the 
euro area. 

‘The Deauville deal came unexpectedly. It showed that premature and 
spontaneous talk on debt restructuring can be very damaging to the 
credibility of the euro zone in financial markets,’ said Rehn, at the time 
the European commissioner for economic and monetary affairs and 
the euro. ‘When the Deauville deal was done it was lose-lose, both in 
terms of watering down the sanctions and in terms of prematurely 
and spontaneously raising the possibility of a debt restructuring.’ 
Trichet, then-ECB president, said that at the EU summit of 28 and 
29 October 2010 he had opposed the Deauville agreement, because it 
would be understood as an open invitation to speculate.

Government borrowing rates skyrocketed in Ireland, where the 
government’s balance sheet had ballooned, and the banks were 
receiving unsustainable levels of emergency support from the central 
bank. The Deauville deal directly put Ireland on the path to losing its 
market access, said Trichet. It also added to the re-pricing of risks that 
had already started in the markets. Investors began differentiating 
among euro area countries as never before, with a particular focus on 
countries that had accumulated large economic imbalances. Taken 
together, these developments amplified the contagion that would push 
Ireland into a rescue programme within weeks.

‘People tend to forget,’ Rehn said. ‘It was not evident that Ireland  
had to go into a programme. Probably they would have, but we don’t 
know that.’  

On 4 November 2010, Ireland announced record budget cuts of 
€15 billion90, but the yield on its 10-year bonds rose anyway to average 
a punishing 8.22% that month. Spreads to the 10-year German Bund 
widened that day to 526 basis points. At such elevated levels, sovereigns 
typically refrain from long-term issuance. The ECB also began putting 
pressure on Dublin to seek broader assistance.

90  Ireland, Department of Finance (2010), ‘Information note on the economic and budgetary outlook 

2011-2014’, Press release, 4 November 2010.  
http://www.finance.gov.ie/updates/information-note-on-the-economic-and-budgetary-outlook-
2011-2014-in-advance-of-publication-of-four-year-budgetary-plan/

'()*"!!+

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Ireland’s bank-rescue bill 
and broader concerns over 
potential euro area debt 
restructurings precipitated 
a rise in Irish interest rates 
at the height of the crisis, 
but Ireland then benefited 
from a good track record 
under the programme.

Source: European  
Central Bank

10-year government bond yield — Ireland 
in %, monthly average

November 2010: 
Ireland requests 
financial 
assistance

12

10

8

6

4

2

0

December 2013: 
Ireland exits programme

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
y
r
a
u
n
a
J

0
1
0
2
y
r
a
u
n
a
J

1
1
0
2
y
r
a
u
n
a
J

2
1
0
2
y
r
a
u
n
a
J

3
1
0
2
y
r
a
u
n
a
J

4
1
0
2
y
r
a
u
n
a
J

5
1
0
2
y
r
a
u
n
a
J

6
1
0
2
y
r
a
u
n
a
J

7
1
0
2
y
r
a
u
n
a
J

8
1
0
2
y
r
a
u
n
a
J

9
1
0
2
y
r
a
u
n
a
J

At this point, Irish banks were heavily dependent on the ECB’s tool for 
solvent financial institutions that are experiencing temporary cash flow 
problems, Eurosystem emergency liquidity assistance. Trichet later said 
that the total liquidity supply coming from the Eurosystem to Ireland 
was the largest in the euro area, surpassing 100% of Irish GDP. 

On 19 November, Trichet wrote to Lenihan to say the ECB would not 
continue to augment the emergency liquidity it had been providing 
unless Ireland sought a rescue programme91. Two days later, the 
government gave in.

‘I would like to inform you that the Irish Government has decided 
today to seek access to external support from the European and 
international support mechanisms,’ Lenihan wrote to Trichet on 
21 November. He called it a ‘grave and serious decision’92.

91  ECB (2010), Letter written by Jean-Claude Trichet to Brian Lenihan, reclassified for publication 
on 6 November 2014, 19 November 2010. https://www.ecb.europa.eu/press/shared/pdf/2010-11-
19_Letter_ECB_President_to%20IE_FinMin.pdf?31295060a74c0ffe738a12cd9139f578

92  Ireland, Department of Finance (2010), Letter written by Brian Lenihan to Jean-Claude Trichet, 

reclassified for publication on 6 November 2014, 21 November 2010. 
https://www.ecb.europa.eu/press/shared/pdf/2010-11-21_Letter_IE%20FinMin_to_ECB_%20
President.pdf?432af7ba36b71099b55893b819ae2502

 
 
 
 
 
 
 
 
 
 
 
 
 
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The same day, the IMF said it stood ready to join in the rescue effort. 
EU and euro area finance ministers also put out a statement saying 
they were prepared to move ahead, pledging to finalise the deal in 
early December93.

EU finance ministers officially approved the agreed rescue package at 
their 6 and 7 December meeting94. The package envisaged €85 billion 
in assistance, of which Ireland itself provided €17.5 billion. Others 
delivered the remaining €67.5 billion, including €17.7 billion in loans 
from the fledgling EFSF95, whose board assented on 21 December 
following the IMF.

In exchange for international assistance, Ireland pledged to shrink its 
banking sector, tighten financial regulation, rein in public spending, and 
enact structural reforms aimed at boosting growth. Specifically, the Irish 
agreed to open up service sectors that had been protected, and also to 
pursue wage adjustments in a bid to make the country more competitive. 

General government fiscal balance — Ireland 
in % of GDP

5

0

-5

-10

-15

-20

-25

-30

-35

Ireland racked up enormous 
deficits in providing aid for 
its overindebted banks.

Source: Eurostat

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

93  Statement by the Eurogroup and Ecofin Ministers, 21 November 2010.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/117898.pdf 

94  3054th Council meeting Economic and Financial Affairs, Press release, No. 333, 7 December 2010. 

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/118290.pdf

95  Council Implementing decision on granting Union financial assistance to Ireland, 

Interinstitutional file, 2010/0351(NLE), 7 December 2010. 
http://data.consilium.europa.eu/doc/document/ST-17211-2010-INIT/en/pdf

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From the start, Irish authorities were determined to show the 
international community that they were serious about overhauling 
their economy. ‘Ireland has proved so far to be flexible and aggressive 
in dealing with its problems and will continue to be so,’ Lenihan said in 
his letter to Trichet96.

In the days leading up to the programme, Irish officials fought hard to 
make sure the reforms required were things they could deliver. 

‘All the incentives are to pre-negotiate as much as possible,’ said 
Ireland’s Cardiff, at the time one of Lenihan’s senior deputies. ‘In 
fairness, the other side also wanted that because the one thing no one 
wanted was that you’d have a promise that there would be a deal and 
then it couldn’t be finalised. That could be terrible.’

In the run-up to the aid negotiations, Ireland had sought to keep 
its distance from the IMF in order not to spook investors. It could 
negotiate with its euro area peers on the sidelines of regular meetings, 
but direct talks would have signalled that Ireland was in need of a 
rescue package and therefore on the brink. ‘The IMF was like a little 
explosive, once you introduced the name into a conversation,’ Cardiff 
said. If IMF officials came for a special meeting, ‘then that became a 
signal to the market of some sort.’

This signalling was especially significant because Ireland would 
become the first country to seek aid under the new EFSF firewall 
system. The country might have benefited from looking to outside 
help sooner – in 2017, an evaluation report of EFSF and ESM 
activities found that Ireland could have requested a programme as 
early as April or May 2009 – but at that time there was no euro area 
mechanism in place. 

In Cardiff ’s view, Ireland had every incentive to wait until the outlines 
of the deal would be clear to make its request for aid. Otherwise 
international officials might have pressured Ireland to make changes 
out of step with Irish economic priorities, Cardiff said. ‘People really 
want to help, but they’re also policymakers with administrations 
behind them, and people are saying, “We waited 10 years to have a 
moment when we could ask for this, that, or the other.”’

96  Ireland, Department of Finance (2010), Letter written by Brian Lenihan to Jean-Claude Trichet, 

Reclassified for publication on 6 November 2014, 21 November 2010.  
https://www.ecb.europa.eu/press/shared/pdf/2010-11-21_Letter_IE%20FinMin_to_ECB_%20
President.pdf?432af7ba36b71099b55893b819ae2502

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The final negotiations came down to just a few days in mid-November. 
As Cardiff describes it: ‘We were trying to say what would be in the 
programme. I remember being on the phone back to Dublin to the 
minister saying: “After trying hard I finally have a list. It’s not that 
ambitious, we might actually do more than they’re asking.” Our own 
list of economic conditionality was a bit bigger than the proposal.’

By this point, Regling had built the core of his firewall and was 
laying the groundwork for the EFSF’s financial market debut. Cardiff 
remembers him at a euro area finance ministers meeting just before the 
deal went through – present, but keeping a low profile, in conformity 
with the EFSF’s initial technocratic design.

Ireland proved a test case for the rescue model on a number of fronts. 
It faced relatively high interest rates from the EFSF because the 
consensus at the time was that support programmes should be a last 
resort to be quickly exited, and therefore made economically relatively 
unattractive. The IMF provides loans at shorter maturities with interest 
rates also geared towards encouraging programme exit. But euro area 
countries later twice adjusted their approach, offering in 2011 and 2013 
an easing of loan terms to Ireland and Portugal, once it became clear 
that high borrowing costs hindered rather than helped the countries’ 
efforts to restore access to financial markets. 

As the programme progressed, Ireland became a positive case study 
for the euro area model of providing conditional financial assistance 
to countries in need. The Irish 10-year government bond yield, which 
had peaked at a monthly average of 12% in July 2011, would steadily 
decline through 2012, giving the Irish authorities some breathing 
room. In the first half of 2012, the Irish debt agency resumed selling 
short-term paper on the financial markets. In July 2012, the Irish debt 
agency sold its first bond, and since then the country has made a point 
of rolling over existing debt and managing its budget so that it has 
close to a year of financing on hand at all times.

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Irish programme (2010–2013)

Initial programme amount: €85 billion, including Irish national funds  
of €17.5 billion

Total amount disbursed: €67.5 billion, of which the EFSF provided 
€17.7 billion, the EFSM/EU €22.5 billion, the IMF €22.5 billion,  
and Denmark, Sweden, and the UK €4.8 billion

Lenders: EFSF, EFSM, bilaterals, IMF 

Final weighted average maturity (EFSF loans): 20.7 years 

Key legislated reforms: financial sector strategy (downsizing, 
reorganisation of banking sector); strategy to restore fiscal 
sustainability (reducing expenditure, tax system reform, generation of 
additional revenue); structural reform package 

‘We wanted to deal with our own situation,’ Cardiff said. ‘There  
was, at that point at least, determination in the government to 
address the problems fully. There was no one trying to say “let’s do 
half a job here.”’ 

Wieser, former chairman of the Eurogroup Working Group, agreed 
that the Irish recognised that they were authors of their own 
misfortune. The programme largely covered the financial reforms 
they themselves knew needed implementing. ‘With one or two 
extremely important exceptions, the programme design followed 
very much the Irish economic policy restructuring plans, which they 
themselves had drawn up,’ Wieser said. ‘It is more a matter of the 
political system and the sociological conditions in a country whether 
there is the perception of being against the wall or not. If you look at 
the five different programme countries, in Ireland there is the highest 
degree of perception that they were instrumental themselves in 
causing this mess.’

Ownership was present in Ireland from the rescue’s beginning. The 
Irish Times, in an opinion piece on 18 November 2010, in the end 
stage of the negotiations, echoed Greek resentment at the need to 
request outside aid, but also recognised domestic responsibility 
for what had happened. ‘We have surrendered our sovereignty to 
the European Commission, the European Central Bank, and the 
International Monetary Fund. […] The true ignominy of our current 
situation is not that our sovereignty has been taken away from us, it 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

is that we ourselves have squandered it.[…] It is the incompetence 
of the governments we ourselves elected that has so deeply 
compromised our capacity to make our own decisions’97.

The EFSF disbursed the first tranche of €3.6 billion to Ireland at the 
start of February 2011. Setting a pattern for other aid recipients, 
Ireland made its first cautious return to market financing during 
its programme, in July 2012, with a 5-year bond sale that raised 
€500 million98. 

‘That sense of ownership was essential to Ireland’s eventual success 
with its programme,’ said Chief Economist Strauch. Ireland also 
benefited from its willingness to engage fully with the global economy, 
which led to a strong economic recovery once it had overcome the 
worst of the crisis, Strauch said, adding: ‘That’s basically because 
Ireland is a small, open economy. Once you’re over what was really a 
bubble, then you can grow fairly rapidly.’ 

By sticking to its economic commitments, Ireland was able to make 
a clean exit from its rescue programme in December 2013. A year 
later, it repaid the first tranche of its IMF loans ahead of schedule. By 
March 2015, it had completely repaid the most expensive part of its 
IMF assistance, roughly €18 billion in loans that had been scheduled 
for repayment between July 2015 and January 202199. By 2018, it had 
repaid the IMF in full, as well as Denmark and Sweden100. 

Schäuble, the former finance minister of Germany, paid tribute to 
Ireland’s success. ‘Ireland has successfully downsized and consolidated 
its bloated banking sector and is now one of the EU’s most dynamic 
economies once again.’

97  The Irish Times (2010), ‘Was it for this?’, 18 November 2010.  

https://www.irishtimes.com/opinion/was-it-for-this-1.678424 

98  Ireland, National Treasury Management Agency (2012), ‘NTMA announces bond switch and 

outright sale’, 26 July 2012.  
https://www.ntma.ie/news/ntma-announces-bond-switch-and-outright-sale;  
for a fuller assessment of how four programme countries approached the restoration of market 
access, see Strauch, R., Rojas, J., O’Connor, F., Casalinho, C., de Ramón-Lapa Clausen, P., 
Kalozois, P. (2016), Accessing sovereign markets: The recent experiences of Ireland, Portugal, Spain, 
and Cyprus, ESM, Discussion Paper 2, 20 June 2016.  
https://www.esm.europa.eu/sites/default/files/esmdp2final.pdf

99  Ireland, National Treasury Management Agency (n.d.), ‘EU/IMF programme summary’.  

https://www.ntma.ie/business-areas/funding-and-debt-management/other/eu-imf-programme
100  Ireland, National Treasury Management Agency (2017), ‘NTMA completes further €5.5 billion 

early repayment of EU/IMF programme loans’, 20 December 2017.  
http://www.ntma.ie/news/2017/12/20/ntma-completes-further-e5-5-billion-early-repayment-of-
euimf-programme-loans/

A phone, a laptop, and 
an espresso machine: 
start-up culture

11

It felt like we were flying a plane while we were 

still building the engine.

Kalin Anev Janse 
ESM/EFSF Secretary General

A small suite of old-fashioned offices provided the firewall’s 

first home. Even those were a step up from Regling’s personal 
laptop and telephone, which constituted the fund’s entire 

infrastructure for his first weeks as chief executive in June 2010. When 
Regling was hired, the EFSF existed on paper only. The rescue fund 
needed to be built from the ground up, under intense time pressure.

‘My contract started on the 1st of July, but I basically started working 
in the middle of June, just going back and forth between Brussels and 
Luxembourg,’ Regling recalled. 

After the decision was taken to base the EFSF in Luxembourg, 
Regling’s next task was to rent an office. The EIB, which had offered set-
up help, suggested one of its nearby facilities. But the space was larger 
than the new firewall needed, so Regling protested: ‘It’s too big! I will 
only take half of it and pay half the rent.’ 

The EIB agreed, but 18 months later it handed over the other half of 
the space as the EFSF’s responsibilities expanded. 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

EFSF staff and service 
providers in 2011, 
a year that ended 
with two countries in 
programmes and a third 
on the way.

Credit: ESM archives

Those first offices sported blue carpet and wood panelling, harking 
back to stodgy 1970s interior designs for bureaucracies. Apart from the 
dated décor, the office wasn’t so bad, said Denise Franzen, one of the 
original dozen pioneers and the EFSF’s first office manager. But getting 
space was only part of the struggle of setting up a new entity. 
Conference rooms are useless without people to meet in them, and 
more colleagues needed to make it to Luxembourg, too. 

In the early days, the EFSF resembled a hastily set-up campsite. Minor 
irritations were the order of the day. At times, Regling was left on his 
own to search for the last remaining cream for his coffee, and someone 
had to find out how to order new supplies. It turned out to be crucial 
that the EFSF’s first ‘investment’ was a sturdy espresso machine, which 
is still performing its duties to this day.

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Coffee, anyone? One of 
the EFSF’s first purchases 
was an espresso machine. 
Managers regard it fondly, 
given its help in keeping 
them awake during those 
long nights early on.

Credit: ESM

At the time, Franzen was doing everything from purchasing coffee and 
settling invoices to paying out salaries to the burgeoning staff and 
reviewing speeches for the head of press relations. Regling would check 
in on how things were going, but he was on the road so much that most 
of the planning fell to Franzen and the skeleton crew holding the fort. ‘It 
was challenging and interesting. Everything had to be in place more or 
less immediately. I cooperated closely with Klaus’s personal assistant, 
and, because we had such good understanding about what needed to be 
done, things ran smoothly despite a rapidly changing environment.’ 

That informality came with perks and costs. Françoise Blondeel, now 
a management board member, said the new EFSF had to press ahead 
with few set procedures in place on such things as budgeting, choosing 
suppliers, and other logistical matters.

‘Because we were new, we had fewer internal rules to comply with,’ said 
Blondeel, who ran the rescue funds’ middle and back office when she 
joined in early 2012. ‘But we always adhered to the highest professional 
standards. In those early days, the middle and back office team put in a 
lot of hard work, with high-quality results, despite their small numbers.’ 

1 0 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Precision and 
professionalism are 
hallmarks of the ESM. 
Here, members of the 
middle and back office 
team process and review 
transactions. 

Credit: ESM

The initial goal was to make the temporary firewall as lean as possible, 
with a staff of only a dozen. In addition to the challenge of finding the 
right people for those spots, they needed phones, computers, desks, and 
office space. More importantly, this small team needed to be ready for 
its mission. That meant building the appropriate operating chain, 
including choosing, following a fair and competitive tender, the right 
bank and other financial suppliers to process the flow of funds in a fast 
and secure manner as well as establishing the appropriate information 
technology infrastructure to record those flows correctly. It also 
entailed defining and negotiating legal agreements that would protect 
the interests of the institution. 

One of Regling’s first hires was Sarah Fouqueray-Carrick, a 
French-speaking Briton with a background in private sector asset 
management. Fouqueray-Carrick had just resigned from a French firm 
to set up a translation business that would require less travelling and 
allow more time with her small children. 

‘I had just taken the summer off and I was in the process of setting that 
up and, out of the blue, a friend of a friend contacted me saying, “Are 
you interested? They want someone with a marketing/communications 
background who can write well in English,”’ Fouqueray-Carrick recalled. 
She responded that she’d just stepped back from intensive work because 
it was too chaotic and interfering with family life. The friend of a friend 

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told her not to worry. ‘You can work part time because, actually, you may 
have nothing to do.’ With those famous last words, she became employee 
number four, off to rattle around the EFSF’s first suites.

‘We occupied just a small corner of the building; the rest was all empty,’ 
she said. ‘It was this big corridor with empty rooms, and then this big 
empty space at the end.’

It soon became clear that writing for the EFSF would require her to 
be quick on her feet. On Fouqueray-Carrick’s first day, she was asked 
to complain about an article that appeared in a major UK newspaper. 
‘That was my first task, to write a stern letter to the author to say he 
was incorrect on many points.’ Letter dispatched, she began to take a 
more systematic look at how the EFSF would keep in touch with staff 
and stakeholders while its top leaders were educating the markets and 
the media about its bonds. Her core duties of communications and 
investor relations became paramount. 

‘Klaus Regling and [CFO] Christophe Frankel were out on the road 
all the time meeting investors,’ Fouqueray-Carrick recalled. ‘That was 
the best policy: to make sure people were as informed as possible and 
to make ourselves available. We were taking calls night and day from 
journalists, because there were so many rumours swirling and it was 
very important to get the factual information out to them.’

To keep the messages straight, the firewall hired a German journalist to 
deal with the press. He set up a regular conference call to coordinate with 
the European Commission, the ECB, and other key institutions, making 
sure all the organisations were taking the same line. ‘That was just a 
basic thing, but it was really important,’ Fouqueray-Carrick said. ‘He 
established quite quickly the discipline of coordinating what was said.’

Investors noticed, too, said Frankel, which reinforced the decision to 
put communications at the top of the in-house agenda. ‘That’s why a 
communications specialist was one of the first hires,’ Frankel said. ‘It 
was obvious that good communications were crucial to the success of 
this company, for various reasons: communication towards investors, 
the press, shareholders, the IMF, and the other institutions.’

Not only did the EFSF have to win over the bond markets, it also 
had to keep up with its new peer group of international financial 
institutions. ‘They had to see us as a peer, but we were initially 
perceived as the new kid on the block who was still learning,’ Secretary 
General Anev Janse said.

1 0 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The rescue fund is still 
small enough for the 
entire staff to meet 
weekly, to discuss the 
upcoming agenda and give 
feedback to management.

Credit: ESM

As with all start-ups, everyone had to be a jack of all trades, and tasks 
were carried out – at first – in an ad hoc manner. As the organisation 
grew, the EFSF added weekly staff meetings in 2011 to make sure 
important details didn’t get lost in the shuffle. These continue today. 
‘Having a better global overview of what was upcoming in the new 
institution improved our daily work,’ Franzen recalled. ‘With the 
weekly staff meeting I knew what to expect the coming week.’ 

As the firewall staff grew, its mandate provided both recruitment 
incentive and ongoing motivation, said Sofie De Beule-Roloff, head 
of human resources and organisation. ‘Here at the ESM/EFSF you feel 
very involved in the mandate and its social contribution to Europe 
– it’s not just a distant concept you see on the television news,’ she 
said. ‘Even those teams not in direct contact with our programme 
countries feel constantly connected and involved in the mission. This 
engagement and connectivity is exactly what drives our people and 
what makes them go the extra mile over and over again.’ 

Institutional history continues in Chapters 21, 28, and 30.

‘Make sure  
the project flies’:  
the EFSF’s first bond

12

We needed to strike the bullseye first time 
around, because during those tumultuous days 
there could be no near-misses.

Christophe Frankel 
ESM/EFSF Chief Finance Officer and  
Deputy Managing Director/Deputy Chief Executive Officer 

Once the EFSF secured a provisional AAA rating from all  

three big-name rating firms, it was primed to go to the 
markets if needed. 

In the months before Ireland’s formal request, the EFSF team prepared 
for what could be coming, lining up investors and clearing a number 
of obstacles. But, when Ireland did apply for rescue loans in November 
2010, with cash needed quickly, the firewall had to pick up the pace to 
get its first-ever programme ready to go.

‘The first “surprise” was when we went from being a firewall that would 
never be tapped to one that was actually going to be tapped,’ said Chief 
Economist Strauch. ‘That piled on the pressure. We shifted from the 
orderly mode of getting the rating, arranging the mechanics, up into a 
higher gear with a clear and urgent deadline.’

1 1 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Frankel, CFO of the EFSF and head of the roadshow team for the 
inaugural sale, agreed. ‘The rush came when Ireland formally asked for 
assistance at what seemed to us very late in the process.’ 

Starting with a fresh slate brought new challenges. For one thing, the 
euro fund didn’t have instant name recognition. Bond markets were 
also getting used to the EU’s emergency fund, the European Financial 
Stabilisation Mechanism, or EFSM, set up the same weekend as the 
EFSF and also designed to help members with market access problems. 
And there had been a French entity called the Societé de Financement 
de l’Economie Française, or SFEF, now defunct. But the EFSF stood for 
something new and different.

‘The names didn’t help. But at the same time, it was good that we  
had to explain things to investors,’ Frankel said. ‘It was a way for us  
to make sure that everyone really understood the new organisation  
and how it worked.’

On the plus side, the new entity had some weighty backers. These 
included all euro area member states, which were its shareholders, 
and the German sovereign’s funding arm, the German Finance 
Agency, which had agreed to process its market operations. The 
German agency’s imprimatur offered immediate institutional 
credibility, along with the secondment of its senior funding expert, 
Thomas Weinberg. By outsourcing its funding operations, the EFSF 
ensured they would be in experienced hands. Weinberg, well known 
and trusted in the markets, would run the borrowing team in its 
initial stages. 

It was a critical moment. As an issuer that stood for the entire euro 
area, if the EFSF could not raise the funds when needed, it would set a 
disastrous precedent. 

For the original team, the watchword for the EFSF project was: ‘Make 
sure the project flies.’ 

Weinberg had the start-up team move quickly, even though in mid-
2010, shortly after the EFSF emerged in May, it did not look as if there 
was an imminent need to go to market. 

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By summer 2011, Weinberg had assembled a team of four people, 
two fellow German Finance Agency staff, Siegfried Ruhl and Silke 
Weiss, and two outside hires. These included a staffer from Greece’s 
debt agency, Francis Dassyras, as well as a US citizen, Glenn Kim, 
who would be the first of dozens of non-EU nationals to work at the 
rescue fund. 

The core Luxembourg team of Regling, Strauch, and Frankel had to lay 
the groundwork for the new funding team to take up their mission. 
From the start, the EFSF team had to be prepared on multiple fronts: in 
addition to the all-important rating, they had to work through a range 
of technical, legal, and regulatory issues essential to gaining access to 
the right investor base.  

For example, the EFSF, together with the German Finance Agency’s 
front office team, had to make sure the mechanics of the sale would 
work. Its bonds had to be compatible with clearing systems and 
stock exchanges in the major markets. In addition, the securities 
would need to be eligible for repurchase agreements throughout 
the market, and for ECB transactions. They would also need a good 
risk weighting so banks and other institutional investors would 
have an incentive to stock up for their portfolios. ‘We had to knock 
on different doors to explain what the EFSF is and to explain to the 
various regulators that they should give the EFSF bonds the lowest 
weight possible,’ Frankel said.

Against this backdrop, the call to action prompted an orderly rush. 
Frankel said he had been ‘quite confident’ that the EFSF would be able 
to tap the markets. But when Ireland made its move to seek assistance, 
on 21 November 2010, the team had to make a big push. Frankel said 
investors had ‘considerable confidence’ in the set-up from the start.

There were a number of elements that needed deciding: what day 
to hold the sale, which banks would assist, size of the deal, maturity 
of the issue, fixed- or floating-rate coupon, yield at issuance in 
comparison with peers, and how the debut issue would be marketed 
to prospective investors. 

For the banks, a lead role with the first issue of the EFSF would be not 
only financially lucrative, but also prestigious. For the EFSF, finding 
banks to act as bookrunner for the first transaction was ‘a lengthy but 
fascinating process’, Weinberg said. The EFSF needed to work with 
banks that had a strong track record of support for first-time issuers. 

 
1 1 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Metrics were assembled. A major factor was banks’ experience in 
carrying out euro-denominated transactions. The EFSF team probed 
how the banks ranked in their home countries’ primary bond markets, 
how they were viewed in terms of service and market information, 
and their experience in primary markets outside their home countries. 
Once that information was collected and assigned weightings, 
Weinberg’s team went through the long list of league tables, searching 
for banks with experience of bringing a new issuer to market. 

For the banks that had worked with inaugural sales before, did those 
kick-off transactions go well and were they recent enough to be 
relevant? If so, those banks drew relatively high scores heading into the 
next round. In the final step, the German Finance Agency’s EFSF team 
listened to more than two days of presentations, in which candidate 
banks outlined their pitches to the EFSF and the finance agency, with 
the entire team judging. The shortlist contained just a handful of firms.

‘We tried to develop a system that was completely independent from 
political influence. That was important to us, because we feared 
very much that senior bankers would contact politicians to try to 
get a mandate or get a bookrunner role,’ Weinberg said. In his view, 
‘the process was a success’. The firms it chose as the EFSF’s first 
bookrunners were Société Générale, Citibank, and HSBC101: a French 
bank, a US bank, and an Asian-British bank. ‘And I thought, Yes, 
strong banks, no worries. I slept well after that.’ The banks were chosen 
on 17 January 2011, one week before the sale.

To smooth the process of going to the market for the first time, 
Frankel’s goal was that he and Regling should meet as many investors 
as possible in their sales push. They held three roadshow conferences 
in Frankfurt, Paris, and London in October 2010. On the technical 
side, the EFSF made a great impression. But the big picture worried 
some. ‘Of course, there were some doubts about whether we would be 
strong enough or big enough in case a large European country asked 
for assistance,’ Frankel said.

For Ruhl, Weinberg’s right-hand man on the funding team, the key 
would be making sure investors were comfortable with the EFSF’s 
complicated and novel guarantee structure. ‘Marketing would have  

101  EFSF (2011), ‘EFSF mandates Citi, HSBC, and Société Générale as joint lead managers for the 

inaugural benchmark issue’, 17 January 2011.  
https://www.esm.europa.eu/press-releases/efsf-mandates-citi-hsbc-and-soci%C3%A9te-
g%C3%A9n%C3%A9rale-joint-lead-managers-inaugural-benchmark  

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to be extremely good to explain the relatively difficult structure to  
the investor base in order to get them to buy possible bonds,’ said 
Ruhl, who runs the rescue funds’ funding and investor relations 
operations. But on the plus side, the EFSF was emblematic of how  
the currency union had come together in the face of its biggest 
challenge to date. ‘There was so much strong political will behind 
the creation of the EFSF,’ he said. ‘The EFSF stood for the euro area. 
That more than outweighed any difficulties in explaining the complex 
guarantee structure.’

Some 500 prospective investors were called. They had different 
reactions. ‘You had some saying ‘okay, you have a good rating, you are 
a new institution, we will open lines immediately.’ Others would come 
to you saying “let’s talk again when you are ready to issue and we will 
see at that moment whether it makes sense for us to open a line,”’ Ruhl 
recalled. ‘What was important was that everyone was aware of the 
creation of this body, was aware that it was very good and had strong 
member state backing.’

When the time came to ramp up in earnest, the EFSF team reached out 
to the European Commission and its emergency fund, the EFSM, to 
make sure the two mechanisms wouldn’t inadvertently compete, either 
through timing or by issuing securities that were too similar. 

‘We coordinated on how to approach the market once it was clear that 
Ireland wasn’t able to raise its own funds,’ Weinberg said. In the end, the 
Commission went first, selling a €5 billion bond on 5 January 2011102.

As the EFSF’s first bond sale approached, the credit-rating companies 
were due to give their final ratings. Fortunately, they confirmed their 
earlier decisions to award the firewall their top qualification. In a 
19 January 2011 press release following the confirmation103, Regling 
said: ‘We expect investor interest to be high as our debut issue provides 
a good opportunity for investors to diversify into a new supranational 
and liquid asset.’

102  European Commission (2010), ‘€5 billion bond issue for Ireland’, Memo, 5 January 2010.  

http://europa.eu/rapid/press-release_MEMO-11-4_en.htm 

103  EFSF (2011), ‘Top credit rating for EFSF’s debut debt issuance’, Press release, 19 January 2011. 

https://www.esm.europa.eu/press-releases/top-credit-rating-efsf%C2%80%C2%99s-debut-debt-
issuance

 
1 1 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Did investors understand the whole structure? Maybe not entirely in 
those early times. But the EFSF’s top credit rating provided reassurance, 
and there were plenty of investors looking for investment alternatives 
in euro-based assets. 

Once the transaction started, the EFSF team could monitor the 
electronic order book to see the size and price of buy orders. The 
team tracked the building demand with growing wonder. ‘The order 
book showing on our PCs within a few hours was unbelievable,’ 
Weinberg said. ‘By evening it was clear that we would have a 
successful transaction.’ 

The final pricing was made the following day: on 25 January 2011,  
the EFSF placed a 5-year €5 billion bond with the price fixed at 
mid-swap plus six basis points, implying borrowing costs of 2.89%. 
Total demand for the bond was €44.5 billion, or about nine times the 
available amount104.

‘We were all very positively surprised when we received a €45 billion 
order book for a €5 billion transaction,’ Ruhl said. ‘Usually if you 
receive order books in the size of €7, €8, €9, €10 billion for a €5 billion 
transaction, that would be good, so €45 billion was quite a high number.’

In one sign of success, the new firewall withstood the full scrutiny of 
the Japanese finance ministry. If Japan had had any concern about an 
instrument, it would not have invested, said the IMF’s Furusawa, who 
served in his country’s finance ministry when the EFSF was making its 
market debut. He said Japan saw the EFSF as a solid opportunity. From 
a return-on-asset perspective, it was guaranteed by the entire euro area. 
More than that, the Japanese were firm supporters of the collective 
initiative. The product was safe, but the international cooperation was a 
weightier consideration.

‘We bought 20.5% of the total first issue. That was certainly the largest 
purchase in the world at that time,’ Furusawa said. ‘We felt that it was 
in the interest and the benefit of the international community to avoid 
the European crisis becoming a global crisis.’

104  EFSF (2011), ‘EFSF places inaugural benchmark issue’, Press release, 25 January 2011.  
https://www.esm.europa.eu/press-releases/efsf-places-inaugural-benchmark-issue

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Weinberg attributed the success to the EFSF’s marketing efforts: ‘Klaus 
Regling and Christophe Frankel did a superb job with the marketing.’ 

In Frankel’s view, the first transaction was a triumph not only because 
the marketing was well handled, but also because the maturity was 
standard and the market was in a good mood. It turned out that the 
pricing, decided in cooperation with the issuing banks, was quite 
favourable as well. There had been some uncertainty over what kind 
of premium investors would demand, especially since it wasn’t clear 
then how big an issuer the EFSF would become. There are trade-offs 
between liquidity, price, and volume; if a small programme sold a large 
volume of securities, it could have been tricky.

‘You want to be conservative, but not too conservative,’ Frankel said. ‘In 
the end, when you see that kind of oversubscription, you can be very 
satisfied because it shows that the preparation was well done.’ 

This initial bond sale was ‘quite a historic exercise not only because it 
was the first EFSF transaction but also because of how it went,’ Ruhl 
said. ‘There was a lot of uncertainty regarding the future of the euro, 
and therefore how the EFSF would be accepted.’

 
1 1 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Focus  
A precedent-setting disbursement

Once the EFSF sold its first bond, its next technical challenge was 
sending the money to its proper destination. To disburse the funds to 
Ireland a week later, the new firewall needed access to the 24-hour secure 
global communication network used in the exchange of international 
payment instructions, the Society for Worldwide Interbank Financial 
Telecommunications, better known by its acronym SWIFT. 

Shortly before the transfer, Chief Economist Strauch approached Fernando 
Rodriguez, the EFSF’s 13th hire and first and then sole in-house funding 
expert. He joined the day of the inaugural bond offering, only to face his first 
challenge almost immediately. Strauch asked, ‘Do you have any experience in 
the back office and settlement of payments within the SWIFT system?’

‘None at all,’ Rodriguez, who would become advisor funding and investor 
relations, said he responded. ‘So Rolf put a huge pile of folders with 
documentation on my desk and said: “Okay, you now have one week to  
read all these and to set up the necessary arrangements to be able to make 
the payment.”’

‘It was really painful,’ Rodriguez admitted. ‘But we all knew that we were part 
of something big, something that we would always remember.’ 

The disbursement went through on 1 February 2011. Despite the stresses, 
Rodriguez said the experience was intensely rewarding. ‘For me, on a 
personal level, to be able to say to my children, I was the guy that made 
the first payment to Ireland and established the pattern for the financial 
assistance through this mechanism – that’s something no one else can say.’

Funding strategy continues in Chapters 14 and 18.

The crisis spreads  
to Portugal:  
a second call for aid

13

In November 2010 it became apparent that  

the crisis was not confined to Greece. It was 
spreading. I grew increasingly convinced that 
Portugal would soon need to follow Ireland  
in asking for support.

Fernando Teixeira dos Santos 
Portuguese Finance Minister (July 2005–June 2011)

With Ireland and Greece in programmes, Portugal drew the 

focus of market attention. Its bond yields were already 
at critical levels in the spring of 2010, and the question 

became: would Portugal be next?

Albuquerque, who would later become Portuguese finance minister, 
was at the time leading the issuing department of the country’s debt 
management office. From that post, she could see the crisis threatening 
to engulf Portugal’s shores. 

‘When we talk about contagion, it is of course always the most fragile 
or the most vulnerable that cause the biggest concern. Portugal was 
clearly in that situation,’ she said. 

1 1 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

1 January 
Portugal adopts the euro.

GDP begins falling; economy suffers from low productivity,  
eroding competitiveness, rising unemployment, and large  
external deficit.

21 January 
Standard & Poor’s downgrade: A+ from AA-, the first in a  
series of downgrades resulting in the eventual loss of  
investment grade.

23 March 
Parliament rejects government’s reform measures.

24 March 
José Sócrates’ socialist government resigns but remains in a 
caretaker capacity.

29 March 
2010 deficit reaches 8.6% of GDP, above the 7.3% target.

7 April 
Portugal requests financial assistance from the EFSF, the EFSM,  
and the IMF.

16 May 
Eurogroup and Ecofin agree to provide financial aid to Portugal. Of 
the total €78 billion, the EFSF, the EFSM, and the IMF commit to 
€26 billion each.

5 June 
Pedro Passos Coelho announces he will form a coalition following 
elections that prompt Sócrates’ resignation.

22 June 
First tranche of €3.7 billion is disbursed.

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Portugal’s economy had been ailing for some time, with low GDP and 
productivity growth in the 10 years before the crisis105. Because of 
the low interest rate environment across the euro area following the 
adoption of the euro, credit had been easily available, contributing 
to rising debt levels for companies, households, and the government. 
With wage growth outpacing productivity gains, Portuguese products 
became more expensive abroad, contributing to a deceleration in 
export growth and a loss of competitiveness. 

Banks were an additional weak link in the Portuguese chain. Investors 
worried that the Portuguese financial sector was overly exposed to 
the struggling economy, which in turn made the country even more 
susceptible to economic shocks. As interbank lending dried up across 
the euro area, the Portuguese banks resorted to central bank financing. 
That strategy couldn’t last indefinitely.

Net international investment position — Portugal 
in % of GDP

-55

-65

-75

-85

-95

-105

-115

-125

Portugal’s net international 
investment position 
declined in the run-up to 
the crisis, a sign of the 
economy’s weakening 
competitiveness 
and current account 
imbalances.

Note: GDP is not seasonally 
adjusted in this chart.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Eurostat

105  European Commission, Directorate-General for Economic and Financial Affairs (2011),  

‘The Economic Adjustment Programme for Portugal’, European Economy Occasional Papers 91, 
p. 5, June 2011. http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/
ocp79_en.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

With a deficit that would, after multiple revisions, reach a record 
11.2% of GDP in 2010106, Portugal didn’t have much fiscal room to 
tide its economy over or respond to market pressure. As the budget 
news got worse, bond yields increased sharply from April 2010, 
hitting what the government perceived as critical levels as it rose 
above 10% by mid-2011. 

‘The sense of urgency became clear,’ said Fernando Teixeira dos Santos, 
who was finance minister from 2005 to 2011. 

Fitch had cut Portugal’s long-term debt to AA- from AA in late 
March 2010107, the first in a series of downgrades resulting in the 
late 2011 loss of investment grade108. The successive cuts would 
spook markets further, leading to an even more rapid deterioration 
of the spreads. Yields on the 10-year bond would average 13.9% in 
January 2012, levels well beyond the point at which market access 
becomes unsustainable. Portugal’s domestic troubles had become 
caught up in the euro area’s broader spiral of contagion.

10-year government bond yield — Portugal 
in %, monthly average

16

14

12

10

8

6

4

2

0

Rising borrowing costs led 
Portugal to seek financial 
assistance. Since the end 
of the EFSF programme, 
Portuguese efforts to fully 
regain market confidence 
have paid off with low 
borrowing rates.

Source: European  
Central Bank

April 2011: Portugal 
requests financial 
assistance

May 2014: 
Portugal exits programme

8
0
0
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'()*"!!+

106  Eurostat (n.d.), ‘General government deficit (-) and surplus (+) – annual data’, 2006–2017.  

https://ec.europa.eu/eurostat/tgm/table.do?tab=table&plugin=1&language=en&pcode=teina200 

107  MarketWatch (2010), ‘Portugal downgraded to AA- by Fitch’, 24 March 2010.  

https://www.marketwatch.com/story/portugal-downgraded-to-aa-by-fitch-2010-03-24 

108  Bloomberg (2011), ‘Portugal’s credit rating is cut to junk by Fitch on debt’, 24 November 2011. https://

www.bloomberg.com/news/articles/2011-11-24/portugal-s-credit-rating-cut-to-junk-by-fitch 

 
 
 
 
 
 
 
 
 
 
 
 
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  1 2 1

Still, authorities in Lisbon initially resisted asking for help. Gaspar, 
who served as Portuguese finance minister at a later stage of the 
crisis, said any country that might need international aid runs up 
against a ‘stigma effect’ in the eyes of the market. ‘There is definitely 
not an immediate boost to credibility associated with having a 
programme,’ he said. 

Teixeira dos Santos said the IMF’s role in particular was an incentive 
not to seek aid, because of lingering resentment from two prior 
programmes in 1977 and 1983. 

‘Policies were very restrictive. Recession, high unemployment, 
high inflation, declining real incomes, and a deterioration of living 
conditions at the time became associated with the IMF,’ he said. ‘Calling 
the IMF again would be like, for a child, calling for the “bogeyman”. 
Such memories implied it would impose a very high political cost. No 
wonder there was reluctance.’

This stance led to some tense moments in the Eurogroup’s Task 
Force on Coordinated Action, recalled Albuquerque: ‘I remember 
being in meetings where people said things like “we need to find a 
way of setting these programmes without stigmatising the countries 
involved because that leads to political resistance to admit that there 
are problems.” A roomful of people would look straight at me and 
someone would say “because there are countries that really need help 
but refuse to admit it.”’ 

In the end, it took a political crisis for the Portuguese programme 
to come together. José Sócrates’s Socialist government made a last 
effort in mid-March 2011 to win over the markets by pledging a 
deeper overhaul of the budget, with the support of the European 
Commission and the ECB109. But less than two weeks later, this 
reform package failed in the Portuguese parliament, prompting the 
minority government to resign and step into a caretaker role until 
after new elections110. 

109  European Commission (2011), ‘Joint statement by the European Commission and the European 
Central Bank on the measures announced by the Portuguese government’, 11 March 2011.  
http://europa.eu/rapid/press-release_MEMO-11-164_en.htm 

110  European Commission, Directorate-General for Economic and Financial Affairs (2011),  

‘The Economic Adjustment Programme for Portugal’, European Economy Occasional Papers 79, 
p. 15, June 2011. http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/
ocp79_en.pdf 

1 2 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

By the end of March 2011, ‘it was not possible to go to the market  
for funds,’ said Albuquerque. ‘They were just too expensive and,  
from a certain point onwards, non-existent. It stops being a vague 
question of crisis. It becomes an immediate non-availability of the 
markets to lend.’

The deficit for the previous year was revised upwards to 8.6% of GDP, 
above the 7.3% target111. A few days later, at the start of April 2011, 
Portugal faced unsustainably high interest rates, with yields on the 
benchmark 10-year bond at 9%. Crunch time had arrived. On 7 April, 
the caretaker government asked for assistance from the EFSF, the IMF, 
and the Commission’s emergency fund, the EFSM. 

‘The newly formed EFSF was keeping an eye on developments 
as it managed its own debut,’ said Chief Economist Strauch. As 
he remembers it, the process of encouraging Portugal to seek a 
programme evolved over time, until the outgoing government was 
forced to confront how tight market conditions had become. The start-
up EFSF had only a small part in the preliminary discussions, he said. 
Its role ramped up once the programme was underway.

Portuguese politicians still trade accusations about the delay in asking 
for a programme. For Teixeira dos Santos, his government’s last-
minute proposals were an effort to work with the institutions in a 
‘precautionary way, to head off the need for a full aid programme and 
outside funds’, while also trying to bypass what he called ‘the stigma 
associated with seeking a bailout’. Albuquerque says the caretaker 
government was merely delaying the inevitable. ‘So it came late – it 
should have been done earlier.’

In 2017, the EFSF/ESM programme evaluation report concluded that an 
earlier request would have saved Portugal money. ‘Official requests for 
assistance came with considerable delay. Since countries must initiate 
requests for a financial assistance programme, such delays had financial 
and political consequences for the government,’ the report said112. 

111  Ibid. 
112  Tumpel-Gugerell, G. (2017), EFSF/ESM financial assistance: Evaluation report, Publications 

Office, Luxembourg. https://www.esm.europa.eu/sites/default/files/ti_pubpdf_dw0616055enn_
pdfweb_20170607111409_0.pdf

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At the same time, conditions in 2010 and 2011 discouraged early 
requests for help. 

The EFSF was engineered so that programme countries would face 
high interest rates, just as Greece’s first, pre-EFSF rescue programme 
had come with high borrowing costs. The purpose was to avert the 
moral hazard of encouraging some countries to indulge in poor 
budget and debt management, thinking they could always resort to the 
firewall. These higher rates were revisited in 2011, but they were very 
much a part of the early design.

There was also a heavy political cost to seeking aid, and a worry that 
markets would attack any country viewed as entering the early phases 
of that discussion. As Teixeira dos Santos said, the perception in 
potential recipient countries is that ‘the stigma was and still is big.’ 

It took euro area countries over a month – until 16 May – to formally 
approve Portugal’s aid request113. In discussions at EU-level meetings, 
Albuquerque found feedback to be constructive but also tough. 
Portugal needed to own up to how things had got so bad and commit 
to repairing the situation, she said. Rebuilding credibility would be 
essential to keeping EU support.

Portugal’s package – the second for the euro area’s new firewall – 
covered up to €78 billion in financing, split three ways between the 
EFSF, the EFSM, and the IMF. To get the programme underway, both 
the EFSF and the EFSM had to overhaul their financing calendars 
immediately, in order to raise the money for the initial disbursement 
within a matter of weeks.

113  European Commission (2011), ‘Portugal: Memorandum of understanding on specific economic 

policy conditionality’, 17 May 2011. http://ec.europa.eu/economy_finance/eu_borrower/
mou/2011-05-18-mou-portugal_en.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Portuguese programme (2011–2014)

Initial programme amount: €78 billion

Total amount disbursed: €76.8 billion, of which the EFSF provided 
€26 billion

Lenders: EFSF, EFSM, IMF

Final weighted average maturity (EFSF loans): 20.8 years 

Key legislated reforms: fiscal consolidation; structural reforms; 
stabilisation of the financial sector (recapitalisation and deleveraging) 

The package allowed Portugal to pay its immediate bills and 
recapitalise its banks. In return, Portugal agreed to bring down its 
budget deficits, fix its banks, and modernise its economy. The IMF 
and EU institutions required stepped-up banking supervision and a 
front-loaded set of structural reforms designed to encourage growth 
and make the country more competitive. In particular, Portugal was 
called on to reduce unit labour costs, increase working hours in the 
public sector, make labour market rules more flexible, and update 
its housing and service sectors. The programme also sought judicial 
reform. Budget cuts were necessary, but Portuguese authorities were 
encouraged to head off possible public upset by designing tax increases 
and benefit cuts in a way that would minimise their impact on the 
lowest-income groups.

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Nominal unit labour cost — Portugal 
(2010 = 100)

Portugal began to restore 
its economic health when 
it reduced labour costs, 
improving competitiveness. 
After the programme, 
labour costs increased 
again and some of those 
gains were reversed. 

Source: European 
Commission

104

102

100

98

96

94

92

90

88

86

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

On 5 June 2011, the Socialist Party lost an election that delivered a big 
win to the Social Democratic Party. The coalition government of Prime 
Minister Pedro Passos Coelho embraced the economic rebuilding 
plan. Gaspar, the new government’s first finance chief, says the climate 
had defrosted considerably by his first meeting with other ministers 
from euro area countries in July 2011. ‘I was received quite warmly. 
At that point in time we had already presented our strategy for the 
implementation of the programme and that was very well received,’ 
Gaspar said.

It helped that public opinion in Portugal was in favour of the 
adjustment programme. ‘When the programme implementation 
started, the degree of consensus on the need for adjustment in Portugal 
was absolutely overwhelming,’ Gaspar said. ‘The parties that won 
the elections and formed the government had supported the earlier 
Socialist government in the process of the negotiation. During the 
campaign, they said clearly that they would, if elected, implement 
the programme in a committed and, they thought, successful way. 
And obviously the Socialist Party that had negotiated the programme 
campaigned on exactly the same broad approach. That led to a 
situation where, at the beginning of the programme, almost 90% of the 
parliament supported it.’ 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

In the beginning, the euro area rescue fund focused more on Portugal’s 
funding needs than on whether or not it was fulfilling its programme 
conditions. Later in the programme, the firewall took a bigger role in 
technical talks. Albuquerque remembers the team as constructive and 
careful not to get in the way of its fellow institutions. ‘There was never 
a time, at least as it was reported to me, where the ESM raised an issue 
completely different from the European Commission,’ she said. 

Strauch said Portugal showed early signs that it might have the political 
will to work through its difficulties. There was a spirit of optimism that 
the euro area was finding the right tools to navigate the crisis after the 
assistance programme for Ireland was agreed. 

And, in contrast to the dreary weather of Ireland – where the deal was 
finalised on a snowy day in Dublin, in a basement room of the attorney 
general’s office with bars on the windows – the Portuguese sunshine 
gave a lift to morale. 

‘In Portugal, we went to the ministry and it was a warm sunny day 
when we started negotiating the financing agreement,’ Strauch said. 
‘Despite the grave situation for the country, it made it feel more 
manageable in that moment.’

Portuguese programme history continues in Chapter 32.

Scaling up the fund:  
the ‘save Europe’ call 

14

If you have the right people and empower  
them in a challenging environment, you create  
an atmosphere where highly motivated  
staff innovate.

Siegfried Ruhl 
ESM/EFSF Head of Funding and Investor Relations

Programmes for Ireland and Portugal sent a signal that the new 

rescue fund would have to scale up. Chief Economist Strauch 
said the lending and funding structure devised in the beginning 

was an auspicious start. The expansion started a bigger discussion 
about what changes might be needed for the long run. The EFSF’s 
original plan was to raise money on a per-disbursement basis, but 
over time it might need to shift its strategy towards a more consistent 
relationship with the markets. 

Chief Finance Officer Frankel said the EFSF knew the overwhelming 
demand for its first bond offering would not be a regular occurrence. 
Still, that initial performance was a great reassurance as the team 
worked to improve the temporary firewall.  

‘It was quite a busy time for 11 people!’ he said. ‘We were satisfied that 
the mechanism worked and could be used again, even if we knew that 
the nine-times oversubscription would not happen again.’

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

As concerns grew that other countries might also need help, thoughts 
turned increasingly to revamping the initial lending and funding 
structure, Strauch said. ‘We started seeing that the initial financing 
framework and resources envisaged for the EFSF might not be 
sufficient and might have to be changed – particularly in case other 
countries were to follow.’ 

Because the EFSF’s debut transaction had a 5-year maturity114, it 
probably wasn’t a good idea to go back to the same segment of the 
market right away. So the EFSF began considering shorter or longer: 
a 1-year, 2-year, 3-year, or 10-year issue. The timing was tight, but 
the EFSF was ready to fund its share of the €78 billion programme 
once the Eurogroup agreed to provide assistance, on 16 May 2011. 
The EFSF’s contribution was €26 billion and the first disbursement 
was due less than a month later. The EFSF went to the market for the 
second time on 15 June 2011, with a €5 billion 10-year bond. With this 
issue, the ‘temporary’ EFSF could now be counted in decades.

Overall, the second sale succeeded, but on a more down-to-earth scale 
than its predecessor. The order book came in around €8 billion with 
participation from nearly 100 institutional investors115, about a third of 
which were central banks and sovereign wealth funds. The EFSF was 
off to a great start, but, over time, the short turnarounds would become 
increasingly difficult. At times, ‘it was difficult to raise the money and 
the price we had to pay was relatively high,’ Frankel said. 

Strategy discussions focused on long-term funding. ‘It was terrific that 
the first bond sale had been such a success, but the second, third, and 
fourth ones needed to work too,’ said Weinberg, the German Finance 
Agency expert who led the initial EFSF funding programme. The new 
firewall and its eventual permanent successor had to figure out in the 
short run, where to approach the market next, and, in the long run, 
how to establish the right reputation with the kinds of investors the 
euro area needed.

To some, the Luxembourg arrangements seemed a little, well, odd. 
Jürgen Klaus, a long-time trader who became a funding officer at 
the rescue fund, said he remembered thinking to himself: ‘What is 
this private company, this société anonyme, that is located next to a 
shopping mall in Luxembourg?’ 

114  EFSF (2011), ‘EFSF places €5 billion bond in support of Portugal’, Press release, 15 June 2011. 

https://www.esm.europa.eu/press-releases/efsf-places-%E2%82%AC5-billion-bond-support-portugal 

115  Ibid. 

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At first, those assigned to the EFSF within the German Finance 
Agency kept a professional distance from their colleagues. The agency 
created a separate division for its EFSF office to make sure everything 
was in order. 

‘We analysed whether a separation from the activities executed for 
Germany was necessary from a compliance perspective and came to 
the conclusion that it was necessary because of one aspect,’ Weinberg 
said. After the EFSF began to issue in January 2011, ‘every launch of a 
bond transaction required some investments. Because the colleague 
who was responsible for EFSF investments needed to be able to buy 
German government securities, we had to put up a Chinese wall 
between him and the German government securities traders.’

In the beginning, EFSF borrowing was ‘not very flexible. We stuck to 
certain maturities in the first few issues. We were a very small team,’ 
said Silke Weiss, another funding officer. And the German agency 
naturally operated with a domestic, not an international, outlook, 
unlike the EFSF, where English was the working language.

When Dassyras joined the EFSF team from Greece in June 2011, it 
was the first time the German Finance Agency had hired someone 
who didn’t speak German. ‘Since I could speak English, I was asked 
if I could help him,’ Weiss recalled. ‘I bought him a Greek-German 
dictionary to get him started.’

The EFSF’s debt management pioneers worked late, ordered in 
pizza when needed, and tried hard to handle all the demands of a 
two-location start-up. ‘It was maybe not the ideal set-up, but in the 
beginning it was easy enough to communicate,’ Frankel said. ‘There 
were not so many transactions, so it was not so much of a burden to go 
to Frankfurt for the transactions at the start.’

As the pace picked up, the outsourcing period wound down and 
the whole operation moved to Luxembourg. Weiss later transferred 
permanently to the ESM from the German Finance Agency. ‘It felt 
like the rescue funds were something that would be with us for a long 
time,’ she said. 

Weiss said the need to consolidate became evident as the EFSF required 
access to more maturities and a generally more flexible approach, so the 
start-up funding team began designing a system that could grow with 
the institution. ‘Everything in Luxembourg was still in the making so we 
had to coordinate somehow with them, while being in Frankfurt.’

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The team set up a fixed timeslot for a conference call, Mondays at 
17.00, lasting anywhere from 15 minutes to an hour. ‘We called it “the 
save Europe call,”’ Weiss said. She recalled the small core in Frankfurt 
coordinating with Luxembourg, and sometimes the European 
Commission. ‘We talked about the market, upcoming transactions, 
and the sequencing of the transactions of the European Commission’s 
emergency fund, the EFSM, and those of the EFSF.’

João Gião, a former ESM/EFSF legal officer, who joined from the 
Portuguese securities regulator, said the public service aspect made the 
long hours tolerable and created a feeling of belonging. ‘When I moved 
here, I certainly thought I was on a mission. You kind of feel a special 
sense of reward,’ Gião said. ‘When you have to work late, you do it not 
with the goal of getting a bonus at the end of the year, but because you 
are trying to solve a problem that will improve lives, or at least make 
them less hard.’ 

In May 2012, the funding team started commuting, spending 
Monday to Wednesday in Luxembourg and flying back to Frankfurt 
to finish the working week. By then, the original four-person German 
finance group funding team had been joined by an experienced 
trader, a senior business analyst, and an information technology 
specialist who would make sure the EFSF could work smoothly with 
the finance agency systems. 

Klaus thought of it as the ‘Breakfast Club’: Dassyras, Gerhard 
Hannoschöck, Klaus, Thomas Ritter, Ruhl, and Weiss. Ruhl, who had 
become head of the EFSF front office division and was Weinberg’s 
right-hand man, remembers 12- and 14-hour days that ended up 
in a hotel across the street from the office. Weiss said that the 18.55 
Wednesday flight was her weekly commuting milestone. 

Over time, being on-site gained more importance as member states 
began requesting assistance and the EFSF developed new tools 
beyond basic aid loans. Funding Officer Rodriguez said there were 
‘intense negotiations’ to get staff to commit to relocating during this 
period, which eventually succeeded, even if some staff kept up a 
weekend commute afterwards. ‘It was not easy for them or for us,  
but it got progressively better in terms of settling them definitively  
in the institution.’ 

As the relocation to Luxembourg approached, Klaus had his turn to 
see the market in a new way. He was called on to investigate what 
physical set-up the rescue fund could use for conducting transactions, 

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down to picking out the furniture. He sought out his old private sector 
colleagues, but not for what they expected. ‘I visited trading floors in 
Frankfurt – I went to my former employer in search of practical info,’ 
he said. ‘To my former colleagues’ surprise, I showed up asking to 
speak to the facility manager. They would say “Really?” and I would say 
“Really. I would like to have a look at what kind of desks you have.”’ 

Later on, the middle and back office team worked together to organise 
the clearing and settlement of the ESM’s paid-in capital investments. 
While the team managing the capital executed such trades, the 
mechanics were handled by a US bank, and, when this was being set 
up in 2012, there was much discussion about whether or not the euro 
area’s firewall should depend on firms from outside the area to clear 
its transactions. 

But the core goal was to make sure the EFSF and ESM could function 
when the markets themselves weren’t working correctly, which meant 
using the best providers for the job. Those early days were marked by 
many calls with Germany’s Bundesbank, the ECB, and a European 
international central securities depository providing post-trade 
services to arrange all of the necessary payment connections. 

A look inside the EFSF 
and ESM trading room. 
Operations were originally 
split between Luxembourg 
and Frankfurt, but as the 
rescue fund grew, the 
entire trading staff was 
relocated to Luxembourg.

Credit: ESM

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

As the EFSF grew into the ESM, it became more important for all of its 
staff to be under the same roof. For Weinberg, who chose to stay at the 
German Finance Agency, this meant making sure his team was ready 
to take its data, technology systems, and team spirit to their permanent 
home. ‘We supported them as much as we could at that point in time,’ 
Weinberg said. ‘It was important for me personally that they could be 
transferred to Luxembourg as a whole group.’ 

The ESM took over the contracts of the funding team in 
January 2013, ending the formal link to the German Finance Agency. 
Since then, the funding team has more than doubled in size, and 
specialists in investor relations have been added. The focus has 
shifted to how to help the institution mature now that the pressing 
needs of the early days have ceded ground to new pressures to 
develop more versatile strategies and analytical products. Still, the 
core of the team has been the veterans who were present from the 
start. In the end, the ESM was able to import its entire team from 
the German agency, allowing the firewall to grow without losing the 
critical knowledge gained in its first two years. 

‘I have never experienced a team spirit like the one here in the German 
Finance Agency’s EFSF team,’ Weinberg said. ‘I had a feeling of the 
flow, like a runner’s high. If you are running along and are lucky you 
get into the flow. You feel that everything is moving effortlessly, and it 
gives you such a sense of satisfaction.’

Funding strategy, which began in Chapter 12, continues in Chapter 18.

Towards the ESM:  
‘a solid legal foundation’

15

Europe went into this without any consensus, 
no established arrangements, no constitutional 
mechanism and no tools for managing a 
meaningful funding problem. Europe definitely had 
a much, much bigger challenge than we did. I’ve got 
a lot of sympathy for how tough that was.

Timothy Geithner 
US Treasury Secretary (January 2009–January 2013)

As the EFSF began operations and financial markets continued 

to test the euro area, there was a growing awareness that a 
temporary rescue vehicle would not be enough. The mantra 

that ‘a crisis is a terrible thing to waste’ became a common refrain, 
voiced by politicians and commentators alike. 

Few saw the hastily set-up EFSF, with its guarantee-based structure, 
as the model for a new, permanent institution. Its lack of independent 
financial capacity made its fundraising vulnerable to volatile market 
moods, and the EU statistical authority classified the guarantees as 
Member State debt116, putting a burden on national finances. The 

116  Eurostat (2011), ‘New decision of Eurostat on deficit and debt: The statistical recording of 

operations undertaken by the European Financial Stability Facility’, Press release, 27 January 2011. 
https://ec.europa.eu/eurostat/documents/2995521/5034386/2-27012011-AP-EN.PDF/25064294-
4eae-4b50-a447-60165ca9718d?version=1.0

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

temporary fund represented what was politically feasible in May 2010, 
not what was economically desirable over the longer term.

‘The EFSF was set up as a temporary institution. It would be better to 
have something with the same mandate and the same instruments, but 
organise it differently as an international institution and a permanent 
one,’ said Chief Executive Regling.

High-level impetus for a permanent crisis mechanism had already 
come in with the Deauville understanding between Chancellor Merkel 
of Germany and President Sarkozy of France in October 2010. But 
there would be no repeat of the rushed establishment of the EFSF. For 
one thing, the immediate crisis seemed to retreat in late summer and 
early autumn 2010. 

More importantly, given the legal challenges filed in Germany against 
the ad hoc euro area rescue policies, a permanently endowed fund had 
to first be anchored in EU law.

‘Once the EFSF was established, what was important was to then move 
to the next step and create something that would be more robust and 
more credible,’ Malta’s Camilleri said. ‘It was important that we create 
an institution that was robust for the longer term.’

A discussion started over whether or not to amend the Treaty on 
the Functioning of the European Union, especially in the light of the 
Article 125 provision, which makes it illegal for a Member State to 
‘assume the commitments’ of other members. Commonly known as the 
no-bailout clause, Article 125 was intended to dissuade countries from 
running up excessive debts.

EU leaders endorsed the idea of a permanent fund at an October 2010 
summit and addressed the broader legalities in December 2010, when 
they composed an amendment to Article 136 of the EU Treaty117. This 
text affirmed that a stability mechanism could be established by the 
Member States ‘if indispensable to safeguard the stability of the euro area 

117  Conclusions of the European Council meeting (2010), CO EUR 21, CONCL 5, 17 December 2010. 

http://data.consilium.europa.eu/doc/document/ST-30-2010-INIT/en/pdf;  
All euro member states ratified the amendment in time for the ESM’s introduction in October 2012, 
but the amendment didn’t enter into force until 1 May 2013 following final ratification by the 
Czech Republic. See European Parliament (2013), Article 136 TFEU, ESM, Fiscal Stability Treaty, 
Ratification requirements and present situation in the Member States, 11 June 2013.  
http://www.europarl.europa.eu/meetdocs/2009_2014/documents/afco/dv/2013-06-12_
pe462455-v16_/2013-06-12_pe462455-v16_en.pdf

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as a whole’118. It meant that both the ESM and conditions for its use were 
reflected in primary law, the EU’s founding treaties. Financial aid under 
the mechanism, the amendment said, would be subject to economic and 
financial reforms, also known as strict conditionality.

The ESM was thus infused with a hybrid legal character. It was clarified 
that the permanent firewall was compatible with the EU Treaty, 
by virtue of the amendment, but set up outside the EU framework 
as an agreement among euro area governments. Gaspar, a former 
finance minister of Portugal who now heads the IMF’s fiscal affairs 
department, said the decision to go the intergovernmental route 
instead of founding a fully fledged EU institution expedited the set-up.

‘If you had tried to do it inside the European Union machinery 
involving the creation of a new institution through a treaty change, 
that would have taken much, much longer,’ Gaspar said. 

One outcome of this strategy was tighter control by national 
governments, said Buti, the European Commission’s director-general 
for economic and financial affairs. ‘The feeling was also that through 
an intergovernmental approach, Member States and parliaments had 
more of a grip on this and a capacity to stop,’ Buti said.

Germany’s former Finance Minister Schäuble said the treaty 
amendment facilitates the provision of financial aid without violating 
the no-bailout clause. ‘The newly added article119 explicitly clarifies 
that it is permissible for the euro area member states to provide each 
other with financial assistance, as a last resort to ensure the stability of 
the currency union and only under strict conditions,’ Schäuble said. 
‘These kinds of exceptional situations do not represent a violation of 
the no-bailout rule. Hence the ESM Treaty is based on a solid legal 
foundation.’

In the first half of 2011, decisions on the shape of the ESM took place 
against a fraught political and economic backdrop. Greece’s economy 
continued to deteriorate, making an additional injection of aid likely, 
while Ireland and Portugal had embarked on their own programmes. 

118  EU (2011), European Council decision of 25 March 2011 amending Article 136 of the Treaty on 
the Functioning of the European Union with regard to a stability mechanism for Member States 
whose currency is the euro, OJ L91/1, 6 April 2011.  
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32011D0199&from=EN 

119  EU (2012), Consolidated version of the Treaty on the Functioning of the European Union, 

OJ C326/47, 26 October 2012, Article 136(3).  
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012E/TXT&from=EN 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘There was a perception, or the understanding, that some countries 
were just too big for the EFSF capacity and that we needed to find 
something more robust to handle what would come in the future,’ said 
Albuquerque, who also served as Portuguese finance minister.

At first, the permanent fund was conceived of as a more smoothly 
functioning offspring of the EFSF. Its key operational features, sketched 
out by Eurogroup finance ministers in November 2010120 and finalised 
at a European summit on 24 and 25 March 2011121, resembled the 
EFSF’s capabilities at the time. The ESM was to be equipped with 
two instruments – lending to distressed member states based on a full 
macroeconomic adjustment programme, and primary market bond 
purchases – with a pricing structure that mimicked the EFSF’s122. 

In that early conception, aid decisions would have been by unanimity 
and the ESM would have enjoyed preferred creditor status over private 
sector bondholders, two features that triggered criticism.

What set the ESM apart was the use of paid-in capital instead of 
the EFSF’s guarantees. Euro area member states would contribute 
€80 billion upfront123. The funds were initially to be transferred in 
five annual instalments, starting with the ESM’s planned launch in 
July 2013. Euro area leaders also agreed on an additional €620 billion 
in ‘callable’ capital to be contributed when requested, giving the ESM a 
total subscribed capital base of €700 billion.

‘What is interesting, as a footnote to financial history, is that we 
created a unique mechanism for calling capital,’ said Verwey, a senior 
Dutch finance ministry official at the start of the crisis who is now 
with the Commission. ‘It deviates from everything that had been 
done before with financial institutions. We more or less automated it. 
From a rating perspective, this provides more security that the capital 
will indeed be there.’

120  Statement by the Eurogroup, 28 November 2010. http://www.consilium.europa.eu/uedocs/cms_

data/docs/pressdata/en/ecofin/118050.pd

121  European Council 24/25 March 2011 Conclusions, CO EUR 6 CONCL 3, Annex II, 24 and 

25 March 2011. http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2010%202011%20INIT

122  European Council (2012), ‘Treaty establishing the European Stability Mechanism’, Factsheet, 
2 February 2012. http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/
ecofin/127788.pdf

123  European Council 24/25 March 2011 Conclusions (2011), CO EUR 6 CONCL 3, 

Annex II, 24 and 25 March 2011. http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%20
10%202011%20INIT

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Those sums would give the ESM a strong position to borrow on the 
bond markets, enabling the ESM Board of Governors to endow the 
ESM with a lending capacity of €500 billion, a figure that harked back 
to euro area pledges at the EFSF’s creation in May 2010. 

The idea of a fully capitalised crisis response institution had been aired 
at the outset of the crisis, but wasn’t ripe politically, the Commission’s 
Benjamin Angel said. ‘We could not have convinced member states 
at that time to go for a capital structure, so we needed the EFSF to 
convince them that we could do a much better job and build in future 
a much more effective and more operational instrument,’ he said. ‘If we 
had gone straight to this nice and neat structure that the ESM is, I don’t 
think we could have managed to get everybody on board.’

Work on the ESM Treaty proceeded in the spring and summer of 2011, 
with the Commission in charge of the drafting. The lead role fell to 
Angel, who had been one of the Commission’s point men in shaping 
the initial crisis response tools. To sketch out the first version of the 
ESM Treaty, Angel closeted himself in his office for two days to delve 
into the workings of existing international financial institutions. ‘I 
printed the statutes of all the IFIs [international financial institutions] 
I could find, read them and their treaties to see what was behind there: 
how does it work, what kind of elements do we need to put in?’ Angel 
said. ‘We needed to start from somewhere.’

The London-based European Bank for Reconstruction and 
Development, a multilateral development bank, was founded in 1991 
and was thus the youngest major international financial institution 
at the time. It therefore proved to be a relevant template for internal 
administrative issues such as staffing and accounting, but that was  
of secondary importance to the governments that would underwrite 
the ESM. 

‘Ministers cared about our capital, how much they had to pay into 
the ESM because they had to generate the funds, and the treaty. They 
asked: “What are the voting modalities?’ The governance?” That’s 
what is important politically,’ Regling said. ‘There were very intense 
negotiations about the treaty.’

Both solidity and flexibility were called for. The ESM had to be 
firmly grounded, yet adaptable enough to deal with a crisis at an 
indeterminate point in the future. It made little sense to include treaty 
language that would confine the permanent fund to using only the two 
policy instruments then available to the EFSF. Jansen, the firewall’s 

 
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first general counsel, recalls that, at the time, discussions were already 
underway over adding tools such as direct bank recapitalisation. The 
firewall’s architects were aware others might be needed in future.

‘We knew this possibility and other possibilities, so we included in the 
treaty Article 19, which said that new instruments can be added by a 
resolution of the Board of Governors, which means the treaty need not 
be changed,’ Jansen said.

One question for the ESM Treaty was what kind of ties the permanent 
fund would have to the IMF. Even the member states that had sought 
an IMF role in the euro rescue effort were hesitant to write this 
irrevocably into the ESM Treaty. Nor could the euro area pre-commit 
the IMF on any policy question. The solution was to require a euro area 
member state that solicits financial aid to also ‘request’ it from the IMF, 
without prejudging the outcome.

ESM Treaty drafters had to address concerns in the markets – 
amplified by the growing speculation in early 2011 that Greece would 
have trouble repaying its debts – that the permanent fund would be 
used as a debt-restructuring vehicle to force losses on private sector 
bondholders. Some investors were critical of a treaty requirement that 
all euro area member states equip their sovereign bonds with collective 
action clauses, which set out a predictable mechanism to allow a 
voluntary agreement on a re-profiling or restructuring in crises, 
thereby preventing bondholders from refusing to take part. 

Some countries had instituted similar clauses already. The treaty 
stipulated that all ESM Members attach collective action clauses in new 
bond issuances (with maturities above one year) as of 1 January 2013, 
grandfathering previously issued debt as per standard practice. Vittorio 
Grilli, a former Italian finance minister and now a senior executive at 
J.P. Morgan, said that both the clauses and the exemption for existing 
bonds served to enhance euro area financial stability. ‘They were 
very careful that the collective action clauses would not apply to the 
outstanding debt,’ he said.

The first version of the treaty explicitly gave the ESM a role on 
debt sustainability management. In cases where debt was deemed 
sustainable, private investors would be encouraged to maintain their 
exposure; but, in cases where debt was not deemed to be sustainable, 
programme countries were required to engage in active negotiations 
in good faith to secure direct involvement from their non-official 
creditors in restoring debt sustainability. The first version went as far 

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as saying that the granting of financial assistance would be contingent 
on the country having a credible plan for restoring debt sustainability 
and on its demonstrating sufficient commitment to ensure adequate 
and proportionate private sector involvement. Progress in the 
implementation of that plan would be monitored under the programme 
and would be taken into account in the decisions on disbursements. 
Given the market jitters around requiring haircuts on sovereign debt, 
this was missing from the second and final ESM Treaty that would be 
adopted in 2012, other than a mention in the opening recitals.

Similar sensitivities were in play over asserting an ESM claim to 
preferred creditor status in the manner of the IMF. Such status was 
intended to protect the ESM as a lender of last resort, given that it is 
willing to lend to sovereigns when no one else does, in the case of a 
debt restructuring. This was not an issue for the EFSF, which ranks on 
an equal footing with other creditors. For the ESM, it was not clear how 
markets would manage the transition to the new framework, as other 
creditors had not been expecting their claims to become lower priority 
in the euro area. It was eventually decided politically that the firewall 
should waive preferred creditor status for Spain’s aid programme.

With respect to the ESM’s preferred creditor status, some nations made 
the point that taxpayers would benefit from the added protection, 
since, as a lender of last resort, the ESM would lend to a country 
only when all other investors are out. The counterargument was that 
it could scare off the same bond investors that the ESM was meant 
to put at ease. What is more, while the IMF’s status atop the lending 
hierarchy has been recognised thanks to its global membership, there 
was concern that investors outside Europe might contest the ‘preferred’ 
claim of the ESM as a purely European entity.

‘Preferred creditor status is good for you as preferred creditor, but it’s 
not good for the other creditors,’ said ESM Risk Officer den Ruijter. ‘It 
was quite a tricky issue and there were strongly divergent views among 
the countries.’

The solution reached in June 2011 was to rank the permanent fund 
as a preferred creditor just below the IMF, a status that did not apply 
to EFSF lending to the three countries then receiving rescue loans124. 
A year later, the same held true for Spain’s bank recapitalisation 

124  Reuters (2011), ‘ESM not preferred creditor for three bailout states’, 20 June 2011.  

https://www.reuters.com/article/eurozone-esm-status/esm-not-preferred-creditor-for-three-
bailout-states-idUSLDE75J1OG20110620

 
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programme, which was transferred to the ESM from the EFSF ‘without 
gaining seniority status’ in order to reassure holders of Spanish bonds 
that their investments would not be suddenly demoted in the creditor 
hierarchy125.

Wealth divergence across the euro area led to an adjustment of the 
national capital contributions. Central European countries such as 
Slovakia, with GDP per capita below the euro area average, argued 
that it was too burdensome for them to pay into the ESM at the same 
rate – based on each country’s shareholding in the ECB – as the more 
advanced economies.

Den Ruijter, who was at the time with the Dutch finance ministry, 
worked out a mechanism to benefit new ESM Members with GDP 
per capita below 75% of the EU average. This adjustment applies to 
the initial paid-in capital plus any future capital calls or increases 
in the overall capital stock. It is spelled out in Article 42 of the ESM 
Treaty, with eligibility restricted to the first 12 years of a country’s euro 
membership. Slovakia, for example, will benefit until 2020, whereas 
Lithuania, which joined in 2015, can benefit from the mechanism 
until the end of 2026. Malta, Estonia, and Latvia, are all also currently 
benefiting. Slovenia’s temporary adjustment ended on 1 January 2019.

‘The correction is only temporary because we assume that over time 
they’ll catch up with the rest of the euro area,’ den Ruijter said.

On 11 July 2011, finance ministers from the then 17 euro countries 
signed the first version of the ESM Treaty126, an act that would 
normally be the prelude to ratification by the Member States. But by 
then, forces were at work – in Greece, in the euro area more broadly, 
and in financial markets – that would lead the euro area to redo the 
treaty, revise its crisis-fighting strategy, and retool its rescue funds. 

125  Statement by the Eurogroup, 20 July 2012. http://www.consilium.europa.eu/uedocs/cms_data/

docs/pressdata/en/ecofin/131914.pdf 

126  Treaty establishing the European Stability Mechanism, 11 July 2011, Luxembourg.  

https://www.cvce.eu/en/obj/treaty_establishing_the_european_stability_mechanism_11_
july_2011-en-cb18477d-69e4-4645-81a9-3070e02d245a.html

Expanding the EFSF 
toolkit: bonds, banks, 
and guarantees

16

Seventeen democracies cannot react as quickly 

as financial markets, which may change every 
minute. Political processes need time.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

The 2011 accord to create a permanent mechanism was a 

breakthrough. Still, the ESM’s scheduled start date was 
more than two years away. The euro area had to take more 

immediate action to counter the crisis. At an emergency summit on 
11 March 2011, beefing up the EFSF and providing more relief for 
distressed countries dominated the agenda, a peak in the long debate 
over the euro area’s rescue capacity.

From the outset, the EFSF’s principal drawback had been its structure 
of national guarantees. In June 2010, the euro area took an initial 
step to address the problem that not all the countries providing these 
guarantees were themselves rated AAA: it raised its backing to 120% of 
the fund’s capacity. But, even with that buffer, the EFSF could garner a 
top rating only if it limited its total possible lending envelope to about 
€250 billion, well below the €440 billion proclaimed in May 2010. 

Faced with the inescapable mathematics, the leaders had no choice 
but to bolster the guarantees a second time. So, at the March 2011 
summit, they pledged to make the targeted EFSF lending capacity ‘fully 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

effective’127 until the ESM took over. In practice, that entailed raising 
the EFSF guarantees to €780 billion, or 165% of the total, in order to 
underwrite lending of the full €440 billion. By October 2011 the whole 
amount was available, minus the funds that by then had been set aside 
for Ireland and Portugal.

In the virtuous circle of winning market confidence for the euro rescue 
effort, the 2011 guarantee increase was pivotal. Stronger euro area 
backing for the rescue fund translated into more market confidence, 
which in turn allowed the EFSF to borrow under more favourable 
conditions. Better access to market financing lessened the likelihood of 
the guarantees ever having to be activated.

Programme countries were the ultimate beneficiaries. Secure access to 
funding swept aside any doubts about the EFSF’s ability to put together 
aid packages. 

Ultimately, no money would change hands to lift the guarantee levels. 
Moreover, as long as the programme countries followed through on 
their economic and budget commitments, the risk that the guarantees 
would need to be called was low. 

For accounting purposes, however, the EU statistical authority, Eurostat, 
classified the use of the guarantees as debt. As long as the EFSF remained 
unused, this point was moot. However, as soon as the EFSF started to issue 
debt to fund programmes, each such issue also upped EFSF shareholders’ 
debt figures in line with their share of the guarantee given128. 

‘If you look at the EFSF and certain aspects of the EFSF, at how debts of 
the EFSF were routed to Member States, that is one aspect that perhaps 
could have been addressed better,’ Malta’s Camilleri said. ‘But, within 
the context in which we were operating, here was a list of priorities 
which had to be taken first. Which was the biggest priority? The 
biggest priority was stabilisation.’

The euro area had already acted to minimise the deleterious statistical 
impact on aid recipients: in designing the technical specifications for the 
start-up EFSF, they had added in 2010 a ‘stepping-out mechanism’ that 
released countries that were receiving aid from the financial responsibility 
of standing behind the rescue mechanism as a whole. New euro members 
such as Estonia, Latvia, and Lithuania were also exempt from providing 
guarantees that predated their full euro membership. Still, the guarantee 

127  Conclusions of the Heads of State or Government of the euro area of 11 March 2011, 11 March 2011.  
https://www.consilium.europa.eu/media/21423/20110311-conclusions-of-the-heads-of-state-or-
government-of-the-euro-area-of-11-march-2011-en.pdf

128  Eurostat (2011), ‘New decision of Eurostat on deficit and debt. The statistical recording of 

operations undertaken by the European Financial Stability Facility’, Press release, 27 January 2011.  
https://ec.europa.eu/eurostat/documents/2995521/5034386/2-27012011-AP-EN.PDF

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difficulties showed the EFSF’s limitations and the need for the ESM to 
take its place as the euro area’s backstop.

In March 2011, however, the EFSF was all that was available. At the 
emergency summit, leaders also took the first in a series of steps 
to expand the rescue toolkit, by empowering the EFSF to purchase 
bonds on primary markets129. This tool, which went through several 
permutations as the rescue funds evolved, was intended to shore up 
borrowing by countries with partial market access. Buoyed by the EFSF 
as an additional buyer, bond sales would be less likely to be stymied by 
insufficient demand. This instrument has not been used, but remains 
available through the ESM should a country ask for it.

May 2011 brought fresh urgency. On 6 May 2011, finance ministers 
from Germany, Spain, France, and Italy met with Trichet, then 
president of the ECB, at a castle in Luxembourg to discuss more aid 
for Greece and the real prospect of writing down Greek debt and 
forcing losses on private investors. Trichet was distressed at the time 
by leaks to the media about a meeting out of the public eye and the 
presumption that the agenda included Greece’s potential departure 
from the euro area – particularly since the Deauville deal was still 
on the table. Trichet, an adamant opponent of normalising sovereign 
debt writedowns, walked out of the meeting. Nonetheless, the event 
prompted press reports that Greece might leave the euro. 

The international crisis-fighting team was thrown into further turmoil 
when IMF Managing Director Strauss-Kahn stepped down that same 
month130. In early July, France’s Lagarde was named his successor, 
around the same time that Italy’s Draghi was chosen to take over from 
Trichet at the ECB.

Meanwhile, market access was faltering in many corners of the euro 
area. In mid-May, the EU published debt and deficit forecasts that 
showed further erosion of the fiscal outlook in Greece and Portugal. 
On 31 May, Cyprus drew a three-notch downgrade from Fitch, and 
other markdowns followed. On 5 July, Moody’s cut Portugal’s long-
term sovereign debt to below investment grade status131.

129  Conclusions of the Heads of State or Government of the euro area of 11 March 2011, 11 March 2011.  
http://www.consilium.europa.eu/media/21423/20110311-conclusions-of-the-heads-of-state-or-
government-of-the-euro-area-of-11-march-2011-en.pd

130  IMF (2011), ‘IMF Managing Director Dominique Strauss-Kahn resigns’, Press release, 18 May 2011. 

http://www.imf.org/en/News/Articles/2015/09/14/01/49/pr11187;  
Financial Times (2011), ‘Strauss-Kahn resigns as head of IMF’, 19 May 2011.  
https://www.ft.com/content/ab0bdf0a-81ce-11e0-8a54-00144feabdc0

131  For further discussion of the factors that influence sovereign ratings, see D’Agostino, A. and 

Lennkh, R.A. (2016), Euro area sovereign ratings: An analysis of fundamental criteria and subjective 
judgement, ESM Working Papers 14, 12 May 2016.  
https://www.esm.europa.eu/publications/euro-area-sovereign-ratings-analysis-fundamental-
criteria-and-subjective-judgement

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Sobering fiscal numbers, deteriorating credit quality, and waning 
confidence in Greece’s turnaround combined to unnerve financial 
markets. It was clear that part of the original strategy – elevated 
interest rates on official loans to deter other would-be borrowers –  
was not having the intended effect. 

Euro area leaders rebooted the crisis-fighting strategy at another 
hastily arranged summit, in July 2011. Relief for programme countries, 
in the form of lower rates and longer loans, was accompanied by a 
decision to further expand the rescue toolkit. The EFSF and, later, the 
ESM were equipped with three new instruments: secondary-market 
bond buying, precautionary aid programmes, and indirect bank 
recapitalisation in order to help countries reinforce their financial 
sectors without a full-scale macroeconomic adjustment programme. 

The secondary market purchases, which so far have never been used, 
would take advantage of the firewall’s influence in the market in a 
completely different way from its usual activities. For the ESM’s day-to-
day investment operations, the opposite effect is required: the objective is 
to buy and sell sovereign bonds and other securities without a noticeable 
impact on market pricing. But if the euro area were to authorise 
sovereign bond purchases – possibly alongside a precautionary or full 
economic adjustment programme – the ESM would design its purchases 
specifically to support market prices for bonds of the programme 
country, provided all necessary conditions were met.

Rescue fund purchases of bonds on the secondary market could take 
place only ‘on the basis of an ECB analysis recognising the existence 
of exceptional financial market circumstances and risks to financial 
stability’132, and only by mutual agreement of all the euro area member 
states, the summit statement said. Precautionary programmes were 
designed to support a country’s market access and thereby pre-empt 
a larger crisis by allowing a country to seek help at an early stage and 
benefit from less strict conditions.

Some of the inspiration for the new firewall tools came from the IMF. 
Lagarde said the IMF has had positive experiences with countries 
that took up its precautionary credit lines, and such instruments ‘can 
be extremely helpful.’ Just as no country has sought a bond-buying 
programme, the ESM has yet to use the precautionary instrument. 
‘There are countries that would do well with a precautionary line, but 
they are a bit concerned about being associated with it,’ she said. 

132  Statement by the Heads of State or Government of the euro area and EU institutions, 21 July 2011. 
https://www.consilium.europa.eu/media/21426/20110721-statement-by-the-heads-of-state-or-
government-of-the-euro-area-and-eu-institutions-en.pdf

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One euro area resource, however, is without an IMF equivalent: the 
banks-only programme that provides loans for countries to recapitalise 
banks without requiring a full macroeconomic programme. It is 
known as indirect bank aid because the funds are channelled through 
the national government. It has been used successfully in Spain, where 
it was granted under the EFSF and then transferred to the ESM by the 
time funds were disbursed. Later on, once the ESM was in place and 
the EFSF had ceased offering new programmes, the euro area would 
consider whether or not to provide direct bank aid and remove the 
national government from the financial equation, but back in 2011 
there was no such instrument.

The summit deal was essential to secure central bank support for the 
by now inevitable impending writedown of Greece’s privately held 
debt. Trichet had been pushing back against the idea because he didn’t 
want the euro area to set a precedent that could spook markets, but the 
July talks persuaded him to adjust his stance. 

The former ECB chief said he thought it would at some point be 
necessary to engage in debt alleviation for Greece. However, as long 
as the Deauville agreement was in the air, any such event would be 
interpreted by market participants as the first in a sequence that could 
touch all vulnerable countries in the euro area, risking its dismantling. 
It needed to be clear that taking action regarding Greece would not lead 
to similar fates for other euro countries. Trichet said this reasoning led 
him to assent, on behalf of the ECB, in July 2011 to debt writedowns for 
Greece, as long as the euro area agreed to certain conditions. 

Specifically, he wanted assurances that the ECB would not be hurt by 
the event; that the governments would affirm solemnly that all other 
countries would honour their obligations, in effect cancelling the 
Deauville agreement; and that the governments accepted that they could 
intervene themselves on the secondary market of public debts. The goal 
was ring-fencing all other euro countries from Greece-related contagion. 
When the EU leaders released their July 2011 statement, the key 
paragraph for Trichet was this: ‘As far as our general approach to private 
sector involvement in the euro area is concerned, we would like to make 
it clear that Greece requires an exceptional and unique solution’133. 

Trichet said the euro area also benefited from its July commitment to 
bolster the EFSF and ESM with new tools, particularly by giving the 
firewalls the power to intervene on secondary bond markets under 
exceptional circumstances. This was an ‘extremely important decision’ 
that gave the euro area more tools to address contagion, he said.

133  Ibid. 

 
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Focus  
Bond-buying power

Early in the EFSF’s existence, the euro area decided it should have the power 
to buy bonds on primary or secondary markets, if requested by a euro area 
member state in danger of losing market access. These tools could be used 
to help the country raise liquidity and support the demand for its bonds. Any 
such programme would first need to be requested by the beneficiary and 
approved by the Eurogroup, along with the necessary conditions. But then it 
would need to be executed.

Primary-market purchases would be carried out by the EFSF’s funding 
team, with its substantial experience in bond offerings. Secondary-market 
purchases might be trickier, especially in the EFSF’s early days, when there 
was not yet an established investment department. 

The Bank of France and the ECB decided to help. The EFSF developed a 
governance system and communications platform for collaborating with the 
two central banks. ‘Very quickly the capacity of the EFSF was put in place. 
Everything was ready at a very early stage – but it’s never been used,’ said 
Sébastien Lévy, a former Bank of France staffer who is now the ESM’s head 
of investment and treasury. 

The ESM now has two bond-buying instruments at its disposal that countries 
may request: primary-market purchases, intended to help countries continue 
to sell bonds directly to investors, and secondary-market purchases, which 
can be used to aid liquidity on capital markets.

With the ESM’s establishment, the ECB withdrew and focused on its own bond-
buying programmes. The ESM took over all EFSF activities. But the Bank of 
France has remained on call as a service provider for both the EFSF and now 
the ESM. Should a secondary-market purchasing programme ever take place, 
the ESM’s investment division would be at the helm of the operation, but trades 
could be carried out in either Luxembourg or Paris. This gives the ESM more 
flexibility, and also more avenues for carrying out its purchases. 

In August 2011, Spain and Italy became the targets of market 
speculators, amid warnings from private sector analysts that their 
market access was under threat134. Trichet said he turned to the July 

134  New York Times (2011), ‘Worries rise over Spain and Italy debt’, 2 August 2011.  

https://www.nytimes.com/2011/08/03/business/global/pressure-builds-on-italy-and-spain-over-
finances.html 

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framework as the basis for a series of actions to push back against 
the financial contagion. First, he asked the euro area governments – 
particularly Germany and France – to confirm their July commitments. 
He also wrote on behalf of the ECB to the prime ministers of Spain 
and Italy, ‘to draw their attention to the necessity of regaining 
creditworthiness through effective and visible measures’. Against this 
backdrop, the ECB was ready to act. 

The ECB sought to protect its monetary transmission mechanism, 
by patching up dysfunctional segments of bond markets. On 
4 August, the ECB voted to resume its own bond-buying programme, 
which it had started in 2010 during the euro area’s first efforts to 
build a coordinated crisis response135. Three days later, the ECB 
held an emergency conference call and signalled it would begin 
purchasing Italian and Spanish bonds as part of its Securities Markets 
Programme136. The impact was immediate: the next day, Spain’s 10-
year yield fell 88 basis points to 5.16% and Italy’s sank 80 basis points 
to 5.28% on Monday 8 August. 

But that respite proved short-lived. There was a perception that 
contagion was beginning to spread. In the month of October alone, 
Spain and Italy were hit by a wave of downgrades attributed to political 
uncertainty, weak growth, and the ongoing crisis. Standard & Poor’s 
downgraded Cyprus and Slovenia. 

135  ECB (2011), ‘Introductory statement to the press conference (with Q&A)’, Transcript, 4 August 2011.  

https://www.ecb.europa.eu/press/pressconf/2011/html/is110804.en.html

136  ECB (2011), ‘Statement by the president of the ECB’, Press release, 7 August 2011.  

http://www.ecb.europa.eu/press/pr/date/2011/html/pr110807.en.html

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New EFSF instruments 

June 2010, EFSF commences operations
Initial design includes powers to offer macroeconomic assistance 
programmes to governments that accept conditions.

March 2011, political agreement137 on: 
•  extra guarantees to make the full €440 billion capacity available for 

programme lending;

•  reduction in interest rates for countries that accept reform programmes;
•  possibility of primary-market bond purchases.

July 2011, political agreement138 on:
•  precautionary aid programmes;
•  indirect bank recapitalisation;
•  possibility of secondary-market bond purchases.

October 2011, political agreement139 on: 
Possibility of leverage to expand capacity of funds, fleshed out by finance 
ministers and leaders in November and December.

February 2012, leverage programmes ready for use if needed 
Two versions: 
1. European Sovereign Bond Protection Facility (ESBPF), which would provide 
partial-risk protection certificates to new bonds issued by programme 
countries. Primarily designed to work as part of a precautionary aid 
programme; would back 20% to 30% of bond value.

2. European Sovereign Bond Investment Facility (ESBIF), a co-investment 

fund, which would use funds from public and private investors to purchase 
bonds in the primary and secondary markets, with a first loss tranche to be 
financed by EFSF.

June 2013, EFSF phased out 
Leverage vehicles remain unused.

3 December 2015 
ESBPF liquidated and closed.

7 December 2016
ESBIF liquidated and closed.

137  Conclusions of the Heads of State or Government of the euro area of 11 March 2011, 11 March 2011.  
http://www.consilium.europa.eu/media/21423/20110311-conclusions-of-the-heads-of-state-or-
government-of-the-euro-area-of-11-march-2011-en.pdf

138  Statement by the Heads of State or Government of the euro area and EU institutions, p. 3, 21 July 2011. 
https://www.consilium.europa.eu/media/21426/20110721-statement-by-the-heads-of-state-or-
government-of-the-euro-area-and-eu-institutions-en.pdf

139  Euro summit statement, p. 6, 26 October 2011.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.pdf;  
Statement by the euro area Heads of State or Government, p. 5, 9 December 2011.  
https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf

Meeting at the opera: 
the leverage debate

17

Intergovernmentalism was the solution  

to the crisis.

Thomas Wieser 
Chairman of the Eurogroup Working Group  
(October 2011–January 2018)

Euro area politicians were under fire in their own countries as 

the crisis gained speed, which made it hard to find common 
ground on how next to tackle the crisis. On the one hand, the 

ESM was on the way and the EFSF was fully operational. On the other, 
each additional step towards a comprehensive firefighting approach, 
however incremental, was met with fierce debate.

Leaders met for a record 11 times in 2011 alone, debating how – and 
how far – to extend the rescue funds’ financial reach. Over the course 
of five formal meetings, an extraordinary summit, and one ‘informal’ 
meeting of the European Council, four euro area summits, they 
debated new tools for the EFSF and how to ensure the permanent 
firewall’s decision-making agility. The process would culminate in a 
dramatic move to make the ESM more responsive and bring forward 
its start date. But first they had to prepare the political ground.

Top of the agenda was the guarantee increase to unlock the EFSF’s 
full capacity. Germany’s Constitutional Court cleared the way on 
7 September 2011, dismissing legal challenges to the temporary 

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firewall and residual objections to the first Greek programme. The 
court also held that, in general, a German role in major rescue 
operations required the approval of either the Bundestag’s budget 
committee or a full plenary session.

The next step was persuading German lawmakers to grant their 
consent to the EFSF expansion. Regling, the EFSF’s chief executive, 
contributed to the debate by testifying before the German parliament.

‘It was probably useful that I was there to explain it in person,’ said 
Regling. A German newspaper that was sceptical of the changes 
‘wrote at one point that if I had not been there, maybe it wouldn’t 
have gone through parliament or the hostility would have got out of 
control.’ Despite the endorsement by the euro area’s largest country, 
politics elsewhere was marked by growing resistance to the rescue 
programmes. 

Finland added a condition to its involvement in future rescues, 
after the eurosceptic True Finns party surged to 19% of the vote in 
parliamentary elections140. The new government coalition insisted 
on obtaining collateral from aid recipients before assenting to a 
programme. For aid-seeking countries, putting up collateral would 
entail an additional cost – one that would potentially undercut a 
rescue package in the event that more creditor countries followed 
Finland’s example.

In Slovakia, the EFSF upgrade led to the downfall of Prime Minister 
Radičová’s government. While three coalition partners favoured 
the guarantee increase as the necessary price for euro membership, 
a junior partner, the Freedom and Solidarity Party, baulked. On 
10 October, the EU urged Slovak political parties ‘to rise above the 
positioning of short-term politics’141, but Radičová lost a confidence 
motion a day later. In the political bargaining that ensued, the 
opposition party Smer agreed to back the EFSF enhancements in 
exchange for the holding of early elections in 2012. The EFSF bill 
passed on 13 October. Radičová’s government went on to be defeated 
in the subsequent election.

140  Statistics Finland (2011), ‘True Finns the biggest winner in the elections. Coalition party the 

largest party in the parliamentary elections 2011’, 29 April 2011.  
https://www.stat.fi/til/evaa/2011/evaa_2011_2011-04-29_tie_001_en.html 

141  Joint statement by President Herman Van Rompuy and President José Manuel Barroso on the 

recent political developments in Slovakia (2011), EUCO 95/11, 12 October 2011.  
https://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/125058.pdf 

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With a Group of 20 summit looming in November, pressure on Europe 
to do more mounted from every direction. The Vix index, for instance, 
which measures future volatility and global risk aversion, had been 
elevated since August. EU countries outside the euro suffered from 
growing market volatility, yet had no control over euro area policy 
and would face the consequences of inaction or heightened crisis. 
Countries outside the EU were affected too.

The world was watching what tack the euro area would take; the IMF’s 
Lipton said: ‘It needed to be convincing enough to calm markets and 
avoid contagious spread of sovereign risk premia that seemed to be 
such a threat to other governments.’ 

There was no shortage of ideas for getting more firepower out of 
the euro area’s rescue funds. France proposed granting the EFSF 
a banking licence, enabling it to borrow from the ECB. But others 
argued that a bank-style credit line for the EFSF would intrude 
on the central bank’s independence and violate rules against the 
monetary financing of governments.

Crisis diplomacy went into overdrive in October, ranging from the 
traditional summit venue in Brussels to backroom discussions among 
key leaders at Frankfurt’s Old Opera House during a retirement 
ceremony for Trichet at the end of his ECB term. Trichet used 
the occasion to remind the euro area leaders in attendance of the 
commitments they had made at the 21 July summit142. 

Euro summits on 23143 and 26 October144 addressed what European 
Council President Van Rompuy called ‘the by now familiar fronts 
where action was needed: Greek debt sustainability, the firewall against 
contagion, the banking sector, economic growth’145. 

To give the EFSF more heft, the leaders decided to set up two leverage 
vehicles that could use smaller upfront investments to unlock far 
larger aid sums. Eventually these would be christened the European 

142  Statement by the Heads of State or Government of the euro area and EU institutions, 21 July 2011. 
https://www.consilium.europa.eu/media/21426/20110721-statement-by-the-heads-of-state-or-
government-of-the-euro-area-and-eu-institutions-en.pdf

143  European Council, 23 October 2011, Conclusions, EUCO 52/1/11, 30 November 2011.  
https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125496.pdf 

144  Euro summit statement, 26 October 2011.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.pdf 

145  The European Council in 2011, p. 7, January 2012.  

https://www.consilium.europa.eu/media/21347/qcao11001enc.pdf

 
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Sovereign Bond Protection Facility and the European Sovereign 
Bond Investment Facility, the latter a co-investment fund able to draw 
investors from around the world.

‘The leverage effect of both options will vary, depending on their 
specific features and market conditions, but could be up to 4 or 5,’ euro 
leaders said in the 26 October 2011 statement146. 

Each would require incorporating a new special purpose vehicle 
in Luxembourg under plans drawn up quickly by the EFSF staff. 
On Sunday 30 October, the EFSF’s leadership convened in a global 
teleconference. Regling and CFO Frankel were in Tokyo, while the 
EFSF’s investment advisors were in New York. Jansen, then general 
counsel, was spending the day with his family, while Anev Janse, the 
secretary general, was celebrating his 29th birthday. The party didn’t 
quite turn out as planned. 

‘On that particular Sunday, all of a sudden we had to have a 
Management Board meeting,’ Anev Janse said. ‘Next to the EFSF and 
ESM, we had to create two other separate entities. From noon until five 
in the afternoon, I was on a call discussing questions like: “How do we 
set up these SPVs [special purpose vehicles]? How do we make this 
work organisationally? What are the financial structures? How do we 
build that into our systems?”’

As details came into focus, it became evident that the proposed up 
to five-fold leveraging of EFSF funds was a bridge too far. Part of the 
existing facility was already allocated to Ireland and Portugal, with 
more earmarked for Greece. In addition, it appeared that financial 
markets would require more participation from the EFSF to make 
either of the leverage plans workable. Doubling or tripling resources 
from the fund would be more realistic, under proposals Regling 
brought to a November meeting of the Eurogroup. 

Both leverage options could be combined with other rescue 
instruments, but unlike other EFSF tools, they wouldn’t be taken over 
by the ESM. At their debut, however, they were an anchor point for the 
euro area strategy. The next summit, on 9 December 2011, vowed that 

146  Main results of euro summit, 26 October 2011.  

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125645.pdf 

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(From left) Evangelos 
Venizelos, Greece’s finance 
minister, Olli Rehn, the 
European Union’s economic 
and monetary affairs 
commissioner, Wolfgang 
Schäuble, Germany’s finance 
minister, Jean-Claude 
Juncker, Luxembourg’s prime 
minister and president of 
the Eurogroup, and Mario 
Monti, Italy’s prime minister, 
arrive for a Eurogroup 
finance ministers meeting 
at the European Council 
headquarters in Brussels, 
Belgium, on 29 November 
2011 as efforts to expand the 
rescue fund falter.

Credit: Jock Fistick/
Bloomberg via Getty Images

they would be ‘rapidly deployed’147, and the two vehicles were declared 
ready for use in February 2012148. But the leverage vehicles would later 
be dissolved, unused, even though investors had expressed interest in 
cooperating on their financing. 

By the following year, the crisis – and the response – would move on, 
as centre stage shifted to more overarching decisions on economic 
governance and crisis management also taken at that same 9 December 
summit. These actions, as so often in policymaking to stabilise the 
euro area, reflected a compromise between the interests of creditor and 
programme countries by acting on two fronts, crisis prevention and 
crisis response.

On the governance front, the leaders toughened the euro area’s fiscal 
rules by committing to a new pact – eventually known as the Treaty 
on Stability, Coordination and Governance in the Economic and 
Monetary Union149 – that enshrined the pursuit of balanced budgets 

147  Statement by the euro area Heads of State or Government, 9 December 2011.  

http://ec.europa.eu/dorie/fileDownload.do;jsessionid=zrKxL3CyxC2bUHVaut8198iEXakiK35PBF
qXWiHCu9k50-L7EIBv!1583997504?docId=1099413&cardId=1099411

148  EFSF (2012), ‘European sovereign bond protection facility launched’, Press release, 17 February 2012.  
https://www.esm.europa.eu/press-releases/european-sovereign-bond-protection-facility-launched

149  Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, 

2 March 2012. https://www.consilium.europa.eu/media/20399/st00tscg26_en12.pdf

 
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in national law and committed euro countries to closer economic 
coordination. While open to countries outside the euro area, the fiscal 
compact150 was binding on the common currency countries and the 
additional EU countries that opted in. Twenty-five of the then 27 EU 
countries signed it in March 2012151.

As Regling explained, the push for more effective rules meant that 
‘national governments will remain in charge and accountable, 
responsible for their fiscal and structural reforms. However, reforms 
need to be better coordinated and must work better than in the past.’ 

The commitment to enhanced fiscal stewardship, to be made at the 
constitutional level in most cases152, was intended to help countries 
avoid the need for a rescue programme. The pledges also paved the 
way for a breakthrough on crisis management tools. 

Moving beyond earlier steps to increase the EFSF’s firepower, the leaders 
announced at the summit that the launch of the ESM – then scheduled 
for mid-2013 – would be brought forward by a year, to July 2012.

‘The Treaty will enter into force as soon as Member States representing 
90% of the capital commitments have ratified it,’ the post-summit 
statement said153. ‘Our common objective is for the ESM to enter into 
force in July 2012.’

The planned speedier introduction of the ESM reshaped the course 
of crisis management. Although that timetable would slip by a few 
months, the move was still a decisive step forward that unshackled the 
rescue effort from the EFSF’s guarantee structure. Equally important 
to getting the ESM up and running fast, the euro area sped up the 
delivery of the ESM’s paid-in capital, starting with two tranches in 

150  ECB (2012), ‘Main elements of the fiscal compact’, Monthly Bulletin, p. 101, March 2012.  

https://www.ecb.europa.eu/pub/pdf/other/mb201203_focus12.en.pdf?0ea5f8ccbeb103061ba3c778

151  European Commission (2017), ‘The fiscal compact – taking stock’, 22 February 2017.  

https://ec.europa.eu/info/publications/fiscal-compact-taking-stock_en 

152  European Commission (2017), ‘Report from the Commission presented under Article 8 of 

the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union’, 
C(2017) 1201 final, Appendix III, pp.18-19, 22 February 2017.  
https://ec.europa.eu/info/sites/info/files/c20171201_en.pdf

153  Statement by the euro area Heads of State or Government, 9 December 2011.  

http://ec.europa.eu/dorie/fileDownload.do;jsessionid=zrKxL3CyxC2bUHVaut8198iEXakiK35PBF
qXWiHCu9k50-L7EIBv!1583997504?docId=1099413&cardId=1099411 

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2012 and concluding with the final tranche in 2014, a full four years 
ahead of the original schedule154.

Critical features of the proposed ESM were modified as well. Amid 
lingering concerns in the markets that Greek bond writedowns, by 
then under negotiation, would set a precedent for future rescues, the 
leaders added language to the preamble of the ESM Treaty to reassure 
investors that the Greek solution was ‘unique and exceptional’155. Only 
in extreme cases, the summit statement said, would the ESM pursue 
private sector involvement, and then solely in accordance with ‘well 
established IMF principles and practices.’

Summit debate then tackled the requirement for unanimous decisions 
on loans to programme countries – a rule written into the first draft 
of the ESM Treaty. There was widespread recognition that, given 
the vagaries of national politics, the unanimity rule could hinder 
rescue efforts, especially when rapid intervention was called for. At 
the summit, the leaders added an emergency procedure to the ESM 
Treaty that would allow the granting of financial assistance over the 
objections of some of the euro area’s smaller members.

‘To ensure that the ESM is in a position to take the necessary decisions 
in all circumstances, voting rules in the ESM will be changed to include 
an emergency procedure. The mutual agreement rule will be replaced 
by a qualified majority of 85%, in case the Commission and the ECB 
conclude that an urgent decision related to financial assistance is 
needed when the financial and economic sustainability of the euro area 
is threatened,’ the leaders said156.

Under the 85% threshold, Germany, France, and Italy, the ESM’s 
three largest shareholders, continued to have blocking powers. As 
Schäuble, then German finance minister, explained, this was essential 
for him to support the ESM.

‘Given the sums involved, someone has to take responsibility for them 
– namely the taxpayers in the member states, including the Germans 

154  Statement of the Eurogroup, 30 March 2012.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/129381.pdf 

155  Statement by the euro area Heads of State or Government, 9 December 2011.  

http://ec.europa.eu/dorie/fileDownload.do;jsessionid=zrKxL3CyxC2bUHVaut8198iEXakiK35PBF
qXWiHCu9k50-L7EIBv!1583997504?docId=1099413&cardId=1099411

156  Treaty establishing the European Stability Mechanism, 11 July 2011.  

https://www.cvce.eu/en/obj/treaty_establishing_the_european_stability_mechanism_11_
july_2011-en-cb18477d-69e4-4645-81a9-3070e02d245a.html 

 
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with their 27% share in the paid-in capital,’ Schäuble said. ‘Parliament 
is accountable to the German taxpayers, and the finance minister 
is in turn accountable to parliament. Nobody can relieve me of this 
responsibility.’

Teixeira dos Santos, then Portuguese finance minister, said the shift to 
the 85% rule overcame ‘a serious limitation on the decision-making 
process – without which member states in crisis could see the approval 
of the rescue programme refused or delayed. That would further 
worsen the situation.’

Recalling the negotiations in the Task Force on Coordinated Action, 
Benjamin Angel of the European Commission said it took ‘several 
attempts’ to remove the unanimity rule. ‘It’s potentially good to have 
these procedures, even though we haven’t used them,’ he said. 

Taken together, the ESM overhaul reflected lessons learned from 
two years of crisis fighting and gave the euro area a new toolbox for 
curbing contagion. Nevertheless, the new clause notwithstanding, 
it would still be hard for the euro area to press ahead with major 
decisions without consensus.

‘Just think of how difficult it was for certain smaller ESM Members to 
justify the Greek programme to their own populations,’ said Schäuble. 
‘If all Members support a programme, then at least one important 
precondition is met in terms of achieving political acceptance in the 
monetary union.’

Rethinking  
rescue funding:  
the diversified strategy

18

As a permanent issuer in the market, you need 

to have a strategy that can be communicated. 
Transparency and reliability are key.

Thomas Weinberg 
Head of the German Finance Agency’s EFSF team (2010–2013)

With outstanding rescue debt reaching out a couple of 

decades, it became obvious over the course of 2011 that the 
newly operational EFSF and the incipient ESM were already 

in the market for the long haul. This required the EFSF to step back 
and craft a plan for how to go about this in the fixed-income markets. 
The resulting diversified funding strategy, in place by November 2011, 
proved to be one of the firewall’s most pivotal strategic moves157.

‘Looking back, this was the crucial element to make it possible for the 
EFSF and ESM to be such a success,’ said Ruhl, head of funding and 
investor relations. ‘With the liquidity needs for Portugal and Greece, 
back-to-back funding wouldn’t have allowed us to raise the money 
needed. We needed to broaden our approach.’ 

157  EFSF (2012), ‘Financial statements, management report and auditor’s report: 31 December 2011’, 
p. 3, 12 June 2012. https://www.esm.europa.eu/sites/default/files/efsfannualaccounts2011.pdf 

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As the debt crisis deepened, the EFSF faced increased uncertainty 
with its initial market approach of borrowing only when ready  
to disburse. Programme country negotiations missed deadlines,  
and political discussions frequently ended without a verdict.  
Because the EFSF couldn’t raise money until a programme 
disbursement was approved, it couldn’t front-run its future 
borrowing needs even when it looked like another rescue was  
on the immediate horizon. 

‘For every single country, the time between the request and the 
disbursement was short, which meant we had to rush to be able to help 
them immediately after the request,’ said CFO Frankel. ‘If you cannot 
prepare, it is obvious that you don’t get the best price.’

As more countries required emergency assistance, talks began  
on the best way to facilitate ongoing market access. The firewall’s 
initial back-to-back funding strategy called for a straightforward 
approach to financial markets: one bond, one loan, with similar 
maturities, rates, and financial characteristics, issued by the EFSF  
for the programme country. But, as the EFSF was increasingly  
pressed into service, inefficiencies emerged. Borrowers wanted 
relatively long loans, but investor appetite was often for much 
shorter-term securities.

A cartoon depicts EFSF 
CEO Klaus Regling as a 
prize weightlifter after a 
2012 bond sale.

Credit: Olly Copplestone

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Pooled funding was the first revolution. Instead of borrowing at the 
last minute before a disbursement was due, the EFSF began tapping the 
market strategically, then holding on to the money until all conditions 
for a payout were met. 

The EFSF formally switched to selling its first pooled bill under the 
diversified funding strategy in early 2012. That framework evolved 
into a strategy, in which the ESM raises funds into a long-term pool 
of capital market instruments and a short-term pool of money market 
instruments. These two pools fund the disbursements and maintain a 
liquidity buffer. 

To set up the diversified funding strategy, the firewall would need 
to build an in-house treasury to manage the liquidity pool between 
receiving the funding and disbursing it. 

The EFSF had been drawn up to be as temporary as possible to 
prevent countries from overusing it, making the proposition a hard 
sell for some. ‘This was a tough negotiation with the Members,’ said 
Funding Officer Rodriguez. ‘But we were able to convince them that 
it was crucial to obtain the best possible funding conditions from 
the markets, which would ultimately reduce the lending rates for the 
countries receiving the financial assistance.’

The diversified funding strategy took effect just under a year 
before the ESM was established. When the new fund began to seek 
investors, they needed to approve the ESM as an institutional name 
just to set up a credit line that could be tapped once the new fund 
started to borrow, said Fouqueray-Carrick, who deals with the 
firewall’s investor relations. Fortunately, the rescue funds’ financing 
needs meant that the ESM did not need to issue a bond until 
8 October 2013158, precisely one year to the day the ESM opened its 
doors, giving the team ‘the comfort of a whole year to introduce the 
institution to investors,’ she said.

During this 12-month period, the ESM nonetheless provided 
financing for both the Spanish and Cypriot programmes.  
For Spain, the ESM supplied floating rate notes for the banking  
sector recapitalisation, circumventing the need to raise funds 
immediately on the debt capital markets.

158  ESM (2013), ‘ESM issues inaugural long-term bond’, Press release, 8 October 2013.  
https://www.esm.europa.eu/press-releases/esm-issues-inaugural-long-term-bond

 
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For more on this funding approach, 
see ‘Focus – When bonds are better than cash’

And, because the ESM also launched a bill programme in 
January 2013, it was able to finance the first maturing floating rate 
notes as well as the initial disbursements for the Cyprus programme. 

The ESM had considerable advantages over the EFSF, which at this 
point had already got off to a good start by issuing liquid bonds with 
big outstanding amounts at several points on the yield curve. A better 
credit rating and the strength of the paid-in capital behind it made the 
permanent mechanism an easier sell to investors, Fouqueray-Carrick 
said. But the team needed to make sure the ESM’s debut went smoothly 
without undercutting its sibling – which still needs to borrow billions 
of euros per year while its loans are outstanding. ‘This is still a 
challenge,’ Frankel said. ‘We don’t want investors to stop buying one 
and concentrate only on the other.’

The ESM also adopted the diversified funding strategy, which opened 
the door to other innovations. Regular bill sales, for example, would 
be one of the ESM’s boldest moves, and a sure sign that the institution 
intended to be a permanent fixture on global debt markets. 

The ESM, aided by the German Finance Agency, chose an auction 
system for its short-term bills. The ESM auctions were innovative for 
supranational institutions but typical for government issuers. This 
approach increased the ESM’s market nimbleness.

‘Auctions are far less labour-intensive and time-consuming than 
setting up a syndication,’ said Weinberg, who ran the EFSF team 
when it was based at the German Finance Agency. An auction can 
be put together within a relatively short time period, and the ESM 
outsourced the mechanics to the Bundesbank. Weinberg said the 
move also underlined the ESM’s permanence because a schedule  
of regular auctions ‘is only used if you’re in the market forever,  
so to speak.’

This long-term perspective differentiates Europe’s firewalls from 
the IMF, which finances its programmes from Member States’ 
foreign exchange reserves rather than raising funds directly from 
markets. The IMF typically offers relatively short-duration funding 

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to the countries it helps159, while the ESM is specifically designed to 
give countries long-term access to affordable funding. The firewall 
harnesses the power of short-term, high-quality borrowing to make 
long-term loans to countries that can’t manage that kind of market 
access on their own.

‘It is more plausible that the ESM would engage in much longer 
maturity transformation than would be wise for the IMF,’ said Lipsky, 
former IMF deputy managing director. ‘I don’t think the idea of 20-, 
40-, or 50-year debt from the IMF is in any way a workable model, but 
it is a possible choice for the ESM.’

The IMF’s workhorse tool, the stand-by arrangement, provides for 
a repayment period of 3.25 to five years, while repayment periods 
for its longest-term tool, the extended fund facility, run from 4.5 to 
10 years160. 

When the ESM took on the Greek programme in 2015, it had reason 
to issue much longer maturities and therefore access investors with  
a preference for much longer-dated bonds. With an eye to 
lengthening its maturity profile, the ESM issued its first 30-year  
bond on 13 October 2015, raising €3 billion161. It followed up with 
its first 40-year bond on 24 November to close out its funding 
programme for the year162, which was also the first ultra-long euro 
benchmark bond issued in the sovereign, supranational, and agency 
issuer world. 

159  IMF (2018), ‘IMF lending’, 8 March 2018. https://www.imf.org/en/About/Factsheets/IMF-Lending
160  IMF (2018), ‘IMF extended fund facility (EFF)’, 20 April 2018.  

https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/20/56/Extended-Fund-Facility 

161  ESM (2015), ‘ESM issues 30-year €3 billion bond’, Press release, 13 October 2015.  

https://www.esm.europa.eu/press-releases/esm-issues-30-year-%E2%82%AC3-billion-bond 

162  ESM (2015), ‘ESM issues 40-year €1 billion bond’, Press release, 24 November 2015.  

https://www.esm.europa.eu/press-releases/esm-issues-40-year-%E2%82%AC1-billion-bond 

 
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Focus  
Transparent, flexible funding

Bills: the ESM offers a regular bill programme, auctioning 3- and 6-month paper 
on the first and third Tuesday of each month. The dates are provided in 
advance on a quarterly basis, and demand was strong the last couple of years, 
outpacing supply three to four times. The ESM has been selling bills since its 
inception, taking over from the EFSF bill-issuance programme. 

Bonds: ESM/EFSF combined issuance makes the rescue funds the largest 
sovereign, supranational, and agency issuer (SSA) in euro-denominated bonds. 

The two funds have a unique profile in the market. Like government issuers, 
they seek to be transparent and to issue at the right time and in the right 
amounts. They also use a range of methods of issuance, such as bill auctions 
and taps of existing bonds. Yet the rescue funds also combine this approach 
with the flexibility typically practised in the sovereign, supranational, and 
agency space on issuance size and maturity per transaction. 

Transparency creates trust in the market. Flexibility allows the funds to react 
to investor demand and market developments.

Marketing has been another necessary element of creating and 
keeping a strong market presence. Helping global investors understand 
the euro area’s firewall had been a priority from day one: the first 
transcontinental trip Regling made as EFSF CEO had been to Asia, 
with regular stops there ever since – including to Japan in the wake 
of the tsunami that damaged the Fukushima nuclear reactors. His 
consistent outreach paid off. ‘For the first two years, Asia bought 
40% of our bonds, which is a very high share,’ Regling said. ‘It had a lot 
to do with our marketing efforts there.’ 

To succeed, ESM and EFSF debt also needs to perform well on the 
secondary markets, where previously issued bonds are traded. This 
requires excellent external credentials. To help maintain smooth 
trading, Regling sought to establish good relations with the Bank for 
International Settlements, the bank for central banks, which provides 
a secretariat for the international standard-setting body for banking 
regulation. That body, the Basel Committee on Banking Supervision, 
rated the firewall’s debt a high quality liquid asset, allowing it higher 

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  1 6 3

status in institutional investor portfolios, and gave the funds a zero-
risk weighting – the same as the sovereign countries that provided the 
guarantees and capital163. 

To ensure their bonds remain liquid, the rescue funds frequently 
reopen issues. ‘We do tend to tap quite a bit. If we see a demand for 
a bond, we will reopen it,’ Fouqueray-Carrick said. ‘We have to make 
sure that the bonds are liquid enough, in order to reassure investors.’

Ruhl said the rescue funds cannot be complacent. Their funding needs 
are large, and will continue to be so for years to come, even if there are 
no new programmes.

‘In 2013, we raised €58 billion for the EFSF and €10 billion for the 
ESM. So in total €68 billion, which made us the fifth-largest euro 
issuer worldwide,’ Ruhl said. ‘That was only the third year of the 
EFSF and the first year of the ESM, so we were relatively new to 
the market. These marketing exercises were essential to extend and 
increase our investor base.’ 

163  ESM (2014), ‘Basel Committee on Banking Supervision recognises ESM and EFSF securities as 

Level 1 high quality liquid assets (HQLA)’, Press release, 18 March 2014.  
https://www.esm.europa.eu/press-releases/basel-committee-banking-supervision-recognises-esm-
and-efsf-securities-level-1-high

Focus  
Awards for the ESM/EFSF funding team

Bond market specialists have recognised the ESM/EFSF bond-issuing team 
through a series of awards.

•  December 2018: ESM wins GlobalCapital Award:

 — Best Supranational Euro Deal of the Year, for its €4 billion 5-year bond, 

issued in July

•  May 2018: ESM/EFSF wins GlobalCapital Awards

 — 1st place: Overall Most Impressive SSA Funding Official — Siegfried Ruhl, 

ESM/EFSF head of funding

 — 1st place: Most Impressive Supranational Funding Official — Siegfried Ruhl

 
1 6 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

•  May 2017: ESM/EFSF wins GlobalCapital Awards

 — 1st place: Overall Most Impressive SSA Funding Team

 — 1st place: Overall Most Impressive Funding Official — Siegfried Ruhl

•  December 2016: ESM wins mtn-i Rising Star awards for N-bonds (mtn-i 

provides market information, news, and data for fixed income markets for 
issuers, investors, and banks.)

•  May 2016: ESM/EFSF wins GlobalCapital Awards:

 — 1st place: Most Impressive Supranational Funding Team in Euros

 — 1st place: Most Impressive Supranational Funding Official — Siegfried Ruhl

 — 1st place: Overall Most Impressive SSA Funding Official — Siegfried Ruhl

•  January 2016: ESM wins International Financing Review Award:

 — Issuer of the Year in the Sovereigns, Supranationals, Agencies and 
Regions category, earning special recognition for coping with huge 
growth: ‘Overnight, the body’s funding target shot up from €5 billion for 
the last four months of 2015 to €18 billion’164

•  May 2015: ESM/EFSF wins GlobalCapital Awards: 

 — 1st place: Overall Most Impressive SSA Funding Team 

 — 1st place: Most Impressive Supranational Funding Team in Euros 

 — 1st place: Most Impressive Supranational Funding Official in Euros – 

Siegfried Ruhl

•  January 2015: EFSF wins GlobalCapital Awards:

 — 1st place: Euro Supranational Deal of the Year, for its €4 billion  

30-year bond issued in July 2014 

•  January 2014: ESM wins EuroWeek Award:

 — 1st place: Deal of the Year, for €7 billion, 1.25%, October 2018 bond, 

working with HSBC, J.P. Morgan, and Société Générale

164  International Financing Review (2016), SSAR Issuer: European Stability Mechanism, online IFR 

Review of the Year 2015.  
http://www.ifre.com/ssar-issuer-european-stability-mechanism/21223502.fullarticle 

Funding strategy, which began in Chapters 12 and 14, continues 
in ‘Focus — When bonds are better than cash’ in Chapter 25 and in
‘Focus — How do you solve a problem like a downgrade?’ in 
Chapter 29. 

From bailout to bail-in: 
towards a new 
programme for Greece

19

We had problems finding a political consensus 

around what needed to be done. It took three  
years to get to the first kind of reluctant consensus 
in 2012. So, it was a very toxic domestic  
political situation.

George Papaconstantinou 
Greek Finance Minister (October 2009–June 2011)

Greece was a recurring concern in the first years of the euro 

crisis. By January 2011, the three major rating agencies had 
all reduced Greece’s debt to below investment grade. Credit 

downgrades continued until, by the end of July, Greece was the lowest-
rated country in the world165, cut off from market financing and left 
dependent on outside financial help. 

European policy debates reflected this slide in market confidence, as 
optimism evaporated that Greece could emerge from the crisis on its 
own. Worries about the scope of Greece’s economic challenges – and 
doubts about whether or not the faltering assistance programme could 
address them – took centre stage. 

165  Reuters (2011), ‘Greece falls to S&P’s lowest rated, default warned’, 13 June 2011.  

https://www.reuters.com/article/us-greece-ratings-sandp/greece-falls-to-sps-lowest-rated-default-
warned-idUSN1312685920110613 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

14 January 
Fitch downgrade: BB+ from BBB-, the last of the three major 
agencies to rate Greek debt below investment grade. 

11 March  
At an emergency EU summit, leaders offer to ease pricing terms of 
the first programme, the Greek Loan Facility.

20 June 
Eurogroup says that the country is unlikely to regain private market 
access by early 2012. 

29 June 
Parliament passes second fiscal consolidation bill after widespread 
protests and strikes.

July 
The fourth review of the adjustment programme says pace of 
reforms has substantially slowed, and that recession is worse  
than projected.

21 July 
Euro area leaders prepare for a second programme. EFSF to  
provide the EU’s contribution, and debt restructuring to involve 
private sector.

2 October  
Greece says it will miss key deficit targets agreed with its 
international lenders.

31 October 
Prime Minister George Papandreou calls for a referendum on 
the rescue. It is cancelled three days later, and he resigns on 
9 November.

11 November  
Lucas Papademos is sworn in as new prime minister. 

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Euro area leaders didn’t want to put more money into Greece just to 
enrich speculators who had bought its bonds. But private investors 
opposed being forced into forgiving debt owed to them by Greece. 
In the 2010 push to assemble the first rescue programme for Greece, 
international authorities had hoped this infusion of funds would be 
enough to stabilise the Greek situation and prevent contagion.

Disbursements from the first programme, via the Greek Loan Facility, 
were made in January and March 2011. At an emergency EU summit 
on 11 March 2011, leaders offered to ease pricing terms166. They 
lowered the rates and extended the maturity of Greek Loan Facility 
loans – a step that gave Athens more breathing room to manage the 
tough reforms required.

Only a few months later, matters turned critical again. In conducting 
the fourth and final review of Greece’s first programme, the troika of 
institutions – the ECB, IMF, and European Commission – warned in 
July of a let-up in reform implementation and a worse-than-expected 
recession167. Given the lack of progress, there was less willingness to 
disburse more of the rescue funds that had become Greece’s lifeline.

Deteriorating finances, a loss of competitiveness, and historically rigid 
industrial structures plagued the Greek economy. Many professions 
were stifled by restrictive regulation, making it hard for new entrants 
to do business. Tax evasion remained a major problem. Greek 
banks were also struggling to keep up with the challenges facing 
the economy. 

Although Greece succeeded in bringing its deficits down considerably 
during the first rescue programme with the Greek Loan Facility, 
the country was still in trouble. The recession deepened. 

166  Statement by the Heads of State or Government of the Euro area – 11 March 2011, The European 

Council in 2011, p. 32, January 2012.  
http://www.consilium.europa.eu/media/21347/qcao11001enc.pdf

167  European Commission, Directorate-General for Economic and Financial Affairs (2011), ‘The 

Economic Adjustment Programme for Greece fourth review – spring 2011’, European Economy 
Occasional Papers 82, July 2011.   
http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp82_en.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

In retrospect, the IMF pointed to a number of shortcomings in its first 
Greek programme168. ‘Market confidence was not restored, the banking 
system lost 30 percent of its deposits, and the economy encountered 
a much deeper-than-expected recession with exceptionally high 
unemployment,’ the IMF would later describe this period in a 
2013 evaluation. ‘The depth of ownership of the program and the 
capacity to implement structural reforms were overestimated.’ The 
report also noted that social and political turmoil undermined 
confidence.

Much of the latter half of 2011 was spent considering how to address 
Greece’s debt. When leaders acknowledged that Greece would need 
more money, they also made clear they would refuse to act unless 
financial markets agreed to absorb some of the costs. Until there was 
accord on how to do that, leaders weren’t prepared to put more money 
into solving Greece’s overarching economic problems. 

Days before a crucial 20 June 2011 Eurogroup meeting, Greece’s 
finance ministry underwent a change at the top. Papaconstantinou was 
replaced as finance minister by Evangelos Venizelos, a political veteran. 
Whereas Papaconstantinou had been part of the rescue negotiations 
since Greece’s budget woes first emerged in 2009, Venizelos was brand 
new to the debt talks, but he was known for political savvy gained over 
a career that included stints as defence, justice, and transport minister. 
The hope was that he had the domestic clout to deliver on Greece’s 
promises, even if he didn’t have as much financial market expertise.

At that June meeting in Luxembourg, euro finance ministers conceded 
that Greece would not be able to borrow on its own any time soon.  
‘[G]iven the difficult financing circumstances, Greece is unlikely to 
regain private market access by early 2012,’ the Eurogroup said in a 
statement after the meeting169. 

The admission raised the stakes: more money would be needed, but 
this time the Eurogroup determined that private sector bondholders 
would share the costs, which meant forgiving some of the debt Greece 
owed them. ‘Ministers agreed that the required additional funding will 

168  IMF (2013), Greece: Ex post evaluation of exceptional access under the 2010 stand-by arrangement, 

IMF staff country reports, 5 June 2013.  
https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Greece-Ex-Post-Evaluation-of-
Exceptional-Access-Under-the-2010-Stand-By-Arrangement-40639 

169  Statement by the Eurogroup on Greece, 20 June 2011.  

http://europa.eu/rapid/press-release_MEMO-11-426_en.htm?locale=en

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be financed through both official and private sources and welcome the 
pursuit of voluntary private sector involvement,’ the 20 June statement 
said. In that same statement, they still held out hope that Greece could 
avoid a selective default through ‘the pursuit of voluntary private 
sector involvement in the form of informal and voluntary roll-overs 
of existing Greek debt at maturity’. Ultimately, the private sector 
involvement would take place in an exchange of outstanding debt the 
following year, in which bondholders swapped their existing bonds for 
new securities with a lower face value.

Despite what the euro area saw as slowing reform momentum, the 
Greek government pushed through a second fiscal consolidation 
package that included large spending cuts and tax increases at the 
end of June to meet its aid requirements. But parliamentary approval 
generated two days of protests that left hundreds of protesters and 
police injured. Protests had been a serious concern in Greece ever since 
demonstrations in May 2010 had left three dead in the wake of the 
signing of the agreement to initiate the first programme. 

The Greek government was under pressure to hold firm to its 
commitments even as economic conditions worsened and domestic 
opposition to the reforms rose. The Commission said in its fourth 
review of the Greek Loan Facility that ‘reform implementation has 
substantially decelerated.’ It also found the recession to be deeper and 
more protracted170. There was sympathy for the plight of the Greek 
workforce, suffering from the lengthy recession, tax increases, and high 
unemployment, but euro area leaders maintained that there was no 
other way to provide a lasting solution to the country’s years-long drop 
in competitiveness. 

‘These are unprecedented, but necessary, efforts to bring the Greek 
economy back on a sustainable growth path,’ euro leaders said in 
a 21 July 2011 summit statement. ‘We are conscious of the efforts 
that the adjustment measures entail for the Greek citizens, and are 
convinced that these sacrifices are indispensable for economic recovery 
and will contribute to the future stability and welfare of the country’171.

170  European Commission, Directorate-General for Economic and Financial Affairs (2011), ‘The 

Economic Adjustment Programme for Greece fourth review – spring 2011’, European Economy 
Occasional Papers 82, p. 9, July 2011.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp82_en.pdf
171  Statement by the Heads of State or Government of the Euro area and EU Institutions, 21 July 2011. 

http://feelingeurope.eu/Pages/euro%20area%20statement%2021-07-2011.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Against this tumultuous backdrop, Greece’s second rescue programme 
began to take shape. Greece needed a big infusion of cash to pay its 
bills. At the July summit, euro area leaders agreed to start talks on more 
aid – provided that bondholders accepted losses in order to reduce 
Greece’s debt burden172. There could be €109 billion available from IMF 
and European sources, the leaders pledged, but only if Greece stuck to 
its cuts and bondholders bowed to a ‘voluntary’ restructuring. For it to 
work, most private holders of Greek bonds would have to participate, 
even if they had the option not to.

10-year government bond yield — Greece 
in %, monthly average

30

25

20

15

10

5

0

Risks to Greek debt 
sustainability didn’t go 
down well with the bond 
market. Greece’s borrowing 
costs soared to new 
heights in the run-up to the 
debt restructuring.

Source: European  
Central Bank

July 2011: 
Euro area 
leaders prepare 
for a second 
programme 

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
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a
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1
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0
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2
1
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3
1
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2
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a
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4
1
0
2
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a
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5
1
0
2
y
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a
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a
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6
1
0
2
y
r
a
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a
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7
1
0
2
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a
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8
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9
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Soon after the summit, talks with bondholders got underway. For 
its backers, the debt exchange represented an essential step; for its 
detractors, it spelt financial market heresy. Greek stocks plunged, with 
the Athens Stock Exchange falling below 1,000 points on 8 August, the 
lowest in almost 15 years. Bond yields were rising precipitously.

172  Ibid. 

 
 
 
 
 
 
 
 
 
 
 
 
 C H A P T E R   1 9   —   FR O M   B A I L O U T T O   B A I L - I N : T O W A R D S   A   N E W   P R O G R A M M E   F O R   GR E E C E      1 7 1

Private investors warned that the proposed debt exchange would 
leave a catastrophic legacy for Europe, especially given the possibility 
of further losses in other countries. Josef Ackermann, CEO of 
Deutsche Bank, said that there were many investors in the US and 
Asia who would shun euro area bonds under these conditions, 
according to a 28 November 2011 article in Germany's Spiegel 
Online. ‘We will be paying a high price for a long time to come for 
having violated the principle that European government bonds are 
risk-free,’ said Ackermann, who was at that time chairman of the 
Board of Directors of the Institute of International Finance (IIF)173.

IMF and EU officials had laboured with the IIF, a trade group 
representing the private creditors, to find a way to keep the exchange 
legally voluntary and thereby forestall an official declaration of default, 
while reaping enough savings to meet Greece’s debt targets.

Bankers and private sector holders of Greek debt weren’t alone in 
opposing bond writedowns. Sceptics feared that the debt swap could 
devastate the euro area’s marketplace credibility. Trichet, former 
president of the ECB, had negotiated debt relief for underdeveloped 
countries as head of the Paris Club of creditor countries in the 
late 1980s and early 1990s, and saw sovereign debt writedowns, as 
first raised by Germany’s Merkel and France’s Sarkozy in 2010 in 
Deauville, as extremely dangerous as long as they were perceived 
as being the general rule for all vulnerable countries. By casting 
sovereign debt as no longer risk free, he argued, the euro area would 
undermine its work to rebuild market trust in troubled economies. 
On the practical side, it could sabotage the health of the very 
countries it was designed to rescue. 

The prospect of imposing losses on bondholders ‘was destroying 
all of our deterrent, all the deterrent of the EFSF, and also what we 
were doing with the ESM,’ Trichet later said. He said the euro area 
was able to stabilise its reputation only when it made clear that debt 
writedowns for Greece would be a one-off, not a required part of any 
rescue programme.

173  Spiegel Online (2011), ‘A continent stares into the abyss’, 28 November 2011. http://www.spiegel.de/
international/europe/euro-zone-on-the-brink-a-continent-stares-into-the-abyss-a-800285-2.html 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Trichet’s resistance was part central banker caution and part European 
pride, said Lagarde, who had taken over as IMF managing director on 
5 July 2011. ‘For him it was just complete nonsense, an absurdity, and 
a dangerous path,’ she said. ‘He was concerned about the euro because 
he was the president of the ECB. But, as the former president of the 
Paris Club, which leads debt restructurings, most often of developing 
countries, it was just anathema to imagine an advanced country having 
to restructure its debt.’

Initial hopes of getting a second Greek programme in place by 
September proved unworkable, making global leaders nervous. On 
26 September 2011, US President Barack Obama warned at a local 
question-and-answer meeting in California’s Silicon Valley that 
Europe had not done enough to combat contagion, naming Greece as 
the possible trigger for the next systemic shock. ‘They have not fully 
healed from the crisis back in 2007 and never fully dealt with all the 
challenges their banking system faced. It’s now being compounded 
by what’s happening in Greece,’ Obama said. ‘They’re going through 
a financial crisis that is scaring the world. And they’re trying to take 
responsible actions, but those actions haven’t been quite as quick as 
they need to be’174. 

Back in Europe, fears of a Greek exit from the euro, stoked by the 
Luxembourg castle meeting in May, became more prevalent175. In 
October, the government in Athens said Greece would not be able to 
meet the 2011 or 2012 deficit targets it had agreed with its international 
creditors because of the unexpected harshness of the recession. 

Crisis diplomacy in late October focused on the bond writedowns, seen 
as the key to unlocking more aid for Greece. To win the investment 
community’s acceptance of the unprecedented step and prevent it from 
sapping confidence in the bonds of other distressed countries, euro area 
leaders made the case that the Greek restructuring was a one-off due to 
the ‘exceptional’176 nature of Greece’s economic troubles.

174  US, Office of the Press Secretary (2011), ‘Remarks by the president in town hall with Linkedin’, 

26 September 2011.  
https://obamawhitehouse.archives.gov/the-press-office/2011/09/26/remarks-president-town-hall-
linkedin

175  Spiegel Online (2011), ‘Greece considers exit from euro zone’, 6 May 2011.  

http://www.spiegel.de/international/europe/athens-mulls-plans-for-new-currency-greece-
considers-exit-from-euro-zone-a-761201.html

176  Euro summit statement, 26 October 2011.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.pdf

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Portuguese Finance 
Minister Vítor Gaspar 
(left) and European 
Central Bank President 
Jean-Claude Trichet 
(right), with EU Economic 
and Monetary Affairs 
Commissioner Olli Rehn 
(centre) on 22 October 
2011 amid discussions on 
Greek debt.

Credit: John Thys/AFP

‘All other euro countries solemnly reaffirm their inflexible determination 
to honour fully their own individual sovereign signature and all 
their commitments to sustainable fiscal conditions and structural 
reforms. The euro area Heads of State or Government fully support 
this determination as the credibility of all their sovereign signatures is 
a decisive element for ensuring financial stability in the euro area as a 
whole’177, the leaders said in a summit statement on 26 October 2011.

In Greece’s case, the leaders said that bondholders would have to take 
a roughly 50% haircut as part of a new aid package. The leaders set a 
goal of end-2011 to sign off on the programme, with the bond swap 
scheduled for early 2012. Haunted by the threat of a market panic, 
the October summit statement acknowledged the global worries and 
proposed what was intended to be a comprehensive plan because 
‘further action is needed to restore confidence’178. 

177  Ibid. 
178  Ibid. 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

At this point, Greek Prime Minister Papandreou surprised everyone 
on 31 October 2011 by calling for a referendum on the outline of 
the rescue plan179. At a 3 and 4 November summit of the Group of 
20 countries in Cannes, France, Merkel and Sarkozy led the euro 
area in laying down the gauntlet, telling the Greek leader that his 
referendum would in effect be a yes or no vote not just on the rescue, 
but on Greece’s euro membership. 

When, on the eve of the summit, Papandreou arrived unexpectedly to 
inform Sarkozy and Merkel about the referendum plan, they opposed 
it immediately, the IMF’s Lipsky said. ‘The impression was left that in 
addition to objecting to the proposal to hold a referendum, the two key 
leaders had lost confidence in him personally.’

Papandreou called off the referendum on 3 November and Greece’s 
political class moved to form a unity government without him180. On 
10 November, Papandreou formally resigned181 and the next day former 
ECB Vice President Lucas Papademos was sworn in as prime minister. 

Greek programme history, which began in Chapter 3, 
continues in Chapters 22, 36, 37, and 38. 

179  Financial Times (2011), ‘Greece calls referendum on EU bail-out’, 31 October 2011.  

https://www.ft.com/content/68748490-03f5-11e1-98bc-00144feabdc0

180  Reuters (2011), ‘Greek PM ready to go, dump referendum, for euro deal’, 3 November 2011. 

https://uk.reuters.com/article/uk-g20/greek-pm-ready-to-go-dump-referendum-for-euro-deal-
idUKTRE7A20DG20111103 

181  New York Times (2011), ‘Greek leader calls off referendum on bailout plan’, 3 November 2011. 

http://www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html 

European ‘bazooka’:  
the $1 trillion question

20

The markets had a huge influence on our 

discussions. [Our firepower] had to be impressive 
enough to calm the markets.

Jean-Claude Juncker 
President of the European Commission (since November 2014)

By December 2011, euro area leaders figured they had put 

together enough euros to reach the symbolic figure of $1 trillion 
in backstop resources. They hoped that amount would calm 

markets concerned that Spain or even Italy might represent Europe’s 
next weak link. Not only did they agree to reinforce the EFSF’s 
guarantee structure and add new leverage tools, they also pulled 
forward the ESM’s entry into force to mid-2012, so the euro area would 
soon have a robust and capital-backed firewall instead of the EFSF’s 
temporary guarantees. 

When they met on 9 December, the leaders added some finishing 
touches aimed at making the promise of $1 trillion more credible182. 

182  Statement by the euro area Heads of State or Government, 9 December 2011.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/126658.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

For the total commitment to hold up, a number of factors would need 
to come together. As IMF members themselves, they would lobby for 
the fund to receive a €200 billion temporary increase from euro area 
member states. And they pledged to review the capacity question again 
in March 2012.

Unfortunately, the headline number’s foundations were not completely 
sturdy. Former ECB President Trichet put the problem succinctly: 
‘The amount of money that was really mobilised was significantly 
more meagre than what was promised and, in my view, was one of the 
reasons why the Europeans lacked the level of credibility that would 
have been necessary given the circumstances.’

First, the IMF assertion materialised at less than initially announced. 
In a mid-December meeting, finance ministers heralded only a 
€150 billion increase in the IMF, to be funded by currency union 
members. While a few EU Member States that were not in the 
euro area were willing to take part, the UK resisted183 so the initial 
€200 billion figure became unworkable.

Meanwhile, the speedier ESM debut raised many questions. Now that 
the permanent firewall would be running in parallel to the EFSF, was 
there any chance the capacity of the two funds could be combined? 
This in turn raised the stakes for the March capacity review, as EFSF 
CEO Regling acknowledged in a 17 December interview with Al 
Jazeera, where he tried to quiet the drumbeat of questioning whether 
or not Europe was willing to act.

‘Markets will understand that there is enough “firepower” – i.e., 
immediately available financial assistance to any euro area country 
– if needed,’ Regling said, specifying that this would include any 
country, not just the three that were already seeking aid184. ‘Firepower 
is increasing, and also, importantly, the summit decided to review the 
availability of firepower, if that is necessary, by March 2012. By then 
we will know whether more is needed. At the moment I think we have 
more than enough.’

183  Guardian (2011), ‘UK to resist calls to give IMF more funds for euro-bailout’, 14 December 2011. 

https://www.theguardian.com/business/2011/dec/14/uk-resists-calls-imf-bailout

184  Politique-Actu (2012), ‘For Europe: “The firepower is there”: An interview’, 26 January 2012.  
http://www.politique-actu.com/dossier/europe-firepower-there-interview-klaus-regling-
interviewed-sami-zeidan/370687/

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  1 7 7

In the interview, Regling pushed back against the idea that resources 
were insufficient to stand behind the euro with both Italy and 
Spain in the market’s crosshairs. Even in a worst-case scenario, the 
fears of actually needing a trillion euros in a short timeframe were 
unfounded, he said. ‘It’s not correct to look at the total outstanding 
debt,’ Regling told the news channel. ‘When we look at firepower, the 
question is what may be needed over the next 12 months, maybe the 
next 24 months, but no more than that,’ he explained. ‘We know, for 
instance, that Italy and Spain have about €600 billion in maturing 
debt over the next two years. So that’s the appropriate figure for the 
comparison with the firepower of the EFSF.’

Doubts remained. Euro area authorities were quietly mulling over 
Italy’s situation. The Italian economy had been relatively stagnant 
for most of the 2000s, with banks struggling and the country’s 
debt high. The crisis had pushed bond yields up to worrying levels. 
European policymakers wondered if a rescue programme would be 
needed, and, if so, if it could be big enough to make a difference. 

‘A programme was discussed back then. In fact, I remember it was the 
topic of the moment at the Cannes Group of 20 in November 2011,’ 
said Grilli, the Italian deputy finance minister at the time, who would 
become finance minister in July 2012.

In Cannes, the leaders ended up encouraging Italy to work more 
closely with the IMF, rather than recommend that the country take 
the extra step of requesting aid. The end-of-summit communiqué 
said: ‘We support the measures presented by Italy in the Euro Summit 
and the agreed detailed assessment and monitoring by the European 
Commission. In this context, we welcome Italy’s decision to invite the 
IMF to carry out a public verification of its policy implementation on 
a quarterly basis’185.

The ESM’s Nicola Giammarioli, who was at the IMF at the time, now 
heads the ESM strategy team, and has been mission chief to Greece 
and Ireland. He said that precisely because Italy was so big, with

185  Group of 20 (2011), ‘G20 Leaders Summit’, Cannes, 3 and 4 November 2011. Online version 

published by the Organisation for Economic Co-operation and Development (OECD), Paris. 
https://www.oecd.org/g20/summits/cannes/Cannes%20Leaders%20Communiqu%C3%A9%20
4%20%20November%202011.pdf

 
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sufficient resources, it was able to find a solution from within. And 
because Italy – like most euro area countries – maintained good 
relations with financial markets throughout the crisis, it did not face 
the same loss of access to borrowing that other euro area member 
states encountered when spreads began to widen. 

The exaggerated fears for Italy would not be borne out, but, as long 
as the euro area leaders tried to keep the joint rescue capacity small, 
there was equal pressure from financial markets to question if it 
would be enough to protect the euro area from a meltdown. The 
cascade of crises in the US had persuaded markets to be wary of 
small-scale relief efforts. 

Shock and awe characterised the US plan, said IMF Managing 
Director Lagarde. The then-US Treasury secretary, Henry ‘Hank’ 
Paulson, had famously told colleagues in 2008 he was looking for a 
‘bazooka’ to blast at the market and turn sentiment around186. That 
became the $700 billion Troubled Asset Relief Program – a number 
chosen in a bid to exceed the market’s expectations.

But that approach was foreign to Europe, Lagarde said. ‘That 
was very much the hallmark of the US. The go big or go home 
approach to life. Tim Geithner and others on the US side were 
always advocating bigger than big if you can. Whereas, in Europe, 
we’re a little bit more cautious and concerned because we knew 
that member states were being drawn into something that was not 
necessarily in their respective purview, because it was new and 
different.’

Regling made the point that, if you assumed the ESM would get a 
full fresh start and included all past commitments, the euro area 
already had €800 billion available: about €50 billion remained in 
the EFSF programmes for Ireland and Portugal, about €100 billion 
in EFSF funds were already earmarked for Greece, and the euro 
area also had its incoming €500 billion permanent firewall plus the 
IMF’s €150 billion.

186  New York Times (2008), ‘Paulson’s itchy finger, on the trigger of a bazooka’, 8 September 2008. 

http://www.nytimes.com/2008/09/09/business/09sorkin.html 

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But just days before the end-March 2012 capacity review, the total 
firepower that leaders planned to deploy was still an open question. 

If the euro area did nothing, total firewall capacity would be 
capped at €500 billion, with the EFSF’s existing €192 billion in 
commitments subtracted from the ceiling to make only about 
€300 billion available for use. Under the middle-ground option, the 
ESM could start afresh, but the EFSF would be capped at what had 
already been committed. For maximum effect, the euro area could 
decide that, for the year until the EFSF stopped accepting new 
programmes, the firewall would have access to its full €440 billion 
capacity on top of the €500 billion coming in with the ESM.

‘The ECB welcomes the commitment of Europe’s leaders to 
regularly review the lending capacity of the ESM and urges them 
to quickly agree on a significant increase of the resources of the 
ESM by combining the lending capacity of the ESM and the EFSF,’ 
said Peter Praet, a member of the ECB’s Executive Board, in a 
March 2012 article published by a European financial markets 
conference187.

Just one week before the 30 March meeting in Copenhagen, a 
draft circulated widely in the press suggested the maximalist issue 
would win the day. The EFSF’s roughly €240 billion in unused 
capacity could be tapped ‘in exceptional circumstances following 
a unanimous decision of euro area Heads of State or Government 
notably in case the ESM capacity would prove insufficient’188. But 
that language did not occur in the final draft, meaning the potential 
maximum ceiling of combining the two funds to make €940 billion 
was never enshrined in policy.

Instead, finance ministers went for the middle option. They agreed 
on a combined ceiling for the EFSF and ESM of €700 billion: the 
full permanent firewall plus the roughly €200 billion that had 
already been committed from the temporary backstop. Their 
statement also echoed the €800 billion number that Regling had 

187  Eurofi, Praet, P. (2012), ‘Deleveraging and economic growth in the EU: Key factors for success’, 

p. 8, 29 March 2012. http://www.eurofi.net/wp-content/uploads/2012/08/EUROFI_DK_
NEWSLETTER.pdf#page=8 

188  Reuters (2012), ‘Euro zone to back higher combined bailout fund: Draft’, 29 March 2012.  

https://www.reuters.com/article/us-eurogroup-firewalls/euro-zone-to-back-higher-combined-
bailout-fund-draft-idUSBRE82S13O20120329 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

been using in the markets, by adding on the €53 billion paid out of 
the Greek Loan Facility and the €49 billion paid out of the EU-
wide European Financial Stabilisation Mechanism. ‘All together 
the euro area is mobilising an overall firewall of approximately 
EUR 800 billion, more than USD 1 trillion,’ the Eurogroup said in 
a statement189. 

The firepower debate was finally over190. 

189  Statement of the Eurogroup, 30 March 2012.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/129381.pdf

190  Reuters (2012), ‘Eurogroup statement on EFSF/ESM lending capacity’, 30 March 2012.  

https://www.reuters.com/article/eurogroup-firewalls/text-eurogroup-statement-on-efsf-esm-
lending-capacity-idUSL6E8EU3FR20120330 

The ESM takes shape: 
‘something fresh’

21

Despite being pushed to the limits of stress and 
physical exhaustion, you sit in the office at night 
and have an idea. You go out and it becomes part 
of European history. There’s a high personal cost to 
it, but still it was, from a professional perspective, 
unbelievably rewarding.

Rolf Strauch 
ESM/EFSF Chief Economist

As the temporary fund prepared in 2012 to evolve into its 

permanent form, the ESM faced the same challenges as 
a start-up in the private sector: how to retain the nimble, 
entrepreneurial spirit of the early days while providing structure, and a 
career path and positive working environment for the professional staff.

Regling, chief executive of the EFSF, shepherded the permanent 
firewall into being. Throughout this transition, Regling sought 
to maintain the cultural middle ground between a freewheeling 
entrepreneurial spirit and a rules-bound public institution, according 
to EFSF Secretary General Anev Janse. 

‘Klaus said, “I know what I don’t want. I don’t want to recreate existing 
financial institutions. I want something new, something fresh,”’ Anev 
Janse recalled. ‘He also felt the idea of creating a “modern international 
financial institution” was a bit intangible.’ 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

A permanent institution brought the need for a longer planning 
horizon and a host of questions about recruitment, employee retention, 
workforce development, and office culture. As with the EFSF, the 
timeline for setting up the full-scale ESM was short. Initial plans in 
November 2011 envisaged an 18-month launch phase. 

Under the exigencies of the crisis, however, the official start date had 
been brought forward to mid-2012, shrinking the preparation time. In 
December, at the same time as the firewall made its first disbursement 
to Spain, it moved into its permanent headquarters. Then, in 
January 2013, it acquired a workforce, taking over all the previous 
employees of the EFSF as well as integrating those seconded from 
other institutions and recruited from the private sector.

Chief Economist Strauch, who was loaned from the ECB at the 
EFSF’s inception, said the move to the ESM involved a big shift from 
the minimalist mindset at the firewall’s start. The euro backstop was 
supposed to be a temporary mechanism that would not be used and 
would later be disbanded. But the currency area’s needs required a 
change of plans. ‘My original idea was that I would come for one year,’ 
Strauch said. ‘Now I have a permanent contract. And we have loans to 
Greece until 2060 or beyond.’ 

As head of human resources and organisation, the EFSF brought in 
Sofie De Beule-Roloff, a Belgian with a background in the airline 
industry who had been helping companies establish in Luxembourg. 
When she joined in June 2012, there was no human resources 
division and staffers worked under an array of different contracts. 
Because the EFSF had been created on the fly, the basic infrastructure 
that is common even in small firms was patchy. This needed to 
change as the ESM came into being.

‘Well, the daunting challenge was there was no HR department,’ 
De Beule-Roloff said. ‘When I joined I was employee number 23 and 
I had a target to reach 75 staff members by the end of that year. But 
before we could do that, I had to create a structure to accommodate 
us all. It was like building a house from the ground up.’ That included 
developing a health insurance, pension, and social security scheme. The 
EFSF had been established as a company under Luxembourg law and 
was part of the national system. But as an international institution, the 
ESM would have to set up its own structures.

‘Suddenly you don’t have health care anymore, you have no 
retirement scheme, you have no compensation or benefit schemes, no 

C H A P T E R   2 1   —  TH E   E S M  TAkE S   S H A P E :  ‘ S O M E T H I N G   F R E S H ’  

  1 8 3

employment rules,’ De Beule-Roloff said. ‘Because we were no longer 
directly bound by any national legislation, we needed to set up our 
own internal rules and practices.’

A first task was to rethink what to outsource – for example back office 
functions such as payroll and contract preparation – and determine 
which areas required in-house expertise. Once those skill sets were 
identified, the ESM strove to recruit a pool of talented people whose 
careers might grow alongside the institution. 

As an international organisation, the ESM is unlike EU institutions  
in that it does not require new hires to have EU citizenship. To ensure 
it could attract top staff, the ESM decided to set no national hiring 
quotas. The only stipulation is fluency in English, the international 
language of finance, which has been the working language since 
day one of the EFSF. While staff converse in their native languages  
as part of the daily ebb and flow, the English-only principle has  
been especially important for all written documentation, ensuring 
nothing gets lost in translation. The worldwide talent pool brings 
other benefits too, from understanding European economic 
developments in a global context to smoothing funding operations 
outside Europe.

For the early staffers, the demands of the job added up to sleepless 
nights, last-minute train trips and flights, and weekends away from 
family and friends – with agendas and policy planning routinely 
upended by the latest economic statistic, move in the bond market, 
or political utterance. It was a journey into the unknown, with all the 
attendant exhilaration and stress.

Blondeel, who became the rescue fund’s chief corporate officer, said 
it took a while to strike the right work/life balance, especially when 
the fund was in its infancy. On her own in Luxembourg before her 
husband relocated, Blondeel said the start-up days were marked by 
wall-to-wall work.

With experience in setting up a French public agency and in 
modernising the administration of the debt office, Blondeel called it a 
‘natural move’ to lend her expertise to the fledgling rescue fund. ‘I very 
much enjoyed the freedom, positive stress, and pioneering spirit that 
united all the EFSF early joiners,’ she said. ‘It was a strange life, because 
my family was still in France. But, as is the case for many people, I 
would work hard during the week and come back home during the 
weekend to see my family.’ 

 
1 8 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

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C H A P T E R   2 1   —  TH E   E S M  TAkE S   S H A P E :  ‘ S O M E T H I N G   F R E S H ’  

  1 8 5

Attracting the high calibre of staff needed hasn’t always been easy. 
As the second smallest country in the EU, Luxembourg doesn’t have 
the supply of workers, or jobs, of its larger neighbours. Much of the 
Grand Duchy’s workforce commutes in from neighbouring Belgium, 
Germany, or France, but, for those recruited from further afield, 
relocation often poses a problem for families. In addition, while 
English is the lingua franca of the ESM, German and French are 
more commonly heard in other workplaces – limiting the options for 
trailing spouses who don’t speak those languages. To smooth things 
for dual-career couples, the ESM offers German, English, French, and 
Luxembourgish language courses and helps to find jobs for partners.

‘We do a lot to integrate staff members’ families, because Luxembourg 
is not an easy place for partners to find suitable jobs,’ De Beule-Roloff 
said. ‘We are trying to help families integrate here over time so they 
can stay. Luxembourg is not an obvious choice for many people.’ 

From the start, the ESM has sought to include a mix of personal and 
professional backgrounds. Staff come from the public and private 
sectors, and there has been a bid for diversity in terms of age, sex, and 
national origin. About 25% of the staff are hired locally, although they 
may not necessarily be citizens of Luxembourg. By 2018, the ESM had 
staff members who hailed from 42 countries and spoke 33 languages. 
Some 60% had joined the institution from the private sector, and 40% 
from public institutions. 

ESM employees devote one 
day annually to a discussion 
of the fund’s internal culture 
and values. Here is a scene 
from the 2015 event.

Credit: ESM

 
1 8 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘We do not recruit people who are routine job seekers,’ De Beule-Roloff 
said. ‘You need people with a can-do attitude and you need people to 
trust each other, who are willing to make decisions even when they 
don’t hold all the cards.’

Staff retention has become crucial as the ESM puts down institutional 
roots. What is particularly important, De Beule-Roloff said, is to 
maintain the institutional memory by retaining experienced people 
who could leave large knowledge gaps in their absence. The ESM also 
promotes mobility within the organisation. In keeping with its all-
hands-on-deck mentality and because of its evolving mission, internal 
job changes are not unusual. For example, if someone from a middle 
office function wanted to take a funding role, then move from funding 
to investment, the organisation would support the move – provided 
the applicant had the right credentials.

This philosophy infuses the senior management team. In 2016, with 
the work of crafting new tools and programmes mostly complete for 
the time being, the ESM rejigged some management duties. CFO 
Frankel swapped some responsibilities with Anev Janse, and the Board 
separated its investment and funding lines of reporting. Part of the 
logic was to retain these expert staff who had been with the institution 
for the past six years, but keep their jobs interesting with a new focus.

As the institution hired, senior management took the time to reflect on 
how to build a corporate culture conducive to accentuating the upside 
of working on behalf of the European public while cushioning the 
inevitable stresses.

The fund turned to Deborah Henderson of Centre for Inspired 
Leadership, a Canadian-born consultant based in London, to help to 
hone a corporate culture that would bring out the best in all, taking 
into account the challenges of its systemic, political, and economic 
environment. Henderson recognised early on that the rescue fund – 
owned by euro area governments, responsible to them and the public, 
and inextricably connected with banking and the financial markets 
– would need to work relentlessly at developing and maintaining its 
diverse culture within such a context. 

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  1 8 7

The ESM’s seven core 
values were drawn up by 
the staff, not imposed 
by management. Here, 
Managing Director  
Klaus Regling takes part in 
the Values Day discussions 
in 2015.

Credit: ESM

The ESM ‘has so many unique features to it that are different from most 
organisations, even for civil service organisations, by virtue of its origins, 
its structure, and its stakeholders, and because it’s in the centre – a 
perceived safe haven – in any euro financial storm,’ Henderson said. ‘It is 
an organisation that will constantly need huge investment in its culture 
and in its leadership to navigate the complexities and uncertainties of its 
environment and maintain its overall sense of purpose.’

Henderson first surveyed the EFSF’s then-25 employees. She drew on 
a popular business assessment tool to tap into employees’ perceived 
values, aspirations, needs, and attitudes and to identify obstacles to 
better performance and increased job satisfaction. 

The tool was designed around the premise that employees often know 
better than their higher-ups how to achieve their maximum potential. 
The online survey asked three questions: about the employee’s primary 
personal values, the values he or she perceived at the EFSF, and the 
values needed to enhance the organisation’s performance. 

Employees felt that the rescue fund should be sure to cultivate a 
culture of teamwork, openness, and employee recognition, as well as 
continuous improvement, while focusing on the shared vision. Many 
of the 21 employees who filled in the survey saw the EFSF as a unique 
opportunity to help Europe through troubled times. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

However, there were cautionary signs as well. Staff saw only one 
value – commitment – embedded in the organisation as it was then 
constituted. Long hours in the office or on the road were viewed as the 
rescue fund’s biggest drawback, pointing to the gruelling workload as a 
possible source of burnout. Given the crisis conditions of the start-up, 
it was understandable that some fear-driven values also showed up – 
such as confusion and internal competition.

It was an opportune time to assess the mood within the organisation, 
and the EFSF responded by instituting seven values that now embody 
the rescue fund’s core culture: health and well-being, respect, 
excellence, teamwork, creativity, making a difference, and ease with 
uncertainty191. These fundamental tenets are flanked by a commitment 
to diversity.

The senior management endorsed the conclusions from the online 
survey and follow-up dialogue sessions. Importantly, the resulting 
cultural commitments evolved from within the organisation instead of 
being imposed from above. Regling praised Henderson’s approach to 
shaping the internal discussions. ‘She said if you don’t work on building 
your own culture by design, you will still have a culture by default – but 
not usually the one you want,’ Regling said. 

Although the euro economy is enjoying relatively favourable economic 
conditions today, in part due to the work of the EFSF and ESM, 
everyone who works at the firewall is keenly aware of what was so 
recently at risk. The ESM’s Giammarioli grew up in Italy with an 
Italian father and Finnish mother, at a time before Finland joined 
the EU. Europe’s past was etched into his family’s history. ‘My two 
families, 3,000 kilometres apart, suffered greatly during World War II,’ 
Giammarioli said. ‘Europe has guaranteed the last 75 years of peace, 
prosperity, and growth. In the crisis, that came under threat. I see 
myself as a small actor in this big picture, trying to help principles that 
were developed decades ago move forward.’

Institutional history, which began in Chapter 11, 
continues in Chapters 28 and 30.

191  ESM (2018), ‘Working at ESM’, December 2018. https://www.esm.europa.eu/careers/working-esm

A ‘big mistake’: 
Greece’s second rescue 
stumbles

22

Once there was significant involvement of the 
EFSF/ESM, the whole tone of the debate about 
debt restructuring changed completely. It became 
less a question of plugging the existing holes, which 
was more or less what the Greek Loan Facility 
did, and more of having some kind of anticipatory 
precautionary cash in the till.

Thomas Wieser 
Chairman of the Eurogroup Working Group  
(October 2011–January 2018)

With former ECB Vice President Papademos installed as 

interim prime minister in November 2011, Greece quickly 
began readying itself for a second rescue programme. First 

on the agenda was the proposed private sector debt exchange. An 
effort to put a deal together in late 2011 had collapsed, so negotiations 
needed to start again on a bigger scale192. In February 2012, the Greek 
government announced that it had hammered out the terms with 
representatives of private sector bondholders, clearing a key hurdle.

192  Global Restructuring Review (2017), ‘Overview: Restructuring of Greek sovereign debt’, 

10 March 2017. https://globalrestructuringreview.com/benchmarking/the-european-middle-
eastern-and-african-restructuring-review-2017/1137879/overview-restructuring-of-greek-
sovereign-debt

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

21 February 
Eurogroup reaches outline deal on second assistance package for 
Greece. Formal accord follows on 14 March.

9 March
• Sovereign debt restructuring (private sector involvement)  

of around €199 billion begins, concluding on 25 April. 

• First tranche of €34.6 billion is disbursed.

6 May 
Parliamentary elections are held, but with no majority winner. 
Coalition talks fail, so new elections are set for June.

17 June 
Antonis Samaras wins June elections. He is sworn in as new prime 
minister three days later.

27 November 
Eurogroup overhauls the country’s second programme  
and endorses potential future debt relief measures.

5 June 
IMF Executive Board reviews Greece misreporting, and discusses ex 
post evaluation of 2010 stand-by arrangement.

October 
10-year government bond yield steadies below 10%. 

10 April 
Greece returns to international capital markets with a 5-year bond 
issue, raising €3 billion.

8 December 
Prime Minister Samaras seeks early parliamentary appointment  
of next president.

9 December 
Athens stock market experiences biggest one-day  
fall since 1987.

29 December  
Government collapses after failing to elect a new president.

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Greek Finance Minister 
Evangelos Venizelos (left) 
speaks with German Finance 
Minister Wolfgang Schäuble 
at a Eurogroup meeting in 
February 2012 in Brussels as 
Greece’s second programme 
takes shape.

Credit: European Union

By the end of the month, the other pieces were in place. As with all 
euro area aid programmes, the second rescue agreement came with 
conditions that would need to be implemented over time. These included 
pension system reform, higher taxes, minimum wage cuts of more than 
20%, the scrapping of 150,000 public sector jobs, and more flexible types 
of employment. Once Greece had signed up to these conditions and 
permanent on-the-ground monitoring of its compliance by the troika, 
the Eurogroup signed off on the follow-up programme193. 

Formal approval came on 14 March 2012194. In contrast to the ad hoc 
nature of Greece’s first rescue, this second rescue came from the now 
fully operational EFSF. Totalling around €130 billion plus leftover 
IMF and EU funds from the first aid effort, the funds were originally 
scheduled for disbursement between 2012 and 2014, although as with 
many of Greece’s accords with the euro area, this schedule would be 
renegotiated later in the year. The IMF approved an extended fund 
facility for Greece and the release of its first instalment on 15 March.

193  Eurogroup statement, 21 February 2012. https://www.esm.europa.eu/sites/default/

files/2012-02-21_eurogroup_statement_bailout_for_greece.pdf 

194  Statement by the President of the Eurogroup, Jean-Claude Juncker, 14 March 2012.  

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/128941.pdf 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

On 9 March, the private sector debt exchange deal, or private 
sector involvement, got underway. The writedowns went ahead on 
a ‘voluntary’ basis, sparing Greece from a disorderly default and 
the ensuing chain reaction of financial consequences. Participating 
investors accepted writedowns of 53.5% of the principal amount of 
their existing bonds, in exchange for a package of new Greek bonds, 
short-dated EFSF securities, and extra securities linked to Greece’s 
GDP growth195. Out of a total of €206 billion in bonds eligible for the 
offer, approximately €199 billion, or 96.9% were exchanged, easily 
surpassing the 75% minimum needed for the operation to go ahead196. 

It was the biggest sovereign writedown in history, reducing Greece’s 
outstanding debt by about €107 billion197. Yet it went through 
smoothly, because markets had had plenty of time to prepare for it. 
Backers of the haircuts hailed a turning point in the crisis response. 
Those who predicted the policy would trigger a financial market crash 
‘have been proven wrong. Nothing bad happened,’ former German 
Finance Minister Schäuble said. ‘This is an important principle, as 
it ensures that investors take risks into consideration, even when 
purchasing government bonds, and allows free-market mechanisms to 
highlight any need for corrective measures.’ 

195  Reuters (2012), ‘Factbox: Terms of the Greek bond swap laid bare’, 7 March 2012. 

https://www.reuters.com/article/us-greece-swap-factbox/factbox-terms-of-the-greek-bond-swap-
laid-bare-idUSTRE8260K620120307

196  Greece, Ministry of Finance (2012), Press release, 11 April 2012.  

http://www.pdma.gr/greekbonds/index.php/2012-05-28-15-51-31/2012-05-28-15-52-
10/2012-05-28-15-54-7/2012-05-28-15-55-55/2012-05-28-16-01-51/category/24-press-
releases?download=412:11-april-2012 

197  ESM (n.d.), ‘What was the private sector debt restructuring in March 2012?’.  

https://www.esm.europa.eu/content/what-was-private-sector-debt-restructuring-march-2012 

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  1 9 3

Focus  
€15 billion and 10 minutes to spare

Behind the scenes of the biggest sovereign debt restructuring in history, which 
began on Friday 9 March 2012, EFSF lawyers, the lending team, and debt 
managers saw to it that the transaction would go through without a hitch. 
Figuring out the details required everyone to work together at top speed.

The bonds had to be in the Greek settlement system before the weekend 
so that the first set of investors could exchange their old bonds on Monday 
for the new EFSF-provided, as well as other, securities198. The size and scale 
were far beyond normal market operations. ‘This was a very unique exercise 
in high amounts with plenty of bondholders,’ said Ruhl, the EFSF head of 
funding. And the stakes were enormous – if anything went wrong, it could 
destabilise banks across Europe.

‘The private sector involvement was agreed to take place over the weekend, 
so we had to deliver the bonds by Friday evening,’ Ruhl said. The closing time 
was 17.30 for the settlement process, but the bonds couldn’t move until all of 
the authorisations were in place, which depended on Greece delivering a final 
signature on Friday afternoon. 

To get the operation started, Greece had to create about €15 billion in Greek 
government bonds – but the timing was incredibly tight, according to the 
rescue fund’s Chief Economist Strauch. ‘There was a call at 17.00 where I told 
them essentially: if you don’t move so we can do this now, the transaction will 
not take place,’ Strauch said. ‘They had to run to make it happen.’

A broken fax machine at the Greek finance ministry added to the suspense of 
what was already a race against the clock. The EFSF sent over a document 
for the Greek officials to sign, but the finance ministry couldn’t fax it back. In a 
scramble, the officials found a working machine at Greece’s debt management 
office and faxed the signature from there. The team held its breath. 

‘We managed to send our bonds at absolutely the last minute, to an account at 
the Bundesbank, and from there they would go to the Bank of Greece,’ Strauch 
said. ‘There was the back and forth with the signatures and the clock was 
ticking. I think only 10 minutes before, at 17.20, I called the guy in Frankfurt to 
hit the button and send them over to Greece […] and the bonds arrived.’

198  Greece, Ministry of Finance (2012), Press release, 11 April 2012. http://www.pdma.gr/greekbonds/
index.php/2012-05-28-15-51-31/2012-05-28-15-52-10/2012-05-28-15-54-7/2012-05-28-15-55-
55/2012-05-28-16-01-51/category/24-press-releases?download=412:11-april-2012

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Second Greek programme (2012–2015)

Initial programme amount: €164.5 billion

Total amount disbursed: €153.8 billion,  
of which the EFSF disbursed €141.8 billion

Lenders: EFSF, IMF

Final weighted average maturity (EFSF loans): 32.45 years

Key legislated reforms: labour market, income tax, public 
administration, social protection, health system, public financial 
management, business environment

The private sector involvement exercise marked the first use of funds 
from Greece’s EFSF programme. Policymakers then approved a tranche 
of cash payments, which were paid out in several instalments between 
March and June. Around the middle of the year, however, things began 
to slow down.

Greek voters returned to the polls in May 2012, but no party won 
a parliamentary majority. After a follow-up election six weeks later 
in June, it became Antonis Samaras’s turn to get a coalition up 
and running. To be his finance minister, Samaras turned to Yannis 
Stournaras, a university economics professor who also ran a private 
sector think tank.

Stournaras had a technocratic background and was acquainted with 
many of the key players from his time on the EU committee of finance 
ministry deputies in the late 1990s. When Greece was preparing to join 
the euro, he had sat between future EFSF CEO Regling and future ECB 
President Draghi under EU protocol order.

‘The fact that I knew all of these people helped a lot,’ Stournaras said. ‘I 
had a strong opinion about what should be done – I said, first of all we 
have to restore credibility before we ask for anything.’

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  1 9 5

As soon as the new government was in place, talks began in 
July 2012 about how to push ahead with the programme, which had 
stalled during the run-up to the elections and subsequent change 
in government. In October, European finance ministers paired 
encouraging words about Greece’s determination to cut its budget and 
overhaul its economy with a requirement that it commit to 89 policy 
steps199. It took until a series of fraught meetings in November for 
Greece to renegotiate the programme terms and make another attempt 
at getting its debt under control. 

Those negotiations slowed the fiscal adjustment pace, providing for 
more achievable primary surplus targets. The target for 2014, for 
example, was reduced to 1.5% of GDP from 4.5%200, with a goal of 
reaching the more challenging target in 2016.

Stournaras said the ‘more realistic’ fiscal targets improved the 
prospects of turning the economy around. In setting the targets, 
Greece, the European Commission, and the IMF repeatedly clashed 
over how far and how fast Greece would need to reduce its spending. 
The debates would play out repeatedly through the end of Greece’s 
second programme and, ultimately, to its third rescue in 2015. 

Greece had to wait until December 2012 for its next EFSF 
disbursement. Even when finance ministers signed off on a tranche, 
they divided it into smaller201 sums that would be handed out 
piecemeal as Greece tackled its demanding to-do list. 

The EFSF was always standing by with the money as soon as its release 
was approved. Thanks to the diversified funding strategy, the firewall 
no longer had to rush into the markets every time a disbursement 
loomed. Instead, it could be a more regular and predictable issuer, 
satisfying investors as well as programme countries. 

199  ‘Eurogoup meeting – October 2012: Press conference – Part 1’, Video, 8 October 2012.  

https://tvnewsroom.consilium.europa.eu/events/eurogroup-meeting-october-2012/press-
conference-part-1-210;  
Bloomberg (2012), ‘EU lauds Greek budget-cutting will, boosting aid prospects’, 9 October 2012. 
https://www.bloomberg.com/news/articles/2012-10-08/europe-salutes-greek-budget-cutting-will-
raising-aid-prospects

200  European Commission, Directorate-General for Economic and Financial Affairs (2012), ‘The 

Second Economic Adjustment Programme for Greece first review – December 2012’, European 
Economy Occasional Papers 123, p. 3, December 2012.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp123_en.pdf

201  Ibid., p. 59. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

For 2013 and the first half of 2014, the second programme 
moved along largely as designed. In 2013, the EFSF made 
eight disbursements to Greece, totalling €25.3 billion, and for a 
while in 2014, Greece’s prospects seemed to be brightening. Full-
year GDP growth was 0.7%, turning positive for the first time since 
2007202. Ten-year bond yields steadied at around 6% in the summer 
of 2014. The government made a cautious return to the market on 
two occasions, and posted a dramatic budget turnaround. Meanwhile, 
the banks raised private capital and issued bonds. In early 2014, the 
Commission said Greece had achieved a €1.2 billion primary surplus 
in 2013 as a result of its fiscal overhaul203.

10-year government bond yield – Greece 
in %, monthly average

30

25

20

15

10

5

0

Once the bond market 
digested the writedowns, 
Greece’s second 
programme began to turn 
the economy around. By 
early 2014, interest rates 
fell to a point that enabled 
Greece to borrow on its 
own again.

Source: European  
Central Bank

March
2012:
Private
sector 
involvement 
(PSI) in the 
restructuring 
of Greek bonds

April 2014: Greece returns to bond 
issuance for the first time in four years

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
y
r
a
u
n
a
J

0
1
0
2
y
r
a
u
n
a
J

1
1
0
2
y
r
a
u
n
a
J

2
1
0
2
y
r
a
u
n
a
J

3
1
0
2
y
r
a
u
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a
J

4
1
0
2
y
r
a
u
n
a
J

5
1
0
2
y
r
a
u
n
a
J

6
1
0
2
y
r
a
u
n
a
J

7
1
0
2
y
r
a
u
n
a
J

8
1
0
2
y
r
a
u
n
a
J

9
1
0
2
y
r
a
u
n
a
J

202  Eurostat (n.d.), ‘Real GDP growth rate – volume’. http://ec.europa.eu/eurostat/tgm/table.

do?tab=table&init=1&language=en&pcode=tec00115&plugin=1 

203  European Commission, Directorate-General for Economic and Financial Affairs (2014), ‘The 
Second Economic Adjustment Programme for Greece – fourth review – April 2014’, European 
Economy Occasional Papers 192, p. 14, April 2014.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2014/pdf/ocp192_en.pdf 

 
 
 
 
 
 
 
 
 
 
 
 
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  1 9 7

Around mid-2014, Greece seemed to have a chance of wrapping up 
its programme, as both Ireland and Portugal had done. ‘At one point it 
looked as if they could get out, they could get a credit line, and growth 
was back,’ Strauch said. 

Economic sentiment indicator and real GDP growth – Greece 
quarterly frequency

115

110

105

100

95

90

85

80

75

70

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

1
Q
-
3
0
0
2

4
Q
-
3
0
0
2

3
Q
-
4
0
0
2

2
Q
-
5
0
0
2

1
Q
-
6
0
0
2

4
Q
-
6
0
0
2

3
Q
-
7
0
0
2

2
Q
-
8
0
0
2

1
Q
-
9
0
0
2

4
Q
-
9
0
0
2

3
Q
-
0
1
0
2

2
Q
-
1
1
0
2

1
Q
-
2
1
0
2

4
Q
-
2
1
0
2

3
Q
-
3
1
0
2

2
Q
-
4
1
0
2

1
Q
-
5
1
0
2

4
Q
-
5
1
0
2

3
Q
-
6
1
0
2

2
Q
-
7
1
0
2

1
Q
-
8
1
0
2

4
Q
-
8
1
0
2

Economic sentiment indicator (left-hand scale)

Real GDP growth (right-hand scale)

The mood of Greek consumers and businesses mirrored the health of the economy. Hopes in early 2014 that Greece would finally pull 
out of the crisis proved to be premature.

Note: The long-term average for the economic sentiment indicator is 100.

Source: European Commission and Hellenic Statistical Authority (ELSTAT)

But reform momentum slowed in the second half of the year, as 
Greece stumbled under the weight of political turmoil and six years 
of recession. Stournaras became governor of the Greek central bank 
in June 2014 and was replaced at the finance ministry by Gikas 
Hardouvelis.  

 
1 9 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Greece also needed to convince the IMF that its finances were on 
a sustainable path for at least 12 months, a normal requirement 
for every IMF disbursement. The IMF had a different approach to 
debt sustainability from the euro area, but at the time the euro area 
institutions did not want to break ranks inside the troika. So the review 
was never concluded, meaning key disbursements didn’t take place.

‘The biggest error was made in 2014,’ said Stournaras. ‘It was a big 
mistake that the review didn’t close, on account of a fiscal gap of a 
few million euros.’

In Stournaras’ view, the fiscal shortfall didn’t exist, depending on how 
you ran the numbers. The primary surplus target at the time was 3% of 
GDP for 2015 and 4.5% for 2016–2017204.

But Rolf Strauch of the ESM recalls that the failure to close hinged 
as much on the slowdown in structural reforms as on the fiscal gap. 
‘Towards the second half of 2014, the Samaras government had 
exhausted its political capital and was basically unable to move forward 
any significant structural reform. The government had, therefore, fallen 
behind some benchmarks agreed with the IMF, which were effectively 
not met. On the European side, the performance gap was smaller, but 
also not entirely confined to the budget issue.’

Once again, personalities, stress, and emotion influenced the 
discussions, and ultimately sank any prospect of compromise. 
Relations were fraying. Some European policymakers felt that Greece 
rarely delivered on its promises, while many Greek citizens regarded 
the troika as all but impossible to satisfy. It was a vicious cycle that 
made the talks even harder at times.

‘The game was that they were sceptical about the Greek politicians’ 
ownership of the programmes,’ Stournaras said. ‘They asked for more 
and more, thinking that we would implement only a percentage of it. 
But that was a mistake. Austerity is austerity.’ He added: ‘The mistake 
was on both sides. His peers thought that Samaras was bluffing. 

204  European Commission, Directorate-General for Economic and Financial Affairs (2012), ‘The 

Second Economic Adjustment Programme for Greece first review – December 2012’, European 
Economy Occasional Papers 123, p. 22, December 2012.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2012/pdf/ocp123_en.pdf

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But he was not. The parliamentary group, consisting of members of 
parliament from two parties, New Democracy and Pasok, supporting 
the government, could not be convinced that further austerity 
measures were necessary.’

Towards the end of the year, Samaras felt he no longer had the 
political backing needed to carry out the last round of budget cuts 
and structural measures required to secure troika approval. Undercut 
by faltering support at home, he sought leniency from EU leaders, but 
they refused to let Greek domestic politics dictate the course of the 
review. At that point, Samaras saw no choice but to go to the polls.

Strauch said: ‘The last month Samaras was in power, he could no 
longer push through the kind of significant reforms that we were 
asking for. That was the stalemate.’

On 8 December 2014, Samaras announced an election for Greece’s 
largely ceremonial presidency205. Political uncertainty spooked the 
markets – the day after, the Greek stock market plunged 12.78%, 
the biggest one-day fall since 1987206. The year closed with political 
deadlock, as Greece’s parliament failed to choose a new president and 
Samaras’s government collapsed. 

On 25 January 2015, Greece held a parliamentary election207, with 
Samaras representing both continuity and further belt-tightening, 
and the Syriza party representing a break with the old and 
resistance to further spending cuts208. As the clock ran out on the 
second assistance programme in 2015, Greece and the euro area 
would face their biggest test yet. 

Greek programme history, which began in Chapters 3 and 19, 
continues in Chapters 36, 37, and 38.

205  Financial Times (2014), ‘Greek premier calls snap presidential election’, 8 December 2014.  

https://www.ft.com/content/747cdf0c-7f09-11e4-bd75-00144feabdc0 

206  Seeking Alpha (2014), ‘The Greece stock market: This 12% drop came with a warning,’ 

9 December 2014. https://seekingalpha.com/article/2743215-the-greece-stock-market-this-12-
percent-drop-came-with-a-warning

207  Euronews (2014), ‘Greek government announces snap presidential vote’, 9 December 2014.  

http://www.euronews.com/2014/12/09/greek-government-announces-snap-presidential-vote
208  Reuters (2014), ‘Greece faces early election after PM loses vote on president’, 29 December 2014. 
https://uk.reuters.com/article/uk-greece-vote-result/greece-faces-early-election-after-pm-loses-
vote-on-president-idUKKBN0K70NH20141229

 
Debt sustainability: 
revising the metrics

23

The structure of Greek debt required a new 
framework to analyse whether Greek debt would 
be sustainable in the long run. In that context, 
flow data are as important in the long run as the 
traditional debt-to-GDP data. 

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

E urope’s first rescue programmes, from the bilateral loans for 

Greece to the EFSF-led packages for Ireland and Portugal, were 
designed to operate in part on the principle of dissuasion, as well 

as to encourage a smooth programme exit. Short-term lending at elevated 
rates was intended to spur aid recipients into quickly reinstating sound 
economic and fiscal policies, so they could return to market financing that 
would be cheaper than the cost of the rescue loans.

The Greek experience of 2010 and early 2011 led the euro area to 
consider a different approach to lending terms. A first step came in 
March 2011209 when the EU agreed210 to lower the rates on Greece’s 

209  Conclusions of the Heads of State or Government of the euro area of 11 March 2011, 11 March 2011.  
https://www.consilium.europa.eu/media/21423/20110311-conclusions-of-the-heads-of-state-or-
government-of-the-euro-area-of-11-march-2011-en.pdf

210  The European Council in 2011, p. 32, January 2012.  

http://www.consilium.europa.eu/media/21347/qcao11001enc.pdf

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

bilateral loans by 100 basis points and to extend the maturities. In 
committing to these and other ‘more far reaching measures’ in July 2011, 
Euro area leaders also indicated a willingness to ease lending terms to 
Ireland and Portugal to align with what was now on offer to Greece211. 

At the time, Greece was still paying a 200 basis point surcharge on its 
first programme. While euro area policymakers discussed more easing 
of terms, the IMF proposed replacing its stand-by arrangement, which 
had been put in place alongside the bilateral loans, with a different tool, 
the extended fund facility, which provides for a longer engagement and 
repayment period.

‘There were two basic options,’ said John Lipsky, who served as acting 
IMF chief in 2011. ‘One was to stay with the existing programme, which 
in any case was going to require additional funding than had been 
planned initially. As a result, this option meant that those supporting the 
program were going to have to pay more just to achieve – at best – the 
original goals. Or, we could move to an extended fund facility in the 
context of strengthened and lengthened policy commitments. The second 
option, therefore, meant pay more, but get more.’

The IMF, supported by the European Commission, initially proposed 
moving to the extended facility deal in mid-2011, before debt 
restructuring was on the table. The IMF wanted to make the change 
alongside a funding increase from the euro area and additional reform 
commitments from Greece, Lipsky said. But, when European finance 
ministers met in June of that year, the proposal failed. Several of the 
euro area’s smaller countries rejected the plan, even though it had 
support from bigger member states. ‘Without a new agreement, the 
situation continued to deteriorate to the point that it was clear to all 
that debt restructuring of some kind had become unavoidable. Thus, 
there was almost an entire ‘lost year’ as this new deal was hammered 
out,’ Lipsky said.

The IMF eventually took this step in March 2012 as part of Greece’s 
second programme. Then in November 2012, after lengthy negotiations, 
euro area finance ministers agreed in principle to a second set of debt 
relief measures212 – a recognition that the initial rescue loans had been 
too expensive to ensure sustainability. 

211  Statement by the Heads of State or Government of the euro area and EU institutions, Brussels, 
21 July 2011. http://feelingeurope.eu/Pages/euro%20area%20statement%2021-07-2011.pdf

212  Eurogroup statement on Greece, 27 November 2012.  

https://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/133857.pdf

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Known as ‘re-profiling’, the measures covered the first and second aid 
packages. Loan maturities from both programmes were extended by 
15 years. For the bilateral aid in the first programme, the Greek Loan 
Facility, the interest rate was lowered by a full percentage point and 
repayment schedules for the loan tranches were extended. For the 
EFSF loans in the second programme, which already had significantly 
lower borrowing costs, the Eurogroup agreed to a 10 basis point cut 
in guarantee fees, along with a 10-year grace period before Greece 
would have to pay any interest at all on most loans. Finally, the EU 
Member States also agreed to pass on to Athens profits deriving from 
Greek bonds held by their national central banks, starting with fiscal 
year 2013. 

In designing these measures, the Eurogroup took care that the 
changes wouldn’t require a budgetary contribution from member 
states or hurt the EFSF’s creditworthiness. The euro area also ruled 
out writedowns of the principal outstanding amount on Greece’s 
rescue loans. Throughout the discussions on debt relief, the other 
euro area member states have held firm that Greece must repay its 
borrowings in full. 

Stournaras, who became Greek finance minister in July 2012, 
commended the firewall team for helping arrange the debt 
sustainability measures under the November 2012 accord, which also 
extended the aid period of Greece’s second programme by one year. 
‘That was a crucial decision,’ he said. ‘It could not have taken place 
without the ESM, without an organised team to deal with this issue.’

Taken together, the lower rates and maturity extensions made a big 
dent in Greece’s debt burden, both improving its immediate public 
financial outlook and dramatically reducing its long-run costs. At 
the same time, the member states acknowledged that they might 
need to do more for Greece, a promise that was to prove increasingly 
important in the years ahead. 

A second round of re-profiling for Ireland and Portugal came up 
in 2013, when those two countries were again pressing for equal 
treatment. Greece’s second programme had been overhauled at the 
end of 2012 and it became clear that the country was once again not 
on an equal footing with its fellow aid recipients, even though the 
country was doing a better job than it had been at following through 
on its reforms.

 
2 0 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

(From left) Olli Rehn, 
European commissioner 
for economic and monetary 
affairs and the euro, 
Eurogroup President Jeroen 
Dijsselbloem, ECB President 
Mario Draghi, and ESM 
Managing Director Klaus 
Regling speak to the media 
at Dublin Castle, after the 
Eurogroup agreed on further 
EFSF maturity extensions 
for Ireland and Portugal at 
a meeting on 12 April 2013 
in Dublin.

Credit: Peter Muhly/AFP

For Ireland and Portugal, which both had better track records within 
their programmes as well as substantial financial burdens, the prospect 
of a second round of re-profiling seemed possible and fair. At first, 
Greece was viewed as a special case, but gradually the discussion 
broadened to cover the re-profiling of loans for Ireland and Portugal as 
well, said ESM Chief Economist Strauch. 

Euro crisis managers saw maturity extensions as a way to wean 
Ireland and Portugal off their programmes and lower the non-
repayment risks for European taxpayers. If they lengthened the 
weighted average maturity, an average of the due dates of multiple 
loans, the annual burden of servicing debt would decrease and the 
bottom-line cost of repaying the debt would fall, brightening both 
countries’ public finance pictures. 

For more on budget savings from rescue fund loans, see Chapter 38.

Ireland was already en route to a return to global capital markets, and 
the new terms helped smooth out its future repayment timeline and 
plan new bond sales. ‘Once our debt was re-profiled, the Irish debt 
management office had a better window of opportunity to restart 
their issuance. The extension gave them room to improve their market 

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presence,’ said Giammarioli, the EFSF’s mission chief for Ireland at the 
time as well as the head of the rescue fund’s strategy team. Easier debt 
terms for Portugal also would mark a major step towards regaining 
market access. 

‘For Greece, the decision was to guarantee debt sustainability, while for 
Portugal and Ireland there were no doubts about debt sustainability,’ 
Giammarioli said. ‘The political decision at the Eurogroup was not 
controversial, but the implementation was technically complex.’

Over time, policymakers’ embrace of more flexible conditions for 
programme countries – in effect, treating them as clients or partners 
– gained a theoretical underpinning with the debt sustainability 
framework that ESM Managing Director Regling advocated as the 
most accurate measure of a country’s ability to repay its loans. The 
debate gained momentum over the course of 2013, after Greece’s 
second programme got fully underway at the end of 2012. 

‘One should not only look at the level of debt,’ Regling said in a 2013 
interview with the Wall Street Journal 213. ‘One has to look at how it’s 
financed. And we know today that the EFSF represents the biggest share 
of Greek public-sector debt and that it will continue to be financed for 
the next 30 years at very low interest rates. That has to be taken into 
account, it was not taken into account sufficiently in the past.’ 

IMF Managing Director Lagarde credits Regling with crafting 
solutions that were economically sound and politically feasible. ‘The 
benefit of the ESM’s contribution is to have identified the importance 
of extending maturities to enhance debt sustainability,’ Lagarde said.

The IMF’s usual method focuses mainly on the debt-to-GDP ratio 
as an indicator of debt sustainability. Under Regling’s guidance, the 
euro area has emphasised a different metric that shows Greece’s debt 
to be on more sustainable footing because favourable EFSF and ESM 
lending rates and long maturities give it ample room to keep up with 
its obligations. Under the concept of gross financing needs, made up of 
interest payments, principal repayments, and the primary deficit, the 
ESM examines if a country can meet future payments as they come 
due, rather than if the total stock of debt is too high.

213  The Wall Street Journal (2013), ‘Bailout fund boss says current Greek debt analysis “meaningless”’, 
26 September 2013. https://blogs.wsj.com/brussels/2013/09/26/bailout-fund-boss-says-current-
greek-debt-analysis-meaningless/?mod=article_inline 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

As far back as 2011, the IMF had been examining alternative ways to 
gauge repayment prospects, depending on the structure of the debt and 
the situation of the country. The ESM went further, studying Greece’s 
debt-servicing costs and concluding that Greece’s financing trajectory 
could be sustainable. The ESM’s flow analysis lessens concerns about 
Greece’s ability to repay its official sector debt over time.

Prior to Regling’s contribution, the IMF had concluded that Greece’s 
debt was perhaps too large given the size of its economy, and it pushed 
the euro area to consider an official sector writedown. But such a move 
would be at odds with the currency area’s consistent philosophy and 
the EU Treaty’s no-bailout rule. Looking at Greece’s payment outlook, 
instead of its debt-to-GDP ratio, allows the EU to bolster its case for 
requiring all official sector loans to be repaid in full.

To be sure, the IMF also factors gross financing needs into its 
computation of debt sustainability, subjecting countries that overstep 
a critical threshold to closer scrutiny. But IMF loans are much shorter 
than the ESM’s, rarely exceeding 10 years, and the Washington-based 
lender puts more weight on overall debt-to-GDP ratio to assess 
repayment ability. 

The difference from the ESM is one of emphasis. Regling put the 
spotlight squarely on gross financing needs, especially for Greece, 
because the rescue fund provided large sums with very long maturities 
and low interest rates. It will be decades before a large part of the 
Greek debt comes due. So, although the level of debt has not changed, 
Greece’s repayments are spread over a lengthy span of time and it will 
not need to start principal repayments – the outflows that will make 
up the largest component of its financing needs – for many years. Thus 
the ESM methodology shows that Greece’s debt trajectory is more 
sustainable than some of the more pessimistic models would suggest214. 
During and after Greece’s third programme, when debt relief would 
be a central part of the policy agenda, this metric would be more 
important than ever. 

Regling made the case ‘very forcefully and effectively’ for using a 
different metric for Greece, Lipsky said. ‘Klaus made the right points 
and I think won the argument.’

214  Gabriele, C., Erce, A., Athanasopoulou, M., and Rojas, J. (2017), Debt stocks meet gross financing 

needs: A flow perspective into sustainability, ESM Working Papers 24, 14 June 2017.  
https://www.esm.europa.eu/publications/debt-stocks-meet-gross-financing-needs-flow-
perspective-sustainability

Breaking the doom loop: 
towards banking union

24

An important early step was the summer 2012 
decision for a banking union. At that time there 
was all this talk about European banks bringing 
down European governments, and whether that 
would mean the end of Europe.

Andres Sutt  
Former ESM Head of Banking

In the spring of 2012, Spain too was suffering from downgrades as 

it struggled to get its banking system under control. The banking 
crisis would soon force the Spanish government, under its Prime 
Minister Mariano Rajoy, to seek euro area aid. Yet Spain was far from 
alone in its concern about the financial sector. Countries across the 
euro area feared some of the biggest banks could collapse, bringing 
down sovereigns and the common currency with them. 

This phase of the euro crisis reshaped the political map of Europe, 
eventually helping spearhead a drive to address the sovereign-bank 
nexus, which was seen as one of the biggest threats to financial 
stability215. Creating tools to break that so-called ‘doom loop’ seemed 

215  For an analysis of the correlation between bank and sovereign risk, see Erce, A. (2015), Bank and 

sovereign risk feedback loops, ESM Working Papers 1, 7 September 2015.  
https://www.esm.europa.eu/publications/bank-and-sovereign-risk-feedback-loops

2 0 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

a logical method of defence. There would also be a move to end the 
fragmentation of financial markets within the currency union by 
creating a common EU supervisor and a bank resolution regime.

IMF chief Lagarde was among first financial leaders to call for  
a European banking union. The euro area already had a central bank, 
but the continent-wide industry lacked coordinated supervision to 
prevent banks from taking on too much risk, and it did not have 
comprehensive deposit insurance that could help prevent a bank run. 

Unlike in the US, where the Federal Deposit Insurance Corporation 
had been set up in 1933 in response to the Great Depression, there was 
little precedent on the EU level for how to handle a failing private lender. 
Generally speaking, few avenues other than state support shielded 
consumers and investors from the consequences of a bank failure.

When the euro was launched, banking supervision was the sole 
preserve of individual member states. As it became clear that a problem 
in one country could imperil everyone, however, policymakers began to 
believe that any bank big enough to pose a systemic threat to the euro 
area should be supervised at that level. 

In a 17 April 2012 speech, Lagarde noted that the fragmentation 
of financial markets had been created by a patchwork of financial 
regulation and oversight that left the common currency struggling 
to preserve financial stability. She pointed to the growing worry 
of a vicious cycle between banks and sovereign nations, where the 
misfortunes of one could topple the prospects of the other. Europe 
had seen this work both ways: the banking sector’s problems damaged 
Ireland’s overall economy, whereas Greece’s banks, heavily invested in 
their sovereign’s domestic debt, were harmed by the Greek public debt 
crisis and its impact on the broader economy.

‘To break the feedback loop between sovereigns and banks, we need 
more risk sharing across borders in the banking system. In the near 
term, a pan-euro area facility that has the capacity to take direct stakes 
in banks would help,’ Lagarde said. ‘Looking further ahead, monetary 
union needs to be supported by stronger financial integration which 
our analysis suggests be in the form of unified supervision, a single 
bank resolution authority with a common backstop, and a single 
deposit insurance fund’216.

216  IMF (2012), ‘IMF/CFP policy roundtable on the future of financial regulation’, Opening remarks by 
Christine Lagarde, 17 April 2012. http://www.imf.org/en/News/Articles/2015/09/28/04/53/sp041712

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Changes in Europe’s political constellation would put together a coalition 
to tackle banking problems. In May 2012, voters in France replaced 
President Sarkozy, who had shaped the crisis response alongside 
Germany’s Chancellor Merkel, with the socialist François Hollande.

Ahead of a Group of 20 summit in June 2012, there were increased calls 
for the euro area to do more to help countries such as Italy weather the 
crisis and steer clear of potentially crippling contagion. When leaders 
met on 18 and 19 June in Los Cabos, Mexico, the euro area was urged to 
shore up its financial foundations.

‘We fully support the actions of the Euro Area in moving forward with the 
completion of the Economic and Monetary Union,’ their statement said. 
‘Towards that end, we support the intention to consider concrete steps 
towards a more integrated financial architecture, encompassing banking 
supervision, resolution and recapitalization, and deposit insurance’217.

In the run-up to the 29 June 2012 European summit, tension mounted 
over whether or not the EFSF – or the ESM, then a few months from its 
inauguration – should be called into action to buy bonds of countries 
where market access appeared to be tenuous. While the purchasing tools 
existed, there was no consensus on whether to activate them. 

A former European commissioner, Mario Monti, had become Italy’s 
prime minister in mid-November 2011, bringing with him a pro-
European mindset and a government committed to reforms. The 
economics professor was trusted as a safe pair of hands by other 
European leaders – and crucially by financial markets. 

In Monti’s view, Europe had to stand for something positive lest market 
turbulence destroy confidence in the entire euro project. His support 
would be pivotal for the emerging concept of banking union within the 
monetary alliance. 

Italy’s Monti, joined by France’s Hollande and Spain’s Rajoy, rallied 
support for more help.  

Euro area leaders eventually zeroed in on financial infrastructure as the 
area where they could make the most impact. They directed their finance 
ministers to develop a strategy to help troubled banks directly without 
burdening the balance sheet of any already struggling country218.

217  Group of 20 (G20) (2012), ‘G20 leaders declaration’, 18 and 19 June 2012.  

http://www.g20.utoronto.ca/2012/2012-0619-loscabos.pdf

218  For an analysis of the regulatory treatment of sovereign debt held by banks, see Lenarčič, A., Mevis, D., 
Siklós, D. (2016), Tackling sovereign risk in European banks, ESM, Discussion Paper 1, 1 March 2016.  
https://www.esm.europa.eu/publications/tackling-sovereign-risk-european-banks

 
2 1 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

In a 29 June summit statement219, the leaders laid the foundation for 
what would become the euro area banking union, envisaging a move to 
common supervision and resolution powers alongside harmonisation of 
national deposit insurance laws. The banking union would be mandatory 
for members of the common currency and open to any other EU 
countries wishing to join. Euro area leaders also pledged to use the ESM 
to help banks directly as necessary to protect financial stability. 

This June 2012 commitment to banking union was a major 
breakthrough for Europe. The commitment to joint financial sector 
safeguards allowed the currency union to move forward.

Banking union has three main elements: supervision, resolution, and 
deposit insurance220. The first element aims to keep banks from getting 
into trouble by making sure a European regulator monitors day-to-day 
affairs. The second is designed to make sure that EU-wide there is a safe 
way to restructure or shut down a failing bank, avoiding a chaotic collapse 
that could spawn contagion. And the third element focuses on protecting 
the broader economy by reassuring savers that the banking system is safe 
and that they can access their insured cash – up to €100,000 – even if a 
bank falls on hard times221. This can prevent national bank runs. 

Using a section of the EU Treaty that allows the ECB to take on new 
powers, the leaders called on the European Commission to draft a 
proposal for a single supervisory body. This was a major success for 
those favouring greater integration throughout the euro area, as it made 
it possible to create a joint banking supervisor. 

The political breakthrough led the euro area to create a new regulator, 
housed at the ECB: the Single Supervisory Mechanism, which became 
operational in November 2014222. It has direct oversight of about 
120 systemic banks across the bloc223 – the three biggest banks in 
every country, plus others that operate across borders or meet certain 
thresholds and are also considered systemic. 

219  Euro area summit statement, 29 June 2012.  

https://www.consilium.europa.eu/media/21400/20120629-euro-area-summit-statement-en.pdf

220  European Commission (n.d.), ‘Banking union’.  

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union_en 

221  European Commission (n.d.), ‘Deposit guarantee schemes’.  

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-
risk-management/managing-risks-banks-and-financial-institutions/deposit-guarantee-schemes_en

222  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the 
European Central Bank concerning policies relating to the prudential supervision of credit 
institution, OJ L 287/63, 29 October 2013.  
http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R1024&from=en

223  ECB, Banking supervision (n.d.), ‘Single Supervisory Mechanism’.  

https://www.bankingsupervision.europa.eu/about/thessm/html/index.en.html;  
Single Supervisory Mechanism (n.d.),  
https://www.consilium.europa.eu/en/policies/banking-union/single-supervisory-mechanism/

C H A P T E R   2 4   —   BR E AkI N G  T H E   D O O M   L O O P : T O W A R D S   B A NkI N G   U N I O N  

  2 1 1

The euro area also adopted a Single Resolution Mechanism for banks 
under ECB oversight224. Euro area member states backed this up by 
asking banks to begin paying into an accompanying Single Resolution 
Fund and build it up to its target of 1% of the deposits of the banks 
in the participating countries, initially estimated at €55 billion225. This 
fund is ramping up over eight years from 2016 to 2023, with the full 
capacity to be reached in 2024. 

There was some initial talk of housing the resolution agency and its 
fund at the ESM, but euro area leaders decided against making the 
soon-to-debut ESM fully responsible for salvaging banking sectors 
weighed down by legacy issues. Meanwhile, the ESM had been tasked 
with developing a tool for recapitalising banks directly.

The EU made tremendous strides on the supervisory and resolution 
fronts between 2012 and 2014, while the ESM was developing its direct 
bank recapitalisation capability. 

For more on the direct recapitalisation instrument, see Chapter 34. 

Although that instrument was never deployed, Andres Sutt, then ESM 
head of banking, called it an important part of the arsenal. ‘It’s better 
to have the option in your toolkit than not have it at all,’ Sutt said. ‘If 
things get really bad, then you have something at hand to use.’

Another European priority during this period was to draw up a 
legal framework for dealing with troubled banks, setting out a clear 
hierarchy for assigning losses to different classes of investors. The 
landmark bank recovery and resolution directive was set up to govern 
the treatment of failing banks. It requires banks to create recovery 
and resolution plans ahead of time and began taking effect at the 
end of 2014226. These rules, which apply to the entire EU, not just the 
euro area, changed the parameters for the ESM bank recapitalisation 
instrument even as it was being developed. 

The core principle of the directive is that bank creditors such as 
shareholders and bondholders must bear losses before any public 
support can be drawn upon. This reflected a standardising and 

224  European Commission (n.d.), ‘Single resolution mechanism’. https://ec.europa.eu/info/business-

economy-euro/banking-and-finance/banking-union/single-resolution-mechanism_en 

225  Single Resolution Board (n.d.), ‘What is the Single Resolution Fund?’.  

https://srb.europa.eu/en/content/single-resolution-fund

226  European Commission (2014), ‘EU bank recovery and resolution directive (BRRD): Frequently 
asked questions’, 15 April 2014. http://europa.eu/rapid/press-release_MEMO-14-297_en.htm

 
2 1 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

toughening of previous EU approaches on public aid to banks, which 
limited state aid under EU competition law but didn’t dictate losses in 
such a specific way. 

In Ireland and Spain, for example, the question of whether or not and 
how to force senior bank creditors to take losses became an integral 
part of the debate around their rescue programmes. At one point early 
on, Ireland had wanted to ‘bail in’ – or impose losses upon – senior 
bank bondholders as well as junior investors, only to be dissuaded by 
its fellow euro area member states. At that time, there was a view that 
pushing bank bonds into default could further escalate the crisis. 

By the time it became apparent that Spanish banks would need 
recapitalising, consensus was building around the idea that junior 
creditors, at least, should always absorb losses before taxpayer funds were 
put at risk. But the idea was still controversial, particularly because in 
some countries bank bonds were marketed to consumers as equivalent 
to cash savings accounts, even though they posed greater risks.

The bank recovery and resolution directive aimed to make clear to 
investors up front what risks they were taking. It became an essential 
part of the long-term effort to strengthen the euro and its financial 
architecture. In a move to limit the tapping of taxpayer funds, the 
directive also required the banking industry to fund the cost of 
resolution wherever possible. To accomplish this, every EU Member 
State was required to set up a bank resolution fund financed by 
industry fees. Some countries already had a system in place, while 
others had a deposit insurance scheme to coordinate with. Even after 
the euro area created a common resolution system for the currency 
area’s biggest banks, countries also continued to need national systems 
for banks not covered by regular ECB supervision.

Since 2016, the euro area has had common systems for two elements in 
banking union, supervision and resolution227, and it is establishing rules 
on national frameworks for the third, deposit insurance228. Proposals for 
a common deposit insurance system, which would complete the banking 
union fully, may take time before they are ripe for agreement, given 
important legacy problems with banks in several member states and 
sizeable non-performing loan problems in some countries. 

227  Single Resolution Board (n.d.), ‘About SRB’. https://srb.europa.eu/en/mission 
228  European Commission (n.d.), ‘Deposit guarantee schemes’. https://ec.europa.eu/info/business-
economy-euro/banking-and-finance/financial-supervision-and-risk-management/managing-
risks-banks-and-financial-institutions/deposit-guarantee-schemes_en

Spain’s banks:  
the ESM’s  
first programme

25

We carried out reforms essential to  

our economy in record time, and despite enormous 
pressure. They laid the foundation for our 
economic recovery. 

Luis de Guindos 
Spanish Minister of Economy, Industry, and Competitiveness 
(December 2011–March 2018)

Spain’s crisis was a boom-bust cycle turned explosive by euro 

area contagion. In the 2000s, the Spanish economy was generally 
flourishing, its growth outpaced its European neighbours, and the 
budget recorded a solid surplus in many years. Most job seekers could 
find work, aided by a construction boom. Easy loans from banks fed a 
bubble, as house prices nearly tripled between 1997 and 2008. 

When the credit crunch hit, real estate prices collapsed. Clients, 
particularly real estate and construction companies, struggled to repay 
loans and banks were left with huge losses.

2 1 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

1 January 
Spain adopts the euro.

Economy enters recession as a decade-long property  
and credit bubble bursts. Unemployment and fiscal deficit  
increase significantly.

19 January 
Standard & Poor’s downgrade: AA+ from AAA, the first in a series  
by the major rating agencies, although Spain never loses  
investment grade.

26 June 
Fund for Orderly Bank Restructuring (FROB) is established,  
to channel public financial support to banks.

April-May 
Financial markets focus on large fiscal deficit. Government 
announces consolidation measures. 

21 December 
Mariano Rajoy becomes the new Spanish prime minister, following 
elections on 20 November.

27 January 
Jobless rate for 2011 jumps to 22.9%, or 5.27 million people – then 
the highest in the EU. The rate will peak at an average 26.2% in 2013, 
surpassed only by Greece’s 27.5% during the crisis.

30 March 
Government proposes a drastic reduction in budget spending of 
16.9%, or €27 billion, after a 2011 fiscal deficit first estimated at 
8.5% of GDP, but later revised to 9.6%.

25 April 
IMF identifies a group of 10 banks that are vulnerable, including  
the country’s largest mortgage lender, Bankia. 

9 May 
Central bank confirms Bankia is to be partly nationalised. 

25 June 
Formal request is made for assistance.

20 July 
Eurogroup approves Spanish programme for the  
recapitalisation of financial institutions, covering financing  
needs of up to €100 billion.

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  2 1 5

16 November 
Spain’s FROB issues blueprint for Sareb as a ‘bad bank.’

28 November 
European Commission approves state aid and restructuring plans 
for several key banks.

11 December  
ESM disburses first loan tranche (€39.5 billion).

5 February 
ESM disburses second and final loan tranche (€1.87 billion).

31 December 
Spain successfully exits ESM financial assistance programme.

By 2009, Spain was in recession. As the economy contracted, high 
unemployment and debt levels added to the real estate woes. Growth 
improved a little in 2011, but, by the end of that year, almost one 
in four Spanish workers couldn’t find a job. Spain was home to the 
highest unemployment in the EU that year. The rate kept rising, 
peaking in 2013 at an annual average of 26.2%, or six million 
unemployed. By then, Greece had taken over as the country with the 
bloc’s worst-performing labour market, with a jobless rate of 27.7%229. 

‘Spain faced the combination of a loss of competitiveness, a credit 
bubble, and a housing bubble. After the outbreak of the international 
financial crisis, these imbalances led Spain into a triple crisis: 
banking, fiscal, and labour,’ said Luis de Guindos, who joined Rajoy’s 
government as economy minister after elections in late 2011.

As Spain fell back into recession at the start of 2012, the euro area 
threatened to disintegrate around it. Greece was still struggling. 
Ireland’s and Portugal’s government bond prices had fallen and yields 
soared in the summer of 2011. Both countries faced downgrades from 
the various rating agencies, and other countries confronted market 
strain as well. 

229  Eurostat (n.d.), ‘Employment and unemployment (Labour force survey)’.  

https://ec.europa.eu/eurostat/web/lfs/data/database 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Non-performing loans — Spain 
as % of outstanding bank credit, quarterly frequency

14

12

10

8

6

4

2

0

Spanish banks' non-
performing loans rose 
dangerously high as the 
crisis intensified but 
began declining after the 
completion of the bank 
restructuring.

Source: Bank of Spain

4
Q
-
6
0
0
2

4
Q
-
7
0
0
2

4
Q
-
8
0
0
2

4
Q
-
9
0
0
2

4
Q
-
0
1
0
2

4
Q
-
1
1
0
2

4
Q
-
2
1
0
2

4
Q
-
3
1
0
2

4
Q
-
4
1
0
2

4
Q
-
5
1
0
2

4
Q
-
6
1
0
2

4
Q
-
7
1
0
2

4
Q
-
8
1
0
2

Spain was under enormous pressure to get its finances under control 
quickly. De Guindos said the rest of the euro area began to see Spain 
as a concern, encapsulated by a chance encounter at a gathering of 
finance ministers.

‘The story I remember best, largely because of its media impact, was 
a practical joke that Jean-Claude Juncker – who then chaired the 
Eurogroup – played on me in March 2012,’ de Guindos said. ‘Juncker 
approached me, without my seeing him, at the start of a Eurogroup 
when the cameras were still in the room. He put both hands around 
my neck, pretending to strangle me.’ De Guindos continued: ‘First I 
was shocked, but I quickly understood it was a joke, laughed, and the 
grip ended in a hug. The image appeared everywhere in the media 
because it symbolised perfectly the situation we were in. Europe did 
not trust Spain after the deficit mushroomed, and wanted to tighten 
the screws on us to ensure that we reduced it at a faster pace than we 
could manage.’

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  2 1 7

Eurogroup President 
Jean-Claude Juncker puts a 
joking ‘stranglehold’ – that 
quickly transformed into a 
hug – on Spanish Economy 
Minister Luis de Guindos 
at a March 2012 Brussels 
meeting.

Credit: Isopix/Rex Features/
Shutterstock

Spain passed a budget law that enacted big cuts of nearly 16.9%, or 
€27 billion, in March, as it attempted to rein in a public deficit that was 
first put at 8.5% of GDP in 2011 and later revised to 9.6%230. But the 
banking problems would prove too difficult for Spain to resolve on its 
own. In April 2012, the IMF said the past four years had seen ‘a crisis of 
unprecedented proportion in the Spanish financial sector’231. 

230  Spain, Prime Minister’s Office (2012), ‘El Gobierno aprueba el Projecto de Ley de Presupuestos 
para 2012’ (Government approves the 2012 Budget bill (ESM translation)), 30 March 2012.  
http://www.lamoncloa.gob.es/consejodeministros/resumenes/Paginas/2012/300312-consejo.aspx; 
Reuters (2012), ‘Spain reveals deep cuts to meet deficit goal’, 1 April 2012.  
https://uk.reuters.com/article/uk-spain-cuts/spain-reveals-deep-cuts-to-meet-deficit-goal-
idUKBRE82T0OD20120401

231  IMF (2012), ‘Spain: financial sector assessment, preliminary conclusions by the staff of the 

International Monetary Fund’, Online statement, 25 April 2012.  
https://www.imf.org/en/News/Articles/2015/09/28/04/52/mcs042512 

 
2 1 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

General government fiscal balance — Spain 
in % of GDP

2

0

-2

-4

-6

-8

-10

-12

The bursting of the 
housing bubble and rising 
unemployment deepened 
Spain’s budget deficit, 
leaving it unable to rescue 
banks on its own.

Source: Eurostat

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

With further pummelling from global shocks, the banking crisis now 
threatened the entire Spanish economy. Even though Spain’s biggest 
banks were deemed well capitalised, the IMF warned that a group of 
10 struggling lenders could topple financial stability if not addressed. 
Furthermore, in its June 2012 financial stability assessment report on 
Spain, the IMF’s team pointed to vulnerabilities, with ‘the risk of an 
even more severe downside shock than embodied in the analysis’232. 

Banks were not doing enough to make sure their clients could pay 
back their loans. At the time, banks – not just in Spain but also in many 
European countries – did not report the amount of underperforming 
loans in their financial reports, which undermined market confidence 
in the banks’ stated health. Right before the IMF report, several Spanish 
banks faced credit-rating downgrades, some reaching junk status, and 
Spain’s previous repair efforts began to fall apart. 

‘Despite the reform marathon, I realised that we were going to have to 
ask for help when we began to see, in the first days of May 2012, the 
real situation of the banks and, in particular, of Bankia, which had to 
be nationalised,’ de Guindos said.

232  IMF (2012), ‘Spain: Financial stability assessment’, IMF country report No. 12/137, June 2012. 

https://www.imf.org/external/pubs/ft/scr/2012/cr12137.pdf#page=7

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Bankia had been founded in 2010 from a group of seven struggling 
savings banks to become Spain’s largest real estate lender and, overall, 
one of the largest banks in the country. When it had to be completely 
taken over by the state, the Spanish government’s stake was converted 
to voting equity. Bankia also became a test case for the way bank 
bondholders were treated across Europe. Under EU rules, for Spain to 
be allowed to pump more aid into the bank, it would need to figure out 
how bank bondholders would help share the burden.

Confidence was faltering. Some €300 billion in foreign capital fled 
the country over the year from the third quarter of 2011 to the 
third quarter of 2012, largely as a drain on the balance sheets of the 
financial sector. Spain needed to win back market credibility – and fast. 

Spain’s access to markets had become more limited, with the risk that 
it wouldn’t be able to borrow enough on its own, de Guindos said. ‘We 
needed a solution that would prevent the damage that the housing 
and credit bubble had caused financial institutions from affecting the 
public treasury.’

Cristóbal Montoro, the Treasury minister, laid bare the situation on 
5 June: ‘The risk premium says Spain doesn’t have the market door 
open. The risk premium says that as a state we have a problem in 
accessing markets, when we need to refinance our debt’233. Four days 
later, the Eurogroup indicated it would respond favourably to a formal 
request for assistance. 

Despite the Spanish government’s efforts to cut the budget and rein in 
the banks, more was needed. ‘Before requesting assistance, Spain tried 
to solve the problem by consensus,’ said Juan Rojas, a former Bank 
of Spain economist who now heads the ESM’s economic and market 
analysis team. ‘They tried to change several laws to make the banking 
sector more resilient, but the uncertainty regarding the quantity of bad 
loans in the banking sector was so huge that the market did not believe 
in the process. That is why, in the end, Spain had to come to the ESM.’ 

On 25 June, Spain requested a programme for its banks234. The yield on 
Spain’s 10-year government bond averaged a painful 6.6% that month, 

233  Reuters (2012), ‘Spain says markets closing on it, seeks help for banks’, 5 June 2012.  

https://www.reuters.com/article/us-eurozone-idUSBRE8530RL20120605 

234  Spain, Prime Minister’s Office (2012), ‘Spain formally requests financial aid for Spanish banks’, 
25 June 2012. http://www.lamoncloa.gob.es/lang/en/gobierno/news/Paginas/2012/20120625_
RequestAidBanks.aspx 

 
2 2 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

an expensive rate at which euro area sovereigns typically no longer 
issue. Cyprus requested a programme on the same day, although its 
programme would take much longer to negotiate and would include a 
full macroeconomic assistance package.

Spain was the first, and so far the only, euro area member state to 
request a rescue programme only for the financial sector. One of the 
euro area’s largest economies, it didn’t require a full macroeconomic 
adjustment programme because of reforms implemented earlier and 
because it was still able to borrow on capital markets. By limiting the 
aid programme to the financial sector, Spain could focus on ‘the root of 
the problem,’ Rojas said. 

Euro area leaders reacted positively. On 29 June, they urged rapid 
completion of the aid deal. And on 20 July the Eurogroup approved 
it and bond yields started to drop. The Eurogroup granted Spain a 
financing envelope of up to €100 billion, although the precise amount 
would be determined after a more detailed assessment of the banks’ 
capital needs235. Three days later, the EFSF Board of Directors approved 
the assistance. The EFSF was fully prepared to act and pre-funded 
€30 billion in notes that could have been deployed if needed, although 
the money was never used in the interim period between Spain’s 
request and the start of the ESM.

As Spain prepared for the ESM programme, the capital outflows came 
to an end236. ‘I must underscore that, although markets, some of the 
press, and foreign and Spanish businesses pushed us to ask for a full 
programme, this was never on the table,’ de Guindos said. ‘As doubts 
were highly concentrated in the financial sector, it was best to tackle 
the fire with a programme limited to banking.’ 

235  Statement by the Eurogroup, 20 July 2012.  

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/131914.pdf 

236  The Telegraph (2012), ‘IMF fears “credit shock” in Spain if Rajoy blocks rescue’, 10 October 2012. 

https://www.telegraph.co.uk/finance/financialcrisis/9600476/IMF-fears-credit-shock-in-Spain-if-
Rajoy-blocks-rescue.html 

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Its financial adjustment programme was intended solely for indirect 
bank recapitalisation, meaning the ESM would lend to the Spanish 
government for the sole purpose of restructuring the banking sector. 
Nonetheless, the Spanish knew they would need to assuage markets 
by having access to enough money to quash any doubts. ‘In previous 
negotiations, it had become obvious that we had to ask for a sufficiently 
excessive amount to send the message that, no matter how big the 
problem, we were covered,’ de Guindos said.

From a technical standpoint, Spain had initially signed a deal with 
the EFSF because, at the time, the ESM was not expected to begin 
operations in October. The ESM took over the programme in 
November 2012, just before Spain negotiated its first instalment. That 
made Spain the first client of the permanent firewall. The role of the 
IMF had to be limited, as it does not provide any loans to specific 
sectors such as banking. Instead, the IMF took part in an advisory 
capacity, without offering Spain any money. Or as IMF chief Lagarde 
said: ‘We participated in Spain but as a monitor.’ 

Before euro area bank supervision began in 2014 and the Single 
Supervisory Mechanism began conducting regular comprehensive 
assessments of the big banks that came under its care, European 
authorities were reviewing the Spanish financial sector to determine 
the level of need. However, given market concerns about banks’ 
financial reporting, and the May 2012 partial nationalisation of Bankia, 
Spanish authorities thought they needed to take matters one step 
further in assuaging any fears about forthrightness. 

‘At the time there was considerable speculation about the situation of 
Spanish banks, with erroneous figures floating about. These doubts 
could only be cleared up with a fully transparent exercise. So we 
commissioned an independent evaluation,’ de Guindos said. 

Spain retained the consultancy firm Oliver Wyman to conduct 
an independent and comprehensive review of Spanish banks. In 
September 2012, the report237 identified a group of Spanish banks, 

237  Oliver Wyman (2012), ‘Asset quality review and bottom-up stress test exercise’, Oliver Wyman, 

Madrid, 28 September 2012. 
https://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf 

 
2 2 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

including the mortgage-lending giant Bankia, that would need 
significant additional capital. In the short run, this contributed to 
another downgrade238. 

The Eurogroup tied Spain’s assistance to a set of conditions for the 
financial sector. Under the programme, Spain would improve the way 
it regulated and supervised its banks, figure out a new approach to the 
bad loans clogging up balance sheets, and put together in-depth bank 
restructuring plans. The overhauls would be designed in cooperation 
with the European Commission’s Directorate-General for Competition, 
to make sure they were in line with EU state aid rules.

10-year government bond yield – Spain 
in %, monthly average

July 2012: 
Eurogroup approves Spanish programme 
to recapitalise banks

December 2013:
Spain exits ESM programme

7

6

5

4

3

2

1

0

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
y
r
a
u
n
a
J

0
1
0
2
y
r
a
u
n
a
J

1
1
0
2
y
r
a
u
n
a
J

2
1
0
2
y
r
a
u
n
a
J

3
1
0
2
y
r
a
u
n
a
J

4
1
0
2
y
r
a
u
n
a
J

5
1
0
2
y
r
a
u
n
a
J

6
1
0
2
y
r
a
u
n
a
J

7
1
0
2
y
r
a
u
n
a
J

8
1
0
2
y
r
a
u
n
a
J

9
1
0
2
y
r
a
u
n
a
J

Spain attempted to anticipate the rescue programme’s conditions by 
pledging to meet its EU-set budget goals and by amending its banking 
laws to match the euro area requirements. De Guindos said the 
main accomplishments were ‘making the savings banks – which had 

238  Spain, Prime Minister’s Office (2012), ‘Oliver Wyman estimates the Spanish banking system’s 

capital needs at close to €60 billion’, 28 September 2012.  
http://www.lamoncloa.gob.es/lang/en/gobierno/news/Paginas/2012/20120928_Spanishbanking.aspx;  
Spain, Central Bank of Spain (2012), ‘Cost of the Spanish banking sector solvency tests’, 
Press release, 31 October 2012. https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/
NotasInformativas/12/Arc/Fic/presbe2012_48e.pdf

Spain’s bond yields 
gradually reached 
levels that made it 
overly expensive for the 
government to borrow. 
The ESM programme 
put Spain’s borrowing 
costs on a sustained 
downward path.

Source: European  
Central Bank

 
 
 
 
 
 
 
 
 
 
 
 
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  2 2 3

been in trouble for some time – disappear and improving corporate 
governance,’ along with creating a Spanish bank recapitalisation fund. 
Set up in 2009, the Fund for Orderly Bank Restructuring, commonly 
known as the FROB from its Spanish acronym, would make the 
resolution process for Spanish banks more uniform and transparent239.

There was also a ‘bad bank’ tasked with taking troubled loans off bank 
balance sheets and pushing for repayments. Called Sareb, from its 
Spanish acronym, it is a private sector entity put together as part of 
Spain’s euro area aid programme. It received about 200,000 bad loans 
and foreclosed properties, totalling about €51 billion, from banks that 
had been nationalised and restructured as part of the programme240. 

Another potential difficulty emerged. Under treaty rules, the ESM 
enjoys preferred creditor treatment over other bondholders. While 
markets had accepted that Greece had to impose haircuts on its 
private sector bondholders, they were skittish about how quickly that 
precedent could extend to the rest of the euro area. In the case of Spain, 
they began to question if it meant the country’s overall credit risk was 
worse than the euro area was admitting to. This was the last thing Spain 
– which was not completely shut out of financial markets – needed. 

As the financial assistance for Spain was originally to be provided by 
the EFSF, the Eurogroup decided that the ESM assistance programme 
would maintain the status of EFSF loans, whose debt was on an equal 
footing with that of other creditors, rather than follow the preferred 
creditor status of ESM loans241.

The FROB also would have to decide which bank creditors should 
share the burden of recapitalising the banks, one of the conditions set 
out by the rescue agreement. This was controversial both because of 
the lack of precedent and because of the way bank debt had become 
embedded in the overall economy. Ordinary households had sunk 
their savings into bank bonds that were far riskier than promised, 
and one of the FROB’s challenges would be figuring out how to 

239  Spain, Minister of Economy and Finance (2009), ‘Minister of Economy and Finance order issuing 
guarantee of the Central Government (Administración General del Estado) to secure obligations 
to the Fund for Ordered Banking Restructuring arising from issues of financial instruments, the 
arrangement of loan and credit transactions, and the execution of any other financing transactions 
by that fund, in accordance with the provisions of Royal Decree-Law 9/2009, of June 26, on bank 
restructuring and reinforcement of credit institutions’ own funds’, Partial transcript.  
http://www.frob.es/en/Documents/Extracto_orden_otorgamiento_Aval_FROB_prot_En.pdf 

240  Sareb (n.d.), ‘About us’. https://www.sareb.es/en_US/about-us  
241  ESM (2014), ‘Frequently asked questions on the European Stability Mechanism (ESM)’, Factsheet, 

28 July 2014. https://www.esm.europa.eu/sites/default/files/faqontheesm.pdf 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

protect these individuals while also treating all creditors fairly in the 
writedown process. In the end, the FROB chose to impose losses on 
junior creditors while protecting senior creditors, and it later carried 
out a domestic programme to compensate ordinary households that 
had lost savings in the process.

To keep the banks safely open and avoid a run on the banks, almost all 
of the necessary recapitalisation funds from the ESM were disbursed in 
one go. This required some creative thinking from the funding team, 
which resorted to a cashless system of floating rate notes and zero 
coupon bills. 

For more on this funding approach, 
see ‘Focus — When bonds are better than cash’ later in this chapter.

Technical procedures surrounding programme implementation gave 
some reassurance that Spain would stay on a solid footing even after 
the disbursements, ESM Chief Economist Strauch said. For example, 
the Commission required Spain to show its business plan for the 
sector before financial assistance could be released. The Commission 
approved the state aid plan on 28 November242, allowing the first 
disbursement of just over €39 billion to go forward less than two 
weeks later in December 2012, followed by a second, far smaller, 
disbursement in February 2013243. 

‘Only then, once everything is cleared and the European Commission’s 
decision is taken, do we ship any type of capital, which is much 
sounder and has now become the general approach,’ Strauch said. 
‘Overall, this was skilfully handled, on the Spanish side and from an 
overall programme management perspective.’ 

In the end, Spain used only around €41 billion for the banking sector 
out of the total potential €100 billion. The rescue programme was a 
true firewall, giving Spain the time and security to put its economy 
back on track. ‘We believed that with the rescue of the banks in general, 

242  European Commission (2012), ‘State aid: Commission approves restructuring plans of 

Spanish banks BFA/Bankia, NCG Banco, Catalunya Banc and Banco de Valencia’, Press release, 
28 November 2012. http://europa.eu/rapid/press-release_IP-12-1277_en.htm 

243  ESM (n.d.), ‘Financial assistance for the recapitalisation of the Spanish banking sector’.  

https://www.esm.europa.eu/assistance/spain 

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and of Bankia in particular, the situation would improve, and that was 
indeed the case,’ de Guindos said. 

In de Guindos’ view, although contagion was real, markets over-
reacted to Spain’s difficulties. They were uncertain about the solvency 
of the financial system and how this would affect sovereign debt, 
meaning Spain was seen as a bellwether for the entire common 
currency. ‘In part, the markets attacked the euro through Spain, 
because they perceived it as the weak link and, in part, because their 
view of our economy was worse than reality,’ de Guindos said.

Spain’s programme was short – only 18 months. It probably helped that 
it was more focused than the other programmes. 

Spanish programme (2012–2013)

Initial programme amount: €100 billion

Total amount disbursed: €41.3 billion

Lenders: ESM

Final weighted average maturity: 12.5 years

Key legislated reforms: asset quality review of the banking sector  
and stress test; recapitalising and restructuring weak banks;  
transfer of problem assets to an external asset management company; 
bank governance rules

After Spain exited its programme in December 2013, the reforms 
undertaken helped spark a surge in economic growth. 

‘The restructuring of the financial sector also interacted with other 
reforms, such as labour, energy, the single market, budgetary stability, 
and trade liberalisation. This, together with efforts to reduce the deficit, 
is what is driving Spanish growth – currently at twice the euro zone 
average,’ de Guindos said in 2016.

 
2 2 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Spain underlined this better performance by voluntarily starting to 
repay its ESM loans in 2014, earlier than required. By October 2018, 
it had made nine voluntary repayments, paying off 42.6% of the 
total outstanding amount of the €41.3 billion ESM loan to Spain and 
leaving it at €23.69 billion.

In its 2017 review of the Spanish economy, the Organisation for 
Economic Co-operation and Development said: ‘The Spanish economy 
is enjoying a robust recovery from a deep recession, with structural 
reforms contributing to high growth rates and a gradual decline 
in unemployment.’ It added that ‘further measures are needed to 
boost productivity and to ensure that the benefits of growth reach all 
Spaniards’244.

Focus  
When bonds are better than cash

When the firewall provides countries with financial aid to recapitalise their 
banks, it puts a different kind of financing strain on the ESM from regular 
rescue loans. To keep banks open and avoid a bank run, bank recapitalisation 
– whether through a bank-only programme such as Spain’s, or as part of a 
wider programme as was the case for Greece and Cyprus – often needs to 
happen all at once. But, as anyone who has needed to raise cash in a hurry 
knows, market interest rates can sometimes be punitive. 

An EFSF and ESM innovation to get around this was to use floating rate notes 
instead of cash for the disbursement of the loan. Those bonds, which have 
a variable interest rate, are sold to one of the 40-odd international banks that 
belong to the ESM Market Group, in a process needed to legally create the 
notes, and then the ESM immediately repurchases the notes after the bank 
subscribes. No gains or losses are linked to either transaction, both of which 
occur on the same day and for the same price. The ESM then holds the notes 

244  OECD (2017), ‘Spain: Maintain reform momentum to enhance economic recovery and boost 

inclusive growth’, Press release, 14 March 2017. http://www.oecd.org/newsroom/spain-maintain-
reform-momentum-to-enhance-economic-recovery-and-boost-inclusive-growth.htm 

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until the programme country requests a loan to inject capital into its banks, at 
which point the notes are transferred to the recipient banks to serve as capital. 

Thus, this issue and repurchase programme creates notes by issuing 
securities and immediately buying them back. It means that the EFSF and 
ESM don’t have to overwhelm the market with a big short-term request for 
cash, said Strauch, who credits Head of Funding Ruhl with coming up with 
the idea together with CFO Frankel and an outside banking advisor. For the 
banks that receive aid, the attraction is having good-quality securities on their 
balance sheets. 

Greece was an early test case for the floating rate notes, which the EFSF 
used to provide a €25 billion capital increase for the Hellenic Financial 
Stability Fund in April 2012, after Greece was granted its second euro area 
rescue package. Later, the notes were also used on a small scale in Cyprus 
under the ESM. 

Spain, however, was where the issue and repurchase programme 
really proved its mettle. When Spain asked for its first disbursement in 
November 2012, the ESM had been in place for only a month. While legally 
sound, it was not yet an established issuer in the market – and it needed to 
find €40 billion in a hurry. 

Had the ESM simply needed cash, it would have had to go to the market and 
take whatever money it could get at whatever price, Ruhl said. ‘This would 
have meant that we had ruined our reputation before we even began.’

But the Spanish banks weren’t looking for liquidity, they were looking for 
good-quality assets to hold as capital. This left the door open for a technical 
solution that gave the banks exactly what they needed and preserved the 
ESM’s market flexibility. 

‘Instead of sending €40 billion in cash we sent €40 billion in bonds,’ Ruhl 
said. ‘We didn’t have to go to the market, we didn’t have to offer supply to 
the market. It meant we protected our existing curve. We protected existing 
investors. We weren’t forcing our existing bonds to cheapen because we 
weren’t flooding the market.’

Sending notes instead of cash essentially buys time for the ESM to 
accumulate funds. It’s a way of delivering support immediately without 
disrupting the market. The notes have different maturities with sufficient time 
in between so that the ESM has plenty of time to raise money in the markets 
to pay off the next maturity. For Spain, the total amount was split into the 
following six notes: 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Details of the notes provided by ESM – Spain

ISIN

Issuance date

Maturity

Type

Amount

EU000A1U98X6

EU000A1U97C2

EU000A1U97D0

EU000A1U98U2

EU000A1U98V0

EU000A1U98W8

01/02/2013

05/12/2012

05/12/2012

05/12/2012

05/12/2012

05/12/2012

05/08/2015

11/02/2013

11/10/2013

11/06/2014

11/12/2014

11/12/2015

30-month FRN

€1.865 billion

2-month bill

€2.5 billion

10-month bill

€6.468 billion

18-month FRN

2-year FRN

3-year FRN

€6.5 billion

€12 billion

€12 billion

Notes: FRN, floating rate note; ISIN, International Securities Identification Number. 

Source: ESM

‘This was no easy task,’ Ruhl said, and yet it was the best way forward. 
‘Issuing to the market would have been extremely risky. We didn’t know how 
many investors were prepared to buy the ESM bonds. In addition, it was the 
second half of November – the market was calming down, we were coming 
close to year end, books were closed, nobody wanted to enter into new risks. 
This was the worst period of the year to raise a huge amount of money, and 
this with an issuer who hadn’t done any transactions in the market.’

To manage the process of creating and transferring the bonds as needed, 
the team created a variation of the approach used for the private sector 
involvement used in Greece. All worked well in the end. 

Generally speaking, the ESM links the interest rate on the floating notes to the 
corresponding Euro Interbank Offered Rate, the daily reference interest rate 
known as Euribor. This rate moves in line with market conditions, meaning it 
can sometimes enter negative territory. The ESM later adjusted its approach 
to formally and explicitly set the interest rate floor for the notes at zero. 

The ESM on trial:  
green light  
from Germany

26

To my great relief, in the summer of 2012, the 

Federal Constitutional Court rejected  
the criticisms of the ESM, provided certain 
conditions were met.

Wolfgang Schäuble 
German Finance Minister (October 2009–October 2017)

On 10 July 2012, a panel of judges in the distinctive red robes of 

Germany’s Federal Constitutional Court filed into a hearing 
that would ultimately decide whether or not the ESM could 
proceed. Resentment against Europe’s new firewall was bubbling into 
legal challenges across the euro area, with cases pending in Estonia and 
at the Court of Justice of the European Union. But, given the timing 
– Spain and Cyprus had requested programmes only 15 days earlier – 
and the size of Germany’s would-be contribution to the rescue fund, 
the Karlsruhe-based judges were seen as holding the future of the euro 
in their hands. 

If the court ruled that ratifying the Treaty establishing the ESM245 
would violate Germany’s constitution, the new firewall would be 
unable to go forward. If the court gave the ESM its blessing, the euro 

245  Treaty establishing the European Stability Mechanism, 2 February 2012.  

https://www.esm.europa.eu/sites/default/files/20150203_-_esm_treaty_-_en.pdf

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Judges in Germany’s 
Constitutional Court 
prepare to announce 
their verdict on German 
ratification of the ESM 
Treaty and fiscal compact 
on 12 September 2012 in 
Karlsruhe, Germany. 

Credit: Matthias Hangst/
Getty Images

area would have a firm foundation for its new permanent backstop. 
The high court had already ruled on the EFSF. In reviewing the ESM, 
its decision had even bigger stakes.

Chancellor Merkel’s government was extremely sensitive to public 
opposition. Some 37,000 German citizens had signed a petition 
questioning the proposed ESM, including the Bavarian politician Peter 
Gauweiler of the Christian Social Union party, who had also led an 
earlier legal challenge246. Yet more tellingly, 54% of Germans polled 
hoped the Constitutional Court would block the ESM, according to a 
YouGov survey commissioned by the German news agency dpa and 
conducted between 3 and 5 September 2012247. 

At the time, ratification of the ESM Treaty was proceeding apace 
across the euro area. On the date of the German Constitutional Court 
hearing, 10 July, nine countries had ratified it and that number would 
reach 14 by the end of August248. The German parliament had 

246  Reuters (2012), ‘German court removes hurdle to euro zone bailout fund’, 12 September 2012. 

https://www.reuters.com/article/us-germany-court/german-court-removes-hurdle-to-euro-zone-
bailout-fund-idUSBRE88B00220120912 

247  Spiegel Online (2012),‘Mehrheit der Deutschen hofft auf Sieg der Euro-Gegner’ (‘Majority of 
Germans hope for euro opposition victory’ (ESM translation)), 7 September 2012. http://www.
spiegel.de/wirtschaft/soziales/euro-rettung-deutsche-hoffen-auf-bundesverfassungsgericht
-a-854421.html 

248  European Parliament (2014), ‘German Constitutional Court decisions on EU anti-crisis measures’, 
Briefing, July 2014. http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2014/140568/
LDM_BRI(2014)140568_REV1_EN.pdf

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approved it on 29 June, but it could not become law until it was signed 
by Germany’s president, a move that would not happen without the 
court’s endorsement. 

Jansen, the ESM’s first general counsel, described the mood at the  
July hearing as ‘very, very tense’ – one German official working on  
the project told Jansen that his children had received death threats. 
 ‘It was a very bad situation,’ he said. ‘It was emotional. Some people 
were outraged.’

Like Managing Director Regling, Chief Economist Strauch and others 
in the ESM’s senior leadership, Jansen was German and understood 
the quandary facing the country’s leaders. ‘The government knew  
it needed to be done,’ Jansen said. But there was also ambivalence: 
‘They knew it was so unpopular that they could not praise it too 
much, because then they would not be re-elected, but they also  
could not risk letting the project fail because that would have been 
the end of Europe.’

Opponents of the firewall believed it would saddle Germany with the 
bill for profligacy elsewhere – and were determined to stop it. In the 
earlier case before the Karlsruhe-based top court, Gauweiler and a 
group of professors had filed a suit against the German government’s 
support for Greece and the EFSF. On 7 September 2011, the court had 
ruled in favour of the euro area’s firewall strategy, but it made clear that 
German lawmakers had to be consulted on all key steps249.

Then-German Finance Minister Schäuble said those initial Karlsruhe 
decisions were essential for gaining public acceptance. ‘The basic 
approach behind the Federal Constitutional Court’s rulings was 
to ensure that taking on overly high risks did not undermine the 
fundamental principle that the Federal Republic of Germany is a 
parliamentary democracy based on the rule of law, and that future 
parliaments should remain free to make their own decisions,’ Schäuble 
said. ‘In the worst-case scenario, Germany would have been liable for 
significantly more than the agreed share of 27%.’

Looking back, Regling views Germany as home to some of his most 
important and most difficult audiences. In numerous public and 
private appearances, Regling sought to explain that the rescue fund’s 

249  Germany, Federal Constitutional Court (Bundesverfassungsgericht), Judgment of the Second Senate 

of 7 September 2011, 2 BvR 987/10 – paras. (1-142).  
http://www.bundesverfassungsgericht.de/entscheidungen/rs20110907_2bvr098710en.html 

 
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programme financing comes from the market, not from the German 
budget, nor from the taxes that German workers have paid. While the 
German budget would bear some additional risk, it would not take 
on any new costs. ‘I think I was helpful in calming down the hostility 
somewhat, but it was sometimes very severe,’ he said. 

In early 2011, for example, he spoke at a meeting of Germany’s 
federation of family-run businesses alongside his one-time boss, 
former Finance Minister Theo Waigel. From their perch on the 
podium, even before they began to speak, they started to wonder about 
the hundreds of family entrepreneurs in attendance.

‘It was so hostile,’ Regling recalled. ‘The way we were introduced was 
so aggressive, we were thinking: “Where’s the emergency exit? Are 
we getting out of here unharmed?” It was really bad. It was one of the 
worst experiences I’ve ever had.’

Other ESM/EFSF team members also attempted to rally support at 
home. Secretary General Anev Janse appeared on Dutch television, 
and spoke to the European Parliament’s budget audit committee and 
to Dutch members of parliament to make the case for a joint rescue 
facility for the euro area. As he remembers it, the idea was received 
with hostility amid a public perception that Greece had brought its 
crisis upon itself through its own policy mistakes. 

Back in Luxembourg, the EFSF was doing its best to proceed 
calmly, as if there were not a momentous legal challenge pending. 
Regling, who had to keep international investors convinced that 
the euro area’s rescue funds were a good place to invest their 
money, avoided comment on the case. 

The rescue fund continued to manage its programmes for Ireland, 
Greece, and Portugal, and to monitor the progress of Spain’s and Cyprus’s 
requests for assistance. Hiring continued and the core managers kept 
up their institution-building efforts. At the time, the EFSF was aiming 
to expand its workforce, to around 75 from 47 employees by the end of 
2012. People were very interested in how the firewall was developing, 
to the extent that Germany's Spiegel Online included a mention of the 
firewall’s new logo in a September 2012 profile of ESM preparations250.  

250  Spiegel Online (2012), ‘ESM permanent bailout fund prepares for prime time’, 5 September 2012.  
http://www.spiegel.de/international/europe/permanent-euro-bailout-fund-esm-prepares-to-go-
live-despite-law-suits-a-853892.html 

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‘It was quite a risk,’ said Giammarioli, the ESM’s head of strategy and 
institutional relations. ‘I had to create my own division, to establish 
myself, to recruit, and to take strategic decisions for the institution as 
a whole. All the while, I was aware the ESM might not happen because 
there was this pending constitutional decision in Germany.’

Given the stakes, the ESM team couldn’t afford the slightest 
misunderstanding. German judges running the proceedings were 
experts in national law, not euro area policymaking, and were 
therefore not necessarily familiar with the firewall framework, Jansen 
recalled. Throughout the process, he and his colleagues were on hand 
to explain or clarify how the ESM would work, the role of national 
parliaments in its procedures, and other technical details. 

‘The court is very serious and sober,’ Jansen said. ‘But seeing the 
symbols of the German state, the eagle, the flag and the European flags 
– you know history’s being written here.’

The July 2012 hearings took place in a temporary building, while  
the court’s main chambers were under renovation. In addition  
to a huge turnout of European media, US and Asian journalists  
joined the pre-hearing media crush in front of the court. Once 
proceedings began, the camera crews were sent out and official 
recordings took over. 

Hearings in Karlsruhe normally last a few hours, but for this case the 
testimony stretched well beyond that, with only short breaks for the 
participants. Finance Minister Schäuble and other senior officials were 
present, underscoring the importance of the hearing for Germany as 
well as for the ESM.

‘Because it was a long day, we went to lunch at the nearby canteen. 
Everybody was queuing like at school, getting their food, and that 
included all the “important” people,’ Jansen said. While those officials 
who were grasping trays awaited the decision in Germany, another 
legal logjam was facing Regling’s team 2,000 kilometres away.

Two days after the German hearing, Estonia’s Supreme Court ruled 
on a similar case, assessing the treaty’s constitutionality before  
its ratification by Estonia. The challenge contended that the treaty 
impeded Estonia’s right to decide on its use of public funds – the 
paid-in and callable capital Estonia would contribute represented 
approximately 8.5% of the country’s GDP. On 12 July 2012, the  
court said that the ESM should proceed because Estonia faced  

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

a greater threat from currency destabilisation than it did from  
any potential restriction on parliament’s powers over the use of 
national resources251.

Often the German Constitutional Court can take years to issue full 
rulings. When it came to the ESM challenge, such was the urgency that 
the court agreed to make a temporary ruling within two months. On 
12 September, the day of the decision, the ESM/EFSF team trooped 
down to Karlsruhe. Jansen said the suspense lasted until the moment 
of the announcement, with concerned institutions preparing press 
releases for both outcomes and holding their breath to see how it 
would go. The decision was due at 10.00. 

‘Then everything happened really quickly,’ Jansen said. ‘The 
court basically said we can go ahead with it, but they had certain 
conditions.’ It was essential, the court ruled, that any further German 
contributions to the ESM be subject to German parliamentary 
approval, and that the rest of the euro area acknowledge these 
German constraints252. The Eurogroup’s press release welcoming the 
decision went out within minutes, and the final steps in the German 
ratification process were set in motion.

For both the ESM and the EFSF, the German court proceedings  
were ultimately constructive, Regling said. Even though a part of 
German public opinion remains eurosceptic, the court’s deliberation 
shows that the firewalls are compatible with German law. ‘That,  
in the end, was very positive because they said clearly that setting 
up the EFSF and the ESM was in line with the German constitution,’ 
Regling said.

Germany submitted its ratification papers on 27 September. This meant 
the treaty could enter into force and the ESM could be established, 
because the treaty stipulated that member states representing 90% 
of the ESM’s capital contributions must ratify it before it could take 
effect. Germany’s ratification pushed it over that threshold. The formal 
announcement that the ESM Treaty had entered into force came in a 
three-sentence ‘note verbale’ from the Council of the European Union 

251  Estonia, Supreme Court, Constitutional judgement 3-4-1-6-12, 12 July 2012.  

https://www.riigikohus.ee/en/constitutional-judgment-3-4-1-6-12 

252  Germany, Federal Constitutional Court (Bundesverfassungsgericht), Judgement of the Second 

Senate of 12 September 2012, 2 BvR 1390/12 – paras. (1-215),  
https://www.bundesverfassungsgericht.de/SharedDocs/Entscheidungen/EN/2012/09/
rs20120912_2bvr139012en.html 

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  2 3 5

in Brussels, the ESM Treaty’s depositary. Estonia then became the final 
euro area member state to ratify the treaty, just under a week later 
on 3 October.

The ESM existed on paper, but it wouldn’t become operational 
until euro area finance ministers, meeting as the firewall’s Board 
of Governors, approved everything from the rules of procedure to 
tax regulations for the salaried staff. There were only a few days to 
complete the internal preparations that had begun in September 2011 
with what Anev Janse recalls as ‘blue sky thinking’ about the inner 
workings of the permanent fund.

Documents for the founding of the new fund were doublechecked and 
proofread on laptops supplied by the EIB, which had offered the EFSF 
start-up assistance. ‘These were EIB laptops with EIB stickers on them 
and our binders even for the ministers’ meetings were EIB binders, and 
you sometimes still see them at the ESM,’ Anev Janse said.

In parallel, there was still some unfinished legal business. The Court 
of Justice of the European Union had been asked to weigh in after 
an April 2012 challenge by the Irish lawmaker Thomas Pringle, who 
argued that the establishment of a permanent firewall required a more 
extensive amendment to EU treaties than the simplified procedure that 
was used, including referendums if necessary under national law.

The case had been dismissed by the Irish High Court and then referred 
up to the Court of Justice253. In an extraordinary move, indicative of its 
novelty and precedent-setting potential, the full 27-member EU court 
heard oral arguments on 23 October 2012. It returned its ruling under 
an accelerated procedure on 27 November. It concluded that the EU 
Treaty amendment was valid, the ESM wouldn’t violate the EU’s no-
bailout clause, and the permanent firewall could be established before 
final ratification of the amendment.

In support of its conclusion, the court cited sections of the ESM Treaty 
that ‘demonstrate that the ESM will not act as guarantor of the debts 
of the recipient Member State. The latter will remain responsible to 
its creditors for its financial commitments’254. The treaty amendment 

253  Court of Justice of the European Union (CJEU), Judgment of 27 November 2012, Pringle, 

EU:C:2012:756. http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30dd3d9 
bb5367d7e44bd8046fea15ee63f87.e34KaxiLc3qMb40Rch0SaxyNchb0?text=&docid=130381&page 
Index=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=71469

254  Ibid. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

allowing the creation of the ESM would not add any new powers to the 
EU as a whole, which would otherwise breach the treaties. 

At a stroke, any remaining legal clouds over the ESM were dispelled. 
The third article of the ESM Treaty concretised the purpose of the 
institution: ‘[t]o mobilise funding and provide stability support 
under strict conditionality, appropriate to the financial assistance 
instrument chosen, to the benefit of ESM Members which are 
experiencing, or are threatened by, severe financing problems, if 
indispensable to safeguard the financial stability of the euro area as a 
whole and of its Member States’255.

255  Treaty establishing the European Stability Mechanism, 2 February 2012.  

https://www.esm.europa.eu/sites/default/files/20150203_-_esm_treaty_-_en.pdf

Financial milestone:  
the ESM  
starts operations

27

Europe needed a permanent, financial 

complement to monetary union.

Timothy Geithner 
US Treasury Secretary (January 2009–January 2013)

Germany’s ratification of the treaty cleared the way for the 

launch of the ESM at the next scheduled meeting of Eurogroup 
finance ministers, on 8 October 2012 in Luxembourg. 

It was an opportune moment. Europe had put in place a robust crisis 
response plan. EFSF programmes for Ireland and Portugal were 
underway and Spain had secured rescue approval, Greece’s acute 
troubles were in abeyance, and the hard bargaining over Cyprus’s aid 
package was several months off.

Nonetheless, the fear that financial instability would continue to spill 
across national borders was still rampant. Investors were ducking for 
cover in perceived safe assets, inflating yields on what they viewed 
as riskier ones. While financial markets were leaping from one target 
to the next, the political response to contagion had, inevitably, taken 
shape more slowly. But it had been achieved.

In remarks at the Global Investment Conference in London on 26 July, 
ECB President Draghi had given policymakers the room they needed to 
manoeuvre, seizing the market’s attention and refocusing it on the work 
done. He said the central bank would unleash overwhelming resources 
to defeat speculation about the possible breakup of the euro region.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘Within our mandate, the ECB is ready to do whatever it takes to 
preserve the euro,’ Draghi said. ‘And believe me, it will be enough’256.

While Draghi’s declaration had an immediate stabilising effect on 
markets, it occurred in the broader context of more than two years of 
crisis fighting. A grand bargain of sorts had emerged between the euro 
area governments and the ECB, giving Draghi the confidence that the 
common currency was en route to becoming a more sustainable union.

‘There is more progress than has been acknowledged,’ Draghi said at 
the same London event, citing economic reform and deficit reduction 
at the national level, along with improved budgetary policing and plans 
for toughened bank supervision at the European level. And looking 
ahead to the foundation of the ESM, he added: ‘[…] also the various 
firewalls have been given attention and now they are ready to work 
much better than in the past’257.

A week after the London speech, the ECB cemented its resolve by 
announcing conditional plans to buy the bonds of programme countries 
on the open market258. When it published the technical features of these 
outright monetary transactions on 6 September, the ECB made clear that 
it would act on behalf only of countries in an adjustment programme 
administered by the rescue funds. ‘Strict and effective conditionality’ as 
part of an EFSF or ESM package would be a ‘necessary condition’ for the 
targeted ECB bond buying, the central bank said259.

The ECB pledge provided critical relief for the EFSF’s aid recipients, the 
drive for banking union, and the transition to the permanent rescue 
fund. The various crisis-fighting strands were tied closely together, as 
Germany’s Die Welt newspaper noted in a commentary on how the 
ESM’s debut would ‘fundamentally change the monetary union’260.

While the markets were impressed by the central bank’s undertaking, 
‘the ESM will play an important role, because Draghi has linked his 
intervention to the rescue fund,’ Die Welt wrote. It would take political 
backing for a distressed country – as demonstrated by being in an ESM 
programme – to trigger ECB action.

256  ECB (2012), ‘Verbatim of the remarks made by Mario Draghi’, Global Investment Conference, 

26 July 2012. https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html 

257  Ibid. 
258  ECB (2012), ‘Introductory statement to the press conference (with Q&A)’, 2 August 2012.  

https://www.ecb.europa.eu/press/pressconf/2012/html/is120802.en.html 

259  ECB (2012), ‘Technical features of outright monetary transactions’, Press release, 6 September 2012. 

https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html 

260  Die Welt (2012), ‘Multimilliarden-Rettungsfonds verändert die EU’ (‘Multi-billion rescue 
fund changes the EU’ (ESM translation)), 7 October 2012. https://www.welt.de/wirtschaft/
article109678815/Multimilliarden-Rettungsfonds-veraendert-die-EU.html 

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The ESM is born: Managing 
Director Klaus Regling, 
flanked by General Counsel 
Ralf Jansen and Secretary 
General Kalin Anev Janse at 
left and Eurogroup President 
Jean-Claude Juncker at 
right, at the inaugural 
meeting on 8 October 2012 
in Luxembourg.

Credit: European Union 

The Eurogroup agenda261 on the ESM’s official start-up date included 
progress reports on the programmes for Greece, Spain, and Portugal, 
a look at the talks with Cyprus, discussions of longer-term euro area 
reforms, and preparations for the meeting of the Group of Seven 
finance ministers and central bankers a few days later in Tokyo. 

This Eurogroup was held in Luxembourg, the venue for EU ministerial 
meetings every April, June, and October. Finance ministers gathered in 
a building used for meetings by the Council of the European Union, 
an edifice that had reopened in April 2012262 after nearly a decade of 
renovation and reconstruction. 

The day’s ‘milestone’ – to quote Rehn, then the European commissioner 
for economic and monetary affairs and the euro – was the first 
order of business, with the ministers convening as the ESM’s Board 
of Governors for the first time and declaring the permanent fund 
operational. They met in the same room as they would later for the 
Eurogroup. It was the only feasible setting: the rescue fund moved 
into a more permanent home only two months later in December. In 
October, it didn’t have the space to host a top-level meeting.

The ESM’s inauguration prompted reflection inside and outside the 
meeting chamber. ‘Two and a half years ago when Greece first found 
itself cut off from the markets, we had absolutely no instruments at our 
disposal to intervene and provide conditional financial assistance,’ 

261  ‘Eurogroup meeting – October 2012: Roundtable’, Video, 8 October 2012.  

https://tvnewsroom.consilium.europa.eu/permalink/164791 

262  Luxembourg, Official government portal (2012), ‘Ouverture du nouveau centre de conference’ 

(‘Opening of the new conference centre’ (ESM translation)), April 2012.  
http://www.luxembourg.public.lu/en/actualites/2012/04/01-cck/index.html 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

ESM Managing Director 
Klaus Regling and members 
of the Eurogroup mark the 
official setting up of the 
ESM in Luxembourg on 
8 October 2012.

Credit: European Union

Rehn told a press conference. ‘Today, in fact nine months earlier than 
initially foreseen, we are marking the entry into force of the European 
Stability Mechanism, which is an important achievement’263.

ESM establishment highlights

October 2010: ESM idea is born, with planned start date of 2013.

March 2011: Euro area agrees ESM will have €500 billion capacity,  
backed by €700 billion total capital and €80 billion paid-in capital.

July 2011: First draft of ESM Treaty agreed, but never ratified.

December 2011: ESM Treaty updated, start date pulled forward to 2012. 

February 2012: Final text of ESM Treaty agreed.

June 2012: Euro area agrees to develop direct bank recapitalisation tool.

September 2012: ESM Treaty ratification process concludes.

October 2012: ESM opens for business. Members begin to make  
paid-in capital instalments.

December 2012: ESM moves to new headquarters and makes first 
disbursement, to Spain.

January 2013: EFSF staff become ESM employees.

April 2014: The 17 founding Members of the ESM pay final tranche  
of paid-in capital.

December 2014: Direct bank recapitalisation tool declared operational.

263  ‘Eurogroup meeting – October 2012: Press conference – Part 4’, Video, 8 October 2012.  

https://tvnewsroom.consilium.europa.eu/permalink/164815 

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European media marked the occasion with maps and flowcharts 
highlighting the structural differences between the ESM and its 
predecessor. Ouest-France, a French newspaper, urged its readers 
not to be cynical about the founding of another institution for the 
region. ‘It doesn’t have a simple name and is unlikely to make Europe 
more appealing to those who only see it as a hotchpotch of opaque 
institutions,’ the newspaper said. ‘And yet! The inauguration yesterday 
of the European Stability Mechanism is an important step on the 
winding road of the economic and monetary union’264.

In Germany, the Handelsblatt business newspaper noted that the 
transition from a temporary to a permanent mechanism was far 
more than a ‘formality’. In addition to possessing its own resources, 
Handelsblatt said that the ESM would provide ‘democratic legitimacy’ 
for any ECB bond purchasing, under the conditions set by the 
central bank265.

Bond markets saw October 2012 as a watershed and a culmination 
of the mid-2012 actions to stabilise the currency union. As a result, 
bond yields across the euro area fell back from their crisis peaks and 
for most countries entered a new and more sustainable range. In 2015, 
when the euro was again put to the test, financial market contagion 
erupted on a smaller scale than when there had been no permanent 
firewall. 

For ESM staff who were present at the 2012 creation, more than a year 
of organisational planning, drafting, and fine-tuning – often in 80- to 
100-hour working weeks – was condensed into a 12-point agenda that 
the finance ministers got through in barely an hour. 

‘It was like training for the World Cup, then making it to the finals – 
super exciting,’ Secretary General Anev Janse said. But after the Board 
of Governors meeting, there was still another half to play the next day. 
It wasn’t until after the Board of Directors approved further internal 
procedures that rescue fund staff could return to the office to celebrate.

264  Ouest-France (2012), ‘Le Mecanisme Européen de Stabilité, trousse ďurgence pour la zone euro’ 
(‘The European Stability Mechanism, emergency kit for the euro zone’ (ESM translation)), 
9 October 2012. http://jactiv.ouest-france.fr/actualites/zoom-sur/lactu-jour/mecanisme-europeen-
stabilite-trousse-durgence-pour-zone-euro-10369 

265  Handelsblatt (2012), ‘Ist der neue Rettungsschirm nur ein Feigenblatt’ (‘Is the new rescue fund just 

a fig leaf?’ (ESM translation)), 8 October 2012.  
https://www.handelsblatt.com/politik/international/esm-und-ezb-ist-der-neue-rettungsschirm-
nur-ein-feigenblatt/7220812.html?ticket=ST-3186182-OFRlBmKP9NsQtGDfT31P-ap2 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

A growing family:  
ESM staff and service 
providers pose for a group 
photo in October 2012.

Credit: ESM archives

On the personnel front, the ESM’s inaugural meeting named Juncker, 
then head of the Eurogroup, as the permanent fund’s first chairman of 
the Board of Governors, and Regling as both managing director and 
sole political appointee. The ESM would be formally without any staff 
until 1 January 2013, when most of the EFSF staff ’s contracts would 
be officially converted into ESM contracts. In the meantime, the EFSF 
staff would handle the ESM’s tasks.

‘For the future, whenever you have questions related to the ESM, 
please put them to Klaus,’ Juncker said at a joint press conference with 
Regling266. A day later, Regling was off to Tokyo for the annual meeting 
of the IMF, to start marketing the ESM to global investors267.

266  ESM (2018), ‘Highlights of press conference – ESM inauguration meeting’, 8 October 2012, Video, 

13 June 2013. https://www.youtube.com/watch?v=x7jkkycJC1g 

267  ‘Eurogroup meeting – 8 October 2012: Press conference – Part 5’, Video, 8 October 2012.  

https://tvnewsroom.consilium.europa.eu/permalink/164816 

Corporate governance: 
the ESM’s  
operating manual

28

We followed the best practices of peer 

institutions in setting up our framework and 
structure, but it was part of our unique challenge 
to tailor our set-up to ESM needs.

Florian Zinoecker 
ESM Head of Corporate Governance and Internal Policies

Even before the ESM became a permanent fixture, the  

need for a governance framework for Europe’s newest  
international financial institution became pressing.  

Secretary General Anev Janse had worked hard to establish  
strong relations between the institution and its governors and 
directors. When Florian Zinoecker, the ESM’s head of corporate 
governance and internal policies, joined on 1 July 2012, he was  
given little time to craft the ESM’s Board structures and procedures, 
and distil them into legal form.

‘We had literally the summer and a month to finalise all these 
important governance policies,’ Zinoecker said.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The ESM had templates to go by, of course. Alumni of the EIB, the 
IMF, or the European Bank for Reconstruction and Development 
would instantly recognise the ESM’s three-tiered structure; however, 
none of those were an exact fit for the new firewall. The objective was 
to set up a governance structure for an effective and fast-paced crisis 
response mechanism that would also safeguard transparency and 
accountability at the highest levels. 

At the top is the Board of Governors, made up of finance ministers 
of the euro area countries, who set the strategic direction and take 
critical decisions on rescue programmes. One level down is the 
Board of Directors, composed of the ministers’ deputies or other 
high-profile officials from the ministries of finance, with more 
hands-on operational responsibilities. Anchoring the system is 
the Luxembourg-based Management Board, headed by the ESM 
managing director, which prepares and implements the decisions of 
the Board of Governors and the Board of Directors and conducts the 
ESM’s current business.

The ESM has a streamlined organisational structure, without 
the rotating casts of national appointees typical of some other 
international or European financial institutions. The managing 
director, Regling, is the sole Management Board member appointed 
by the ESM Board of Governors; the remaining five members 
were appointed by Regling from within the ESM’s expert ranks. 
The governing bodies make decisions on proposals from the ESM 
managing director. In terms of accountability, the ESM governors 
are the finance ministers of the euro area countries and, as 
members of the national governments, they are accountable to their 
national parliaments. Some ESM Members also conduct national 
parliamentary procedures to approve important ESM decisions.

As part of its governance and proactive shareholder relations, ESM 
staff are in frequent contact with national finance ministries, often 
through a secure online gateway called the ESM Board Portal, 
which enables the posting of documents and agendas. In addition 
to day-to-day contact with other institutions regarding programmes 
and other operational matters, there are regular conference calls in 
which Luxembourg-based staff and national officials discuss matters 
such as the ESM’s annual budget, financial statements, and the 
code of conduct. These technical calls facilitate consensus on draft 
proposals that are sent to the Board of Directors for approval and 
are an ‘essential feature’ of the ESM’s interaction with the national 
ministries, Zinoecker said.

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Regling often meets with national parliaments across Europe to explain 
the purpose or specific actions of the rescue fund and its role in euro 
area governance. When Latvia adopted the euro in 2014 and Lithuania 
followed a year later, Regling briefed parliamentary committees 
in those countries on the ESM’s structure and functioning. On a 
voluntary basis and in the spirit of transparency, Regling has also had 
informal exchanges of views with European Parliament committees 
and working groups. 

Once a year, in September, the ESM hosts a two-day seminar – ESM 
Shareholders’ Day – with national finance ministry officials to help 
deepen their understanding of the rescue fund’s inner workings. 
During the rest of the year, national officials and parliamentarians are 
regular visitors to the ESM’s headquarters.

In keeping with its nature as a crisis response vehicle, the ESM can act 
rapidly when it has to. Standard notification periods for conference 
calls, technical talks, document preparation, and meetings of the Board 
of Governors or Board of Directors can be accelerated in the heat of a 
crisis.

‘We have provisions for very urgent decisions that we had to resort to 
for programme countries,’ Zinoecker said. ‘We can also shorten our 
standard timelines for other urgent decisions.’

Officials representing ESM 
Members attend the annual 
meeting in 2016.

Credit: Steve Eastwood/ESM

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Intense work on the governance structure in the summer of 2012 
culminated with the inaugural meeting of the Board of Governors, 
on 8 October 2012. ‘All of the documentation had to be circulated  
to the board 15 days in advance of the meeting and, as I had only  
just started in July, that gave us a very short window to create and 
finalise them,’ said Zinoecker. One of the first orders of business was 
putting the structure in place. Along with Regling, the first external 
audit firm and the five members of the Board of Auditors were 
appointed that day.

Board of Auditors members serve non-renewable three-year terms 
in an independent capacity. The terms of the first appointees were 
staggered between three and four years, so that the entire Board 
of Auditors wouldn’t have to be replaced at the same time. Of the 
five members, two are nominated by the chairperson of the Board 
of Governors, two by national audit institutions based on a system 
of rotation, and one by the European Court of Auditors. Holding 
meetings once a month, members of the Board of Auditors review the 
ESM financial statements, perform their own audits, and monitor the 
internal and external auditors.

From the outset, Regling deemed it imperative to equip the ESM with 
high standards of risk detection and mitigation. On 9 October 2012, 
less than 24 hours after the ESM’s inauguration, the Board of 
Directors met to finalise high-level principles for risk management, 
which, together with internal controls, are critical to the ESM’s 
credibility as an international financial institution. 

Like many of its peers, the ESM operates with a three-lines-of-
defence model that functions like a financial security perimeter, 
ensuring that credit, market, liquidity, and operational risks are 
tightly controlled. 

The first line of defence covers the day-to-day management of risk, 
which is the responsibility of each department and business function. 
All staff are required to be aware of risks relating to their operations, 
identifying and reporting any issues up the hierarchy.

The second line of defence is provided by the risk and compliance 
department, headed by the chief risk officer. Independent of the daily 
flow of ESM business, this department tracks potential exposures 
to threats such as adverse movement of interest or exchange rates, 
the failed settlement of a securities transaction, the inability to raise 
funds on time, or the holding of securities that cannot be sold or 

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offset due to low market liquidity. It continuously monitors the full 
implementation of the investment, funding and other guidelines 
adopted by the shareholders. It makes mitigation proposals, stays 
up to date on risk management methodologies, and provides early 
warnings to the managing director and Board of Directors. Perhaps 
its most important task, however, is to foster a risk awareness culture 
throughout the organisation, ensuring policies are implemented and 
risks appropriately managed. 

‘The risk management team implements and maintains a state-of-
the-art risk framework, supporting the ESM’s long-term financial 
stability,’ said Katerina Arvaniti, the ESM’s deputy head of risk. ‘By 
defining risk appetite and limits, we help the ESM fulfil its mandate 
to safeguard financial stability in the euro area. The team’s evaluations 
ensure that the institution avoids unnecessary risks and allays those 
inherent to its mandate, instilling confidence in its shareholders  
and its investors.’

An independent internal audit function provides the third line  
of defence. The head of internal audit reports to the managing  
director, ensuring risk management controls are operating properly 
and efficiently.

Not all risks can be measured in euros and cents. Political events that 
are beyond the ESM’s control, for example, could upset the financial 
markets and make it harder to raise funds. But the three-tiered 
structure for risk management sets out clear lines of authority and 
responsibility. 

A risk statement set by the Board of Directors lays out the level of 
risk considered acceptable, and is reviewed annually. In addition, 
the ESM has an internal risk committee that ensures risk policies are 
implemented. Periodically, it conducts a risk self-assessment, which is 
reported to the managing director.

The managing director is responsible for the implementation and 
functioning of the risk management framework, for ensuring 
adequate risk reporting to the Board of Directors, and for further 
developing the risk policy. The chief risk officer and the internal 
auditor both report directly to the managing director as well as to, 
respectively, the Board Risk Committee and the Board of Auditors, to 
ensure their independence. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Rigorous internal controls 
are hardwired into the ESM’s 
operating manual. Here, a 
staff member discusses 
internal controls at a 2016 
meeting.

Credit: Steve Eastwood/ESM

‘No other international financial institution has managed to achieve 
such a mature risk management framework, including the internal 
control framework, within such short timelines,’ said Yana Djoneva, 
the ESM’s deputy head of corporate governance and internal policies.

ESM staff are made aware of the firewall’s approach to risk as soon as 
they start work. This includes face-to-face training with a compliance 
officer, who provides a briefing on the code of conduct. All staff 
members must file an annual declaration certifying their compliance 
with the code of conduct. Beyond that, those classed as ‘designated 
senior officer’ must disclose their financial and business interests to the 
compliance officer.

Employees take part in regular risk and compliance training 
exercises, with many training modules online and completion rates 
monitored. Interactive sessions with visiting risk management experts 
reinforce active risk awareness, and enhance knowledge. Compliance 
certifications are renewed annually.

Recognising that corporate culture filters down from the person in 
charge, Regling has voluntarily published his declaration of financial 
interests. The ESM’s compliance officer, Eva Kinczer, said Regling 
also uses weekly all-staff meetings to ‘reiterate the utmost importance 
of ethical and professional behaviour as well as the need to act with 
integrity and in full compliance with policies and procedures.’ 

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The ESM has made a concerted effort to apply environmental, social, 
and governance best practices to all of its internal operations, and 
it continues to improve them on an ongoing basis. These efforts can 
range from investing in so-called green bonds to encouraging its staff 
to recycle and use public transportation. The ESM works to ensure 
it conducts its activities with the highest standards of integrity and 
to maintain a comprehensive and transparent governance system. 
The ESM also has earned a SuperDrecksKëscht certificate from the 
Luxembourg government on waste avoidance and proper separation 
of recyclables.

The ESM started investing in sustainable, or ‘green’, assets as early as 
2014, with an exposure of €300 million on average. As a result, it has 
been able to diversify its portfolio while supporting the development 
of sustainable investments. More broadly, the ESM’s investment 
strategy is inherently socially responsible because it mainly invests 
in bonds issued by public entities. In 2017, for instance, excluding 
the cash held in central banks, the ESM allocated more than 60% 
of its invested capital to sovereigns, government agencies, and 
supranational entities, with the remainder invested in covered bonds. 
Going forward, the ESM will be looking at further steps to enhance 
its role as a responsible investor. 

Investment strategy continues in Chapter 35 and 
in ‘Focus — An unusual money market transaction’ in Chapter 37.

In 2017, Transparency International, the Berlin-based global anti-
corruption watchdog, reviewed the rescue fund’s practices as part of a 
larger examination of decision-making by euro area institutions. The 
report said that the ESM ‘boasts world class audit arrangements, a 
code of conduct that ensures a high level of integrity, and a dedicated 
whistleblowing procedure that reflects best practice’268.

268  Transparency International EU (2017), From crisis to stability: how to make the European Stability 

Mechanism transparent and accountable.  
http://transparency.eu/wp-content/uploads/2017/03/ESM_Report_DIGITAL-version.pdf  

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘We have tried to endorse transparency to the greatest extent possible 
and we have followed up on the recommendations,’ said Niyat 
Habtemariam, the ESM’s governance and internal policies officer. 

Institutional history, which began in Chapters 11 and 21, 
continues in Chapter 30.

Capital backing:  
key to top ESM  
credit rating

29

We want to build a capacity to withstand a 
potential euro crisis that could have an impact 
even wider than the previous one.

Cosimo Pacciani 
ESM/EFSF Chief Risk Officer

When the ESM was launched in October 2012, it was important 

to secure the highest possible credit ratings, as the EFSF had 
done for its debut in 2010. The ESM would be starting anew, 

and AAA certification would tell investors that the issuer is a low-risk 
investment, enabling the ESM to borrow at the best market rates. 

The ESM’s closest peers are other supranational institutions that sell 
marketable debt, such as the EIB. Most of those existing institutions 
have stable operations and a familiar mandate, so they are able to 
renew their ratings with little fuss. In contrast, the ESM was an 
untested entity created at a time of extreme market nervousness. And 
its remit was to help countries that markets didn’t want to lend to.

Thanks to the ESM’s paid-in capital structure, Managing Director 
Regling was confident that the new firewall was on a surer footing than 
its temporary predecessor – but there could be no certainty. The ESM 
received its first paid-in capital instalments just after its official debut. 

‘Rating agencies are very cautious,’ said Matjaž Sušec, the ESM’s deputy 
head of strategy and institutional relations. ‘The mandate of the ESM is 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

that of a crisis resolution mechanism and therefore the rating agencies 
always approached it more conservatively than other issuers.’

Earning market confidence has always been a priority. From the start, 
Regling had an internal analytical team tasked with working closely 
with the rating agencies and making sure they were using the best 
information. Both the EFSF and the ESM would need to continue to be 
regular players in the fixed-income markets.

In the very beginning, the raters were still judging the ESM based on 
the outlook for its Members, just as they had assessed the EFSF. But 
that soon changed. ‘We insisted on having the rating agencies fully 
value the strength of the ESM,’ Sušec said. ‘The rating agencies started 
appreciating the ESM’s robust financial structure only gradually as 
the contagion risk in the euro area abated. This was also a sign of the 
credibility of the ESM as an institution.’

The ESM, like the EFSF, started out with the highest possible ratings – 
AAA from Fitch and Aaa from Moody’s – and the levels for both rescue 
funds have not fallen significantly over time. 

The ESM has seen just one rating change and a handful of other rating 
events. The most momentous was in November 2012, when Moody’s 
downgraded France and it also downgraded both the ESM and the 
EFSF. The firewall rating has since become less dependent on French 
circumstances. 

In addition, Moody’s, which had assigned the ESM a negative outlook 
at the outset, changed the outlook to stable in 2014 and to positive in 
May 2018. 

‘This was a very good development because it showed that Member 
support is not the only factor that matters for the ESM’s rating,’ Sušec 
continued. ‘It also showed that the ESM was an established issuer, and 
that was very important.’

The next ESM rating event took place at the end of 2014, when, for 
three months, Fitch changed the rescue fund’s outlook to negative 
before returning it to stable. 

The ESM has been rated AAA by Fitch and Aa1 by Moody’s since late 
2012. The EFSF has been rated AA by Fitch since December 2014; AA 
by Standard & Poor’s since November 2013; and Aa1 by Moody’s since 
November 2012. Both funds also have an unsolicited AAA rating from 
the firm DBRS, which the ECB also recognises as a trusted source of 
evaluations and which began rating the ESM in 2014. 

For the ESM’s and EFSF’s complete rating history, 
see Annex ‘EFSF and ESM rating history’.

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Focus  
How do you solve a problem like a downgrade?

When Moody’s downgraded France and the ESM in late 2012, it also moved 
the EFSF to Aa1 from Aaa, which upended the EFSF’s immediate borrowing 
plans to issue a bond269. The downgrade to one of its biggest Members 
meant the EFSF no longer had the quality of guarantees needed to back its 
planned bond issue. 

Since the rescue fund’s liquidity needs couldn’t wait, the team came up with a 
novel twist to solve the problem. Ruhl, the ESM’s head of funding and investor 
relations, and Fouqueray-Carrick, investor relations expert, tell the story:

Ruhl: ‘When France was downgraded, we were in the market with a 
transaction. We couldn’t open the books, in the end, as we did not have 
enough guarantors with a similar rating to the EFSF rating, because of that 
French downgrade. We had to stop the transaction and find a solution. The 
short-term ratings, for paper of less than 365 days, weren’t affected by the 
downgrade. So we thought about this for two or three days and then decided 
to do something very unique: a 364-day bond.’

Because the issue would have a maturity of less than one year, its 
rating would fall under short-term metrics and steer clear of long-term 
comparisons. As France’s downgrade did not affect its short-term borrower 
rating, the EFSF did not face the same guarantor shortage. There was just 
one more hurdle: persuading the bankers to give it a shot.

Ruhl: ‘The bankers said: “This will never fly.” It was a lot of work, especially 
for me, to talk to them many times over the weekend. Saturday and Sunday, I 
spent most of my time on the phone trying to convince them.’ 

Fouqueray-Carrick: ‘I remember we spoke to the banks and they confirmed 
they’d discussed the plan. But in the background I could hear reluctance. 
They were saying: “We really don’t think this is a good idea.” But Siegfried 
insisted: “No, this is a thing we need to do, and we’ll get it done.” They were 
still unpersuaded: “We’re really not sure about this,” but Siegfried remained 
undeterred: “We are going to do it.”’

Ruhl: ‘I was super convinced. Based on my view of the market, of what 
investors want to see and where I thought demand would be – there were 

269  EFSF (2012), ‘EFSF reacts to recent developments with the announcement of a one-year bond’, 
Press release, 27 November 2012. https://www.esm.europa.eu/press-releases/efsf-reacts-recent-
developments-announcement-one-year-bond

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

a lot of details you put together like a puzzle, like a mosaic. You think, will it 
work or not? My impression was: it will work. In the end, it’s a gut feeling.’

Ruhl: ‘Finally, Monday morning the bankers were persuaded and we opened 
the books for a 364-day bond270. It was a very successful trade with a final 
size of €7 billion. Looking back at the situation with France’s downgrade and 
the 1-year, €7 billion transaction, of course it was difficult to challenge the 
experienced bankers. You offer them a trade where they can make money 
and they tell you: “We don’t believe in that.” It’s not easy to withstand. But on 
the other hand, it’s quite simple because there are only two options: we do it 
or we don’t. If we do it the risk is that we fail, and we don’t have the money. 
But if we don’t do it, we definitely don’t have the money.’ 

270  EFSF (2012), ‘EFSF places €7 billion one-year bond’, 27 November 2012.  

https://www.esm.europa.eu/press-releases/efsf-places-%E2%82%AC7-billion-one-year-bond 

Fitch placed the ESM on a similar negative outlook in October 2014, 
again in connection with developments in France. But in this case the 
ESM’s analytical team worked closely with the rating agency to show 
how its methodology was overstating the risk, and two months later, 
in December, Fitch affirmed the ESM’s AAA rating and returned 
the outlook to stable. Since mid-2017, the ESM has been rated 
two notches higher than the EFSF, mainly because of the paid-in 
capital that gives it independence. 

‘All Members, including all the programme countries, paid us capital, 
so we have it in hand. It doesn’t matter whether the countries that gave 
it to us are downgraded or not,’ Regling said. ‘We have the paid-in 
capital, and there’s also €620 billion in callable capital. Of course, for 
the callable capital, rating agencies take into account that some of those 
who would be called upon might not be able to provide the money in a 
crisis, but €80 billion is still a big buffer before one gets to that stage.’

One of Regling’s biggest jobs, therefore, is keeping up relations with 
credit-rating agencies as well as with the asset managers, the sovereign 
wealth funds, and the many other investors that entrust the ESM with 
their money. 

‘That’s why I travel constantly, certainly to the big investors,’ the ESM 
chief said. ‘Some of them want to see me. At one point, a large investor 
I had never visited said, “We want to see the boss at some point,” so I 
thought, Okay. I get the message. If they want to see me, I’d better go.’ 

At home in Luxembourg: 
a look inside  
the ESM’s offices

30

The ESM’s founders set out to create  
a modern, innovative, entrepreneurial  
public institution.

Kalin Anev Janse 
ESM/EFSF Secretary General

The ESM headquarters in Luxembourg’s Kirchberg district, 

the long-time home of private sector banks and public sector 
European institutions, has a major advantage over some older 
institutions: it was unencumbered by legacy systems – or even walls. 
This means its physical and information technology (IT) infrastructure 
were purpose-built. 

‘We were in a very lucky position because in many areas, we could 
start from scratch and design it through,’ said Boris Fallnicht, ESM 
facilities manager.

Designers took inspiration from the finance sector, contemporary 
public buildings, and even Silicon Valley start-ups to create a 
creative, problem-solving environment that would function within 
an institutional framework. ‘We are not a start-up anymore – but we 
try to keep that spirit alive in a mature long-lasting institution,’ said 
Secretary General Anev Janse.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Office blueprints: banks, 
public buildings, and tech 
start-ups provided the 
inspiration for the ESM’s 
interior buildout and décor.

Credit: Steve Eastwood/ESM

Breaking down walls is an operative principle. The management team’s 
offices are spread throughout the building and accessible to all, not 
cordoned off in a C-suite. To instil the out-of-the-box thinking that 
was the hallmark of the ESM’s breakneck, crisis-driven inception, the 
set-up features community spaces, as well as movable walls and 
partitions so room layouts can be re-arranged to accommodate 
meetings of different size and purpose. 

The office’s buildout and décor were constrained by two factors: 
ensuring staff could do their jobs come what may and safeguarding 
the security of the ESM’s people, infrastructure, computer, and 
communications systems. 

With two organisations sharing a staff and a roof, even day-to-
day business entails a degree of complexity. To track the firewalls’ 
finances, for example, the ESM’s accountants need to use two sets of 
accounting rules. As a treaty-based international financial institution, 
the ESM uses the rules laid out in the EU accounting directive271 to 

271  ‘Directive 86/635/EEC of the Council of the European Communities of 8 December 1986 on the 
annual accounts and consolidated accounts of banks and other financial institutions, as amended 
by Directive 2001/65/EC of 27 September 2001, by Directive 2003/51/EC of 18 June 2003 and by 
Directive  006/46/EC of 14 June 2006.’ https://www.caplaw.eu/en/Areas%20of%20Law/Capital_
Markets_Law/European_Law/9066/Richtlinie_86_635_EWG.htm

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manage its books. The EFSF, with its private sector legal structure, 
uses International Financial Reporting Standards. ‘The set-up is quite 
different and they are not all that compatible,’ said Thomas Pies, head 
of finance and control.

Remote, reliable, secure data access was crucial. At the height of the 
crisis, staff knew they could be called on at any hour of the day or 
night, so the computing network had to extend to wherever they 
were. The EFSF was soon aligned with major corporations with robust 
teleworking systems to allow colleagues to videoconference in, from 
home, from a roadshow, or, in the event of a crisis or natural disaster, 
from an off-site office. Dave Wallace, the ESM’s head of information 
technology and operations, called the globalised office ‘one of our 
first mantras. We saw it as key that people could work from anywhere 
at any time as if they were in the office.’

Security was also essential for hosting high-level ministerial gatherings. 
Just eight months after its inauguration, the ESM held its first annual 
Board of Governors meeting in June 2013 at the new premises. 
The ESM needed to accommodate 17 finance ministers and their 
delegations, manage the flow of security, provide media access, and 
handle food and beverage delivery during and around discussions 
and photo ops – in other words, all the logistical minutiae of hosting a 
major event.

‘We had to coordinate everything with the Luxembourg police, so that 
the transfers were swift and safe,’ Fallnicht said. ‘We had to ensure 
the tightest access protocols for participants due to the political 
temperature of the times.’

In 2013, the ESM set up a disaster recovery site. Unlike the shared 
back-up facilities used by banks in London or Paris, the ESM is the 
sole operator of its site. In the event of a sudden need to evacuate 
the headquarters, for example, it wouldn’t have to compete with rival 
tenants for the backup space. 

Staff work out of the recovery site at least twice a year as part of 
disaster response training. Some departments will temporarily 
relocate there during upgrades or refits of the main office. ESM 
officials have examined a wide range of scenarios that could occur 
without warning and could hobble daily operations – from the 
outbreak of an epidemic, to a cyberattack, or even the local loss  
of electricity. 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘We are very strong on scenario analysis, and we have a wide range 
of events for which we have a pre-planned response,’ said Djoneva, 
deputy head of ESM corporate governance and internal policies. ‘We 
need to be able to operate on a 24/7 basis.’

From a systems perspective, the ESM needs to ensure that its  
physical and digital infrastructures can withstand disaster, natural  
or otherwise. This was understood right from the start, when  
the EFSF rented a small generator to keep power flowing to key 
functions in the event of a blackout. The first uninterrupted power 
supply for the whole building was installed in 2014, followed by a 
customised system.

Every year, the ESM also conducts an incident management exercise 
to train and test the responsiveness of top management. There is a 
certain theatrical staging to this. In one room sit experts who simulate 
a real-life incident, peppering senior ESM managers in another room 
with incremental bits of information as the fictional crisis unfolds. 
ESM spokespeople are also involved, since a major part of emergency 
response is communicating with the public.

Unlike the exercises, however, the threats themselves can be all too 
real. In a 2017 campaign, eight letter bombs were sent to institutions, 
including the German finance ministry and the IMF office272 in Paris. 
A booby-trapped parcel addressed to ESM Managing Director Regling 
was intercepted at Athens airport, as was one addressed to Eurogroup 
President Dijsselbloem273. Together with Luxembourg authorities, 
the ESM took emergency security precautions to protect Regling and 
ESM staff. 

In terms of its information technology network, the ESM grew up in 
the cloud era, and could ‘leapfrog many of our peers by adapting a fully 
outsourced strategy leveraging the latest cloud systems and thinking,’ 
Wallace said. ‘This allowed the ESM to scale up quickly and flexibly, 
adopting the newest technology along the way.’

272  New York Times (2017), ‘Letter bomb injures worker at International Monetary Fund office in Paris’, 

16 March 2017. https://www.nytimes.com/2017/03/16/world/europe/paris-imf-bomb.html;  
and BBC News, ‘Paris IMF letter bomb that injured one was sent from Greece’, 16 March 2017.  
https://www.bbc.com/news/world-europe-39292671 

273  DutchNews.nl (2017), ‘Dutch finance minister target of Greek parcel bomb: Report’, 

21 March 2017. https://www.dutchnews.nl/news/2017/03/dutch-finance-minister-target-
of-greek-parcel-bomb-report/; Euractiv.com (2017), ‘Dijsselbloem “mail bomb target”, says 
spokesman’, 22 March 2017. https://www.euractiv.com/section/politics/news/dijsselbloem-mail-
bomb-target-says-spokesman/

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  2 5 9

As well as keeping on top of technology, the ESM is keen to encourage 
innovation. Its Technology Officer Rogelio Rodriguez programmed 
an expert system – a precursor of artificial intelligence – to probe for 
functional inconsistencies in the ESM’s 250 daily financial-system 
reports. It’s nicknamed Jarvis. Automatic scanning of spreadsheets not 
only saves human time – for example removing the need to validate 
the daily cost-of-funding calculation by hand – but also helps address 
any bugs that crop up. Lately, Rodriguez has been leading the team’s 
investigations into the potential benefits for the ESM of deep data and 
artificial intelligence, as well as blockchain-type distributed ledger 
technologies. Blockchain, a secure method of asset tracking, has the 
potential to revolutionise the way capital markets operate, given the 
evolving need for trusted third parties and improved transaction 
settlement. Deep data analytics could maximise the value of specific 
data streams while minimising needs for large data storage. Artificial 
intelligence could lead to radically more efficient systems. 

Jelena Zelenović Matone is another ESM technology pioneer. A former 
refugee of the Yugoslav civil wars, she joined the ESM in 2014. Thanks 
to her technology expertise, gained from working in the private sector 
in Canada, she anticipated some of the ESM’s needs before they had 
fully emerged such as the setting up of security protocols within the 
information technology department. Zelenović Matone said that, in 
her time at the ESM, she has been given the time and scope to consider 
technical approaches that were still off the radar, which is testimony 
to the ESM’s commitment to excellence. ‘They gave me the freedom to 
further explore these areas, such as IT general controls, automated IT 
application controls, end-user computing controls, and policies and 
procedures that were yet to be developed at the ESM.’

The frameworks and controls she designed, along with her quarterly 
risk dashboards, made a strong impression on the ESM’s auditors and 
have become an integral part of internal oversight. Zelenović Matone 
also has been sought out by other international financial organisations 
to share technology-related internal control and audit solutions.

To share know-how and to stay abreast of the latest developments, 
Anev Janse is active in both public and private sector networks. 
Together with peer institutions, the ESM set up a financial technology 
forum for staff to discuss the latest trends and share best practices both 
online and in person.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Anev Janse is often asked to share the ESM’s experiences around the 
globe on becoming part of a start-up-oriented financial technology 
circle to keep abreast of new ideas and test products. ‘We learn and 
they learn,’ Anev Janse said. ‘That’s also the way to push innovation  
in Europe.’ 

Crisis in Cyprus:  
‘no negotiating power, 
no credibility’

31

The overall consensus is that Cyprus  

has done much better than anybody expected.  
The odds weren’t very promising, but now  
it is doing well.

Olli Rehn  
European Commissioner for Economic and Monetary Affairs and the Euro 
(February 2010–July 2014)

Cyprus was struggling with the broader ramifications of the crisis 

when the 2012 writedown of privately held Greek debt led to 
more than €4 billion274 in losses for Cypriot banks, or in excess 

of 22% of GDP. With a banking sector that was then about six and a 
half times the size of the country’s economy, it was virtually impossible 
for Cyprus to overcome this blow on its own. Public finances also were 
deteriorating, with the debt-to-GDP ratio of 80% in 2012, compared 
with about 46% in 2008 on the eve of the crisis275.

274  IMF (2013), ‘Cyprus: Letter of intent, memorandum of economic and financial policies, and 

technical memorandum of understanding’, p. 3, 29 April 2013.  
https://www.imf.org/external/np/loi/2013/cyp/042913.pdf;  
Demetriades, P. (2017) A diary of the euro crisis in Cyprus: Lessons for bank recovery and resolution, 
Palgrave MacMillan, Cham.

275  Eurostat (n.d.), ‘General government gross debt – % of GDP and million EUR’. https://ec.europa.

eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=sdg_17_40&plugin=1

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Cypriot economy suffers from continuous deterioration in 
competitiveness caused by growing unit labour costs and reflected 
in widening current account deficits and lagging exports. From 2005, 
banking sector expands rapidly, creating vulnerabilities.

1 January 
Cyprus adopts the euro.

16 November 
Standard & Poor’s downgrade: A from A+, the first in a series of 
downgrades resulting in the 2012 loss of investment grade. 

16 December 
Parliament adopts measures to reduce the government deficit to 
2.5% of GDP in 2012 from 6.3% of GDP in 2011. 

23 December 
Government agrees €2.5 billion loan from Russia.

9 March  
Greece conducts €199 billion sovereign debt restructuring (private 
sector involvement), triggering privately held Greek debt losses of 
over 22% of GDP in Cyprus.

21 May 
Cyprus adopts legislation allowing it to underwrite Laiki Bank’s 
€1.8 billion capital increase, in effect committing to purchase any 
shares not bought by private investors.

25 June 
Request is made for financial assistance from the EFSF but 
negotiations make little progress ahead of national presidential 
elections.

30 June 
Having failed to attract sufficient private investment, government 
rescues Laiki Bank, making the €1.8 billion share purchase, for an 
84% holding in the bank.

Late September 
The ratio of non-performing loans in Cypriot banks’ Greek operations 
worsens to 42% of total loans, worth €19 billion (111% of GDP).

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24 February 
Nicos Anastasiades is elected president. Negotiations over aid 
programme resume.

16 March 
Eurogroup reaches an initial accord with Cyprus on aid package.

18 March 
Fears of a bank run cause the Central Bank of Cyprus to declare a 
bank holiday, extended until 28 March.

19 March 
Parliament rejects the aid agreement.

25 March 
Eurogroup approves a revised package. Under the new terms, the 
burden is shifted to depositors with holdings over €100,000.

28 March 
Capital controls are imposed, would be lifted two years later.

12 April 
Eurogroup says agreement reached on the conditions of the 
€10 billion ESM/IMF financial assistance for Cyprus, in line with 
25 March package, subject to the IMF’s contribution.

13 May 
ESM disburses part of the first loan tranche (€2 billion).

18 June 
Cyprus returns to international capital markets with a 5-year bond 
sale, raising €750 million.

31 March 
Cyprus successfully exits ESM financial assistance programme.

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

While harbouring reservations about the stigma and short-term 
economic hardship of an aid package, the government, headed 
by a communist president, formally sought a full macroeconomic 
adjustment programme with the EFSF on 25 June 2012 – the same day 
as Spain – but Cypriot pursuit of minimal conditions got in the way of 
a rapid agreement276.

Government bond yield — Cyprus 
in %, monthly frequency

18

16

14

12

10

8

6

4

2

0

Greece’s debt sustainability 
problems had a knock-on 
effect on banks in Cyprus, 
which were major holders 
of Greek bonds. Because 
the Cypriot banking system 
was so large in relation to 
the island’s economy, the 
government was unable to 
provide financial assistance 
without seeking outside aid.

Note: Dotted line refers to 
the average yield of the 
government bond maturing 
in March 2020. The solid 
line refers to the generic 
long-term government bond 
yield reported by the ECB.

Source: Bloomberg, 
European Central Bank

June 2012: 
Cyprus requests financial assistance

March
2012:
Cyprus
hit by Greek
debt restructuring

March 2016:
Cyprus exits ESM programme

0
1
0
2
y
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a
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2
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e
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S

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0
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According to Michael Sarris, who would become finance minister for a 
short period after early 2013 elections, talks between Cyprus and what 
was then the troika of aid institutions focused on small issues instead 
of how to move forward. ‘We spent six months discussing things like a 
cost of living adjustment clause that the donors wanted to discontinue,’ 
Sarris said, describing talks in the second half of 2012. ‘In other words, 
details while the house was on fire.’

276  Statement by the president of the Eurogroup, 25 June 2012.  

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/131195.pdf 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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An agreement on conditions seemed close in November 2012, by 
which time the ESM was up and running. Juncker, then the outgoing 
president of the Eurogroup, said in early December that Cyprus was 
already taking the first steps to implement the draft agreement and he 
looked forward to its conclusion soon277. But by January 2013, talks had 
stalled. At its last meeting under Juncker, the Eurogroup announced 
that the programme would be delayed278.

Discussions didn’t pick up speed until February 2013, when Nicos 
Anastasiades was elected president on a centrist platform279. 

When euro area finance ministers met on 4 March 2013, an accord 
appeared within reach. Now the Cypriot minister, Sarris outlined the 
government’s policy intentions. A post-Eurogroup statement praised 
the ‘useful’ presentation, looked ahead to the ‘swift conclusion’ of the 
negotiations, and pencilled in the end of March as the target for the 
political signoff on the programme280. 

That deadline would be met, but not in the way the Eurogroup 
envisaged. The final push was marked by political brinkmanship, 
Cypriot parliamentary opposition, the floating of Plan Bs, questions 
about Cyprus’s euro adherence, overtures to Moscow, and an extended 
bank holiday that left the 866,000-strong Cypriot population fearful  
for the future.

In hindsight, a Cypriot programme was inevitable. 

‘The Cypriot government put us in a difficult spot by repeatedly refusing 
to apply for a programme,’ said Wieser, Eurogroup Working Group 
chairman during the crisis. ‘They would have got off considerably 
cheaper, easier, and better if they had applied for a programme half a 
year earlier, or even a year earlier, as they should have.’

277  Statement by the president of the Eurogroup, 3 December 2012.  

https://www.eerstekamer.nl/eu/overig/20121210/statement_by_the_president_of_the/document 

278  European Commission (2013), ‘Speech: Vice-President Rehn’s remarks at the Eurogroup press 
conference’, 21 January 2013. http://europa.eu/rapid/press-release_SPEECH-13-41_en.htm
279  Cyprus, Ministry of the Interior (2013), ‘Presidential run-off elections 2013: Official results’, 

February 2013. http://results.elections.moi.gov.cy/English/PRESIDENTIAL__EPANALIPTIKI_
EKLOGI_ELECTIONS_2013/Islandwide 

280  Eurogroup statement on Cyprus, 4 March 2013.  

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/135809.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

What made Cyprus different from previous programme countries was 
the size and skewed nature of its financial sector. Bank assets were 
657% of GDP in 2012. Non-performing loans were high and would 
eventually reach around 50% of the loan book. Along with ordinary 
struggling borrowers, Cyprus had a class of strategic defaulters, who 
could pay but didn’t feel obliged to. ‘The legal framework was very 
debtor-friendly – if you didn’t pay your loan, the bank couldn’t do 
anything,’ said Sutt, then the ESM’s Cyprus mission chief. The haircut 
on Greek bonds exposed the system’s fragility. 

Cyprus had tried to fix the problem on its own in May 2012, with an 
effort to bring in new capital of €1.8 billion for Cyprus Popular Bank, 
known as Laiki Bank281. In June, it became clear that Cyprus couldn’t 
raise the money privately so the government would need to provide 
the rest of the funds. The state aid was necessary because the bank had 
fallen short of meeting its minimum regulatory capital requirements 
as determined by the European Banking Authority, which in 2011 had 
started stress-testing banks across the EU.

In all, Cypriot banks were staring at a €8.9 billion shortfall in their 
balance sheets under an ‘adverse scenario’, according to an independent 
analysis that was conducted by the investment management firm 
PIMCO in late 2012282.

281  Cyprus, Central Bank of Cyprus (2013), ‘Rescue programme for Laiki Bank’, Announcement, 

30 March 2013. https://www.centralbank.cy/en/announcements/30-03-2013;  
European Commission (2012), ‘State aid: Commission temporarily approves rescue recapitalisation 
of Cyprus Popular Bank’, Press release, 13 September 2012.  
http://europa.eu/rapid/press-release_IP-12-958_en.htm

282  PIMCO (2013), ‘Independent due diligence of the banking system of Cyprus’, PIMCO Europe Ltd, 

London, March 2013.  
https://ftalphaville-cdn.ft.com/wp-content/uploads/2013/04/reportasws.pdf.pdf 

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Banks represented an 
outsized proportion of the 
Cypriot economy, rendering 
it unusually vulnerable to 
difficulties in the sector.

Note: GDP is not seasonally 
adjusted in this chart.

Source: European Central 
Bank, Eurostat

Total bank assets — Cyprus 
in % of GDP

800

700

600

500

400

300

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

The problems ran deeper than the banks. The European Commission 
had identified ‘very serious macroeconomic imbalances’ in the Cypriot 
economy, extending to the trade balance and public finances283. It 
called for ‘urgent economic policy attention in order to avert any 
adverse effects on the functioning of the economy and of Economic 
and Monetary Union,’ according to an in-depth review. In other words, 
Cyprus was seen as potentially systemic, bearing a risk of spillovers to 
the rest of the euro area.

This tangle of fiscal, financial, and economic deficiencies formed the 
backdrop for the last act in talks that would make Cyprus the fifth euro 
member state to receive emergency assistance. The institutions had 
concluded that Cyprus would need €10 billion for the banks284, plus 
roughly €7 billion for general government financing285. But this 
€17 billion total was about the size of Cypriot GDP. The IMF warned 

283  European Commission (2012), ‘Following in-depth reviews, Commission calls on Member States 

to tackle macroeconomic imbalances’, Memo, 30 May 2012.  
http://europa.eu/rapid/press-release_MEMO-12-388_en.htm  

284  Reuters (2012), ‘Cyprus bailout eyes up to 10 billion euros for banks: Central bank’, 

30 November 2012. https://www.reuters.com/article/us-cyprus-bailout-banks/cyprus-bailout-eyes-
up-to-10-billion-euros-for-banks-central-bank-idUSBRE8AT0I220121130 

285  European Commission, Directorate-General for Economic and Financial Affairs (2013), ‘The 

Economic Adjustment Programme for Cyprus’, European Economy Occasional Papers 149, May 2013.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp149_en.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

that lending on that scale would render Cyprus’s debt completely 
unsustainable. To design a programme in which the debt could be 
sustainable, the Eurogroup settled on up to €10 billion in aid. 

The IMF and several northern European countries pressed Cyprus 
to bail in bank creditors, Sarris said, to ensure that investors, debt 
holders – and ultimately depositors, because of the way the banks were 
structured – would absorb a share of the losses to cover the capital 
shortfall. Meanwhile, Cyprus was running out of time. Following its 
internal rules, the ECB was poised to cut off the Cypriot banks from 
their last lifeline, Eurosystem emergency liquidity assistance.

Matters came to a head at a Eurogroup meeting on 15 March 2013. 
Sarris went into the session under no illusions about Cyprus’s leverage. 
‘We really had no negotiating power and no credibility,’ he said. With 
the ECB threatening to withdraw the emergency liquidity, Cyprus was 
faced with the choice of applying for a programme or abandoning the 
euro. ‘Basically, they were telling us, “Your banks would have to close,”’ 
Sarris recalled. ‘And they actually said, in so many words, that they 
couldn’t reopen.’

Cyprus’s banks were not only distinguished by their economic heft. 
For financing, they sold relatively few bonds, putting greater reliance 
on foreign depositors. As a last-ditch way to spread the pain as widely 
as possible, Cyprus ended up proposing a 6.75% levy on all deposits – 
essentially a wealth tax on everyone with a bank account286.

Crucially, this tax would not exempt account holders covered by EU-
wide deposit insurance guidelines, which were instituted in 1994 and 
updated in 2009 and 2010 in order to prevent bank runs and reinforce 
confidence in the banking system. By the time of the 2013 Cyprus aid 
negotiations, deposits were insured up to €100,000. Cypriot officials 
presented the tax as a one-off levy of 18 months of interest, since 
Cypriot bank accounts were returning 5% a year. 

The measures being asked of Cyprus were more drastic than anything 
bank customers had endured in modern times. ‘But obviously that 
didn’t change the numbers,’ Sutt said.

286  Economist (2013), ‘The Cyprus bail-in – A bungled bank raid’, 23 March 2013.  

https://www.economist.com/finance-and-economics/2013/03/23/a-bungled-bank-raid 

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In the early hours of 16 March, the Eurogroup agreed to provide up to 
€10 billion to Cyprus in exchange for the downsizing of the banking 
system, the modernisation of the financial supervisory framework, 
the tightening of the government’s budget, and steps to fight money 
laundering. A Eurogroup statement welcomed the ‘ambitious measures 
to ensure the stability of the financial sector’287. 

Cypriots woke up to the news that they would have less in the bank 
than they thought, while financial markets weighed the implications 
of the Eurogroup entering into the uncharted territory of forcing 
losses on insured depositors. When the securities exchanges opened 
on Monday, fears of contagion made the rounds again, with bank 
shares hit by concern that the Cypriot deposit tax would become a new, 
regularly used tool in the euro area’s arsenal and make promises of 
deposit insurance moot.

‘European bank shares fell more than 2% on Monday as a plan by 
Cyprus to seize money from bank deposits raised fears that savers 
elsewhere may not be safe and the euro zone may be plunged back into 
crisis,’ Reuters wrote on 18 March288. It was a reminder of how, thanks 
to the interconnected financial system, an island economy accounting 
for less than 0.2% of euro area GDP could touch off a larger crisis.

Back in Cyprus, the banks were closed and politicians up in arms 
over the tax on small depositors. On Tuesday, the parliament voted 
to reject the plan, without a single lawmaker in favour289. Cyprus 
again looked to Russia as a potential saviour. Russia had disbursed 
€2.5 billion to Cyprus in three tranches in 2011 and 2012, but Sarris 
came back empty-handed from a March 2013 trip290. Russia did 

287  Statement by the Eurogroup on Cyprus, 16 March 2013.  

https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/136190.pdf

288  Reuters (2013), ‘European bank stocks drop on Cyprus contagion fear’, 18 March 2013.  
https://uk.reuters.com/article/us-eurozone-cyprus-banks-idUKBRE92H0ET20130318
289  Reuters (2013), ‘Cyprus lawmakers reject bank tax; bailout in disarray’, 19 March 2013.  

https://www.reuters.com/article/us-cyprus-parliament/cyprus-lawmakers-reject-bank-tax-bailout-
in-disarray-idUSBRE92G03I20130319?feedType=RSS;  
Bloomberg (2013), ‘Cyprus loan request spurned by Russia in Moscow: Sarris’, 21 March 2013. 
https://www.bloomberg.com/news/articles/2013-03-21/cyprus-said-to-seek-about-5-billion-euro-
russian-loan-in-moscow

290  Reuters (2013), ‘Cyprus seeks Russia investment, loan extension: Finance minister’, 21 March 2013. 
https://www.reuters.com/article/us-eurozone-russia-sarris/cyprus-seeks-russia-investment-loan-
extension-finance-minister-idUSBRE92K09220130321 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

eventually restructure its existing loans to Cyprus so they would have a 
longer repayment period and lower interest rates, but only after a euro 
area package was agreed291. 

Lawmakers in Nicosia considered alternatives to the across the 
board bank account levy, eventually settling on a plan that spared 
insured deposits and shifted the burden to those holding more than 
€100,000. Cyprus maintained the pledges to overhaul its economy and 
downsize its banking sector292. What mattered for the Eurogroup was 
that the fiscal maths still worked, paving the way for a decisive policy 
meeting. On 25 March 2013, euro area finance ministers endorsed the 
revised package, with up to €10 billion in assistance during a three-
year adjustment programme. It was the first full ESM programme, 
embracing public finance as well as banking components.

On 28 March, Cyprus imposed capital controls and began to deal with 
the fallout from its decisions. The agreement was finalised on 2 April. 
The ESM signed off on 24 April293 on the European commitment, 
which would eventually be €9 billion. The IMF announced on 15 May 
that it would contribute €1 billion, participating on a much smaller 
scale than it had in past European aid packages294.

IMF Managing Director Lagarde gave the Cypriot government credit 
for taking ownership of the programme, likening its commitment to 
that of Ireland. She praised Anastasiades for his ability to rally support 
at crucial moments. ‘I remember a discussion with the president, 
talking to colleagues and saying, you know, stop questioning, just get 
on and do it,’ Lagarde said.

As part of the agreement, Cypriot banks sold their Greek branches 
to Piraeus Bank ahead of the capital controls, ensuring those offices 
could reopen and Greek depositors wouldn’t be touched by the limits 
imposed. The capital controls won the cautious blessing of the euro 

291  European Commission, Directorate-General for Economic and Financial Affairs (2013), ‘The 
Economic Adjustment Programme for Cyprus’, European Economy Occasional Papers 149,  
p. 107, May 2013.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp149_en.pdf

292  Eurogroup statement on Cyprus, 25 March 2013. 

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/136487.pdf 

293  ESM (2013), ‘ESM Board of Governors grants stability support to Cyprus’, Press release, 

24 April 2013.  
https://www.esm.europa.eu/press-releases/esm-board-governors-grants-stability-support-cyprus
294  IMF (2013), ‘IMF executive board approves €1 billion arrangement under extended fund facility 

for Cyprus’, Press release, 15 May 2013.  
http://www.imf.org/en/News/Articles/2015/09/14/01/49/pr13175 

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area, because of the ‘unique and exceptional situation of Cyprus’s 
financial sector and to allow for a swift reopening of the banks’295. 
As long as the measures were temporary, proportionate and non-
discriminatory, in line with EU treaties, they could go ahead.

Cyprus even managed to restructure some of its government debt as 
part of efforts to get its financial picture under control. In June 2013, 
it swapped some of its local bonds for longer-term bonds in a bid 
to ease immediate liquidity pressures. The move put Cyprus briefly 
into ‘selective default’ from a credit rating standpoint, as analysts at 
Standard & Poor’s judged the new bonds to be on less favourable terms 
for Cyprus’s investors296. 

Although it upset markets at the time, the Cyprus solution was also 
a game changer in bank resolution. The notion of an upfront bail-in 
of all bank creditors, including senior creditors if necessary, was not 
yet customary in the EU and only junior creditors had previously 
been required to take losses. The Cypriot programme was in its 
first year when, in December 2013, the European Parliament and 
representatives of national governments struck an agreement on 
the bank recovery and resolution directive297, which spells out how 
investors are in line to take losses when a bank fails. The move to tap 
senior bank creditors in Cyprus was part of significant changes in the 
banking landscape298.

Today it is clear that the Cypriot programme set a new precedent  
for handling a large and troubled banking sector by de-emphasising 
the taxpayer-funded rescues that had been the traditional approach in 
Europe and elsewhere. In Spain, junior bondholders took losses but 

295  Eurogroup statement on Cyprus, Statement, 25 March 2013. 

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/136487.pdf
296  S&P Global (2013), ‘Research update: Cyprus ratings lowered to “SD” following announced 

exchange offer on several local law bonds’, 28 June 2013.  
https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/8086197

297  European Parliament (2013), ‘Deal reached on bank “bail-in directive”’, Press release, 

12 December 2013. http://www.europarl.europa.eu/news/en/press-room/20131212IPR30702/deal-
reached-on-bank-bail-in-directive 

298  ‘Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing 

a framework for the recovery and resolution of credit institutions and investment firms and 
amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/
EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) 
No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council text with 
EEA relevance’, OJ L173/190, 12 June 2014.  
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0059

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

senior creditors were spared. However, in Cyprus, the banks had little 
junior debt and the numbers didn’t add up unless senior creditors 
contributed. 

The ESM was still an embryonic organisation, sending a two-or 
three-person team to the Cyprus talks. While outnumbered by 
representatives of the other institutions, the ESM delegation brought 
a mix of public and private sector experience, as well as a broad 
spectrum of understanding of the connections between banks, finance, 
and the debt repayment profile.

It helped that the ESM had established itself based on its work in 
other countries. This created a virtuous circle: because the ESM had 
gained respect from its work with the other institutions and local 
authorities, it received better cooperation from its partners. And, with 
the additional information that close cooperation can provide, its own 
contributions improved further.

‘With the ESM in the picture, the institutional roles changed and that 
facilitated the access,’ said ESM Chief Economist Strauch. ‘It worked 
relatively well in Cyprus, pretty much from the start.’

House price index — Cyprus 
(2015=100)

140

130

120

110

100

90

80

70

A house-price collapse 
compounded Cyprus’s 
woes.

Source: Eurostat

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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  2 7 3

Cyprus tackled the task of whittling away at the rapidly accumulating 
debt. Once Cyprus was carrying out its programme, real house prices 
rose, a sign that homeowners were benefiting from the economic 
reforms. Its debt-to-GDP ratio peaked at 107.5%, a better outcome 
than expected, and the country progressed in overhauling its banks. 

Fresh capital for banks, some of which came from the aid programme, 
brought a first glimmer of confidence. However, some of the efforts 
to stabilise the financial sector have proven tricky. The programme 
included €1.5 billion in capital to the country’s Cooperative Central 
Bank, but the bank later required another infusion of state aid after an 
ECB review found it wasn’t doing enough to manage non-performing 
loans299. The cooperative bank then came under increased scrutiny 
until 2018, when it was split up300. Parts of the bank were sold to a 
domestic competitor, while in particular the non-performing loans 
remained in a state-owned asset management company.

In the end, the capital controls did less damage than expected, because 
their implementation varied across different types of transactions in 
an attempt to minimise payment system disruptions and ensure the 
execution of transactions essential for the real economy301.

‘One of the reasons why the capital controls did not disrupt the 
economy was that the programme included an efficient roadmap to 
remove them step by step once clear milestones in the programme 
were reached,’ said Paolo Fioretti, the ESM’s country coordinator 
for Cyprus. ‘A clear time horizon increased the commitment of the 
government in implementing related necessary measures and gave 
people more confidence that the controls would be transitory.’

299  European Commission (2015), ‘State aid: Commission approves additional aid for Cypriot 

cooperative banks on the basis of an amended restructuring plan’, Press release, 18 December 2015. 
http://europa.eu/rapid/press-release_IP-15-6365_en.htm 

300  Central Bank of Cyprus (2018), ‘Withdrawal of licence of Cyprus Cooperative Bank’, 

5 September 2018.  
https://www.centralbank.cy/en/announcements/withdrawal-of-licence-of-cyprus-cooperative-bank 

301  IMF (2013), ‘Cyprus: Letter of intent, memorandum of economic and financial policies, and 

technical memorandum of understanding,’ p. 3, 29 April 2013.  
https://www.imf.org/external/np/loi/2013/cyp/042913.pdf  

Eurogroup President Jeroen 

Dijsselbloem gestures to 

ESM Managing Director 

Klaus Regling (with back 

to camera) as Cypriot 

Finance Minister Harris 

Georgiades looks on at the 

7 March 2016 Eurogroup 

meeting in Brussels. Cyprus 

successfully completed 

its loan programme three 

weeks later.

Credit: European Union 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Lending growth for house purchases — Cyprus 
annual % change

35

30

25

20

15

10

5

0

-5

-10

Lending growth, after 
previously ballooning, 
declined in the run-up to the 
crisis. Bank deleveraging 
compounded economic 
woes during the downturn.

Source: European  
Central Bank

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Overall, the programme strengthened the banks while also reining 
them in. ‘In the end, the banking sector benefited too,’ said Sutt, a 
veteran of the IMF and the Estonian Central Bank. Cyprus Popular 
Bank was shut when its troubles became too big to fix. Meanwhile, 
the largest Cypriot bank became de facto foreign controlled, as did 
the third largest, bringing new incentives for the banks to improve 
governance, work better with the government, and lend in a way 
that helps the overall economy. ‘The shareholder structure changed 
dramatically. It helped to change the governance and the links between 
the banks and the entrepreneurs, and the politics,’ Sutt said. ‘In the end, 
I think it’s a positive for a country. But these exercises are, at the time, 
never easy in terms of implementation.’

The programme in Cyprus benefited from strong cooperation with 
local authorities, once it was finally underway. ‘In March of 2013, 
Cyprus was in a difficult position. Most of the adjustment efforts had 
to come from the Cypriot population. Now, we see that the approach 
has brought good results,’ Fioretti said.

Cyprus lifted all external capital controls on 6 April 2015302. In 
March 2016, Cyprus exited its programme on schedule, although it 
chose to leave €2.7 billion of the initial envelope unspent  – in part 

302  European Commission (2015), ‘The Economic Adjustment Programme, Cyprus: 6th Review – spring 

2015’, European Economy Institutional Papers 004, p. 23, Spring 2015.  
https://ec.europa.eu/info/sites/info/files/file_import/ip007_en_2.pdf 

Lending growth for house purchases — Cyprus 

annual % change

35

30

25

20

15

10

5

0

-5

-10

Lending growth, after 

previously ballooning, 

declined in the run-up to the 

crisis. Bank deleveraging 

compounded economic 

woes during the downturn.

Source: European  

Central Bank

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Overall, the programme strengthened the banks while also reining 

them in. ‘In the end, the banking sector benefited too,’ said Sutt, a 

veteran of the IMF and the Estonian Central Bank. Cyprus Popular 

Bank was shut when its troubles became too big to fix. Meanwhile, 

the largest Cypriot bank became de facto foreign controlled, as did 

the third largest, bringing new incentives for the banks to improve 

governance, work better with the government, and lend in a way 

that helps the overall economy. ‘The shareholder structure changed 

dramatically. It helped to change the governance and the links between 

the banks and the entrepreneurs, and the politics,’ Sutt said. ‘In the end, 

I think it’s a positive for a country. But these exercises are, at the time, 

never easy in terms of implementation.’

The programme in Cyprus benefited from strong cooperation with 

local authorities, once it was finally underway. ‘In March of 2013, 

Cyprus was in a difficult position. Most of the adjustment efforts had 

to come from the Cypriot population. Now, we see that the approach 

has brought good results,’ Fioretti said.

Cyprus lifted all external capital controls on 6 April 2015302. In 

March 2016, Cyprus exited its programme on schedule, although it 

chose to leave €2.7 billion of the initial envelope unspent  – in part 

302  European Commission (2015), ‘The Economic Adjustment Programme, Cyprus: 6th Review – spring 

2015’, European Economy Institutional Papers 004, p. 23, Spring 2015.  

https://ec.europa.eu/info/sites/info/files/file_import/ip007_en_2.pdf 

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  2 7 5

Eurogroup President Jeroen 
Dijsselbloem gestures to 
ESM Managing Director 
Klaus Regling (with back 
to camera) as Cypriot 
Finance Minister Harris 
Georgiades looks on at the 
7 March 2016 Eurogroup 
meeting in Brussels. Cyprus 
successfully completed 
its loan programme three 
weeks later.

Credit: European Union 

because it was unable to meet a few of its last programme conditions 
by the time of the exit, and in part because financing needs turned out 
to be lower than initially estimated. 

Cypriot programme (2013–2016)

Initial programme amount: €10 billion

Total amount disbursed: €7.3 billion, of which the ESM provided 
€6.3 billion

Lenders: ESM, IMF

Final weighted average maturity (ESM loans): 14.9 years

Key legislated reforms: wage policies; foreclosure and bankruptcy 
laws; restructuring and downsizing of financial institutions; fiscal 
consolidation; structural reforms (public administration, services)

‘Cyprus has managed to restore economic growth and repair public 
finances much faster than expected,’ said Juncker, now the Commission 
president. ‘Overall, the experience in Cyprus confirms what we have seen 
in other programme countries: the strategy of providing loans to a country 
in a deep crisis in exchange for economic policy reforms is one that works.’

Clean exit:  
Portugal wraps up  
its programme 

32

We decided that having a precautionary 
programme was not needed. Even in hindsight,  
I still think it was a good decision. 

Maria Luís Albuquerque  
Portuguese Finance Minister (July 2013–November 2015)

The ESM proved its mettle in setting up the assistance 

programme for Cyprus, building on its success in providing 
bank-focused aid to Spain. One of the next challenges would 

be not just how to start a rescue programme, but how to help countries 
cement their recovery. 

In late 2013 and early 2014, EFSF programmes in both Ireland and 
Portugal were coming to a close. Ireland’s economy had bounced back 
strongly and, by mid-2012, financial markets were willing to lend again 
without a euro area safety net. Portugal’s outlook was less certain. It 
began syndicated sales to banks in 2013, but its auction debut would 
have to wait until April 2014303. The successful €750 million return to 
markets was seen as evidence that Portugal would be able to exit its 

303  For a fuller assessment of how four programme countries approached the restoration of market 

access, see Strauch, R., Rojas, J., O’Connor, F., Casalinho, C., de Ramón-Lapa Clausen, P., Kalozois, 
P. (2016), Accessing sovereign markets: The recent experiences of Ireland, Portugal, Spain, and Cyprus, 
ESM, Discussion Paper 2, 20 June 2016.  
https://www.esm.europa.eu/sites/default/files/esmdp2final.pdf 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

23 January 
Portugal returns to international capital markets with  
a syndicated tap, raising €2.5 billion.

June 
Seventh review of Portuguese programme published after  
months of delay.

1 July 
Internal government disagreements prompt resignation of  
Finance Minister Vítor Gaspar.

28 April  
The EFSF makes what turns out to be the final loan disbursement. 
(€1.2 billion)

2 May 
Positive twelfth review, aiming to conclude with a final June 
disbursement. Court blocks a key reform – review ended,  
no disbursement.

5 May 
The European Commission takes note of Portugal’s decision  
not to seek precautionary aid programme.

18 May 
Portugal successfully exits EFSF financial assistance  
programme.

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  2 7 9

IMF Managing Director 
Christine Lagarde (left) 
speaks with Portuguese 
Finance Minister Maria Luís 
Albuquerque (right) prior to 
the start of the Eurogroup 
meeting on 8 July 2013 
in Brussels, just after 
Ms. Alburquerque took 
office. Eurogroup Working 
Group Chairman Thomas 
Wieser is in the centre. 

Credit: Thierry Charlier/AFP

EFSF programme, but at that time markets questioned if it should keep 
some sort of lifeline open to the firewalls.

Of all of the ESM’s new tools, the precautionary credit line was the 
one that seemed most useful for Portugal given the circumstances. 
Modelled after similar arrangements offered by the IMF, the tool was 
designed to help countries maintain or restore market access without 
taking on new loans and a whole new programme. By agreeing to a set 
of economic policies and monitoring protocols, countries could have 
access to a credit line that would ensure they would not run out of 
money overnight. In turn, the very existence of that credit line would 
encourage markets to keep lending, ideally allowing the aid money 
to remain untapped. The idea was that this process would create a 
virtuous circle of momentum, and then they would not need a full 
financial assistance programme again.

The main argument for taking a precautionary credit line was that it 
would reassure markets that Portugal wasn’t on the brink of running 
out of cash, allowing an easier transition back to market financing. 
On the other hand, it would paint Portugal in a different light from 
Ireland, which didn’t need one. In addition, should Portugal decide 
to request aid, it would have to negotiate a new round of conditions 
with its euro area peers and then get those conditions through its 
national parliament.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

ESM Chief Economist Strauch said Portugal’s conundrum and 
eventual decision to go it alone were a product of the political and 
financial conditions of the time. ‘They could get back to the market. 
They could finance themselves, but it would have been very useful 
to keep a bit more pressure on them to continue the reforms. That 
incentive was lost,’ Strauch said. ‘The Irish, by creating the clean exit 
as the role model, meant the Portuguese had to go towards a clean 
exit. We just had to see how it went.’

In 2013, although relations with the troika of international institutions 
were good, public resentment in Portugal was brewing and political 
ownership of the programme – and its conditionality – was slipping. 
‘As the recession went on too long and the social uproar against 
austerity policies became stronger, formally supported by the decisions 
of the constitutional court, the government became more reluctant to 
assume ownership of the programme and slowed the structural reform 
momentum,’ said Teixeira dos Santos, former Portuguese finance 
minister. 

The programme’s seventh review, in 2013, foreshadowed troubles 
ahead304. That review dragged on for three months, a long time 
by Portuguese programme standards. It was marked by internal 
government disagreements, leading up to the July 2013 resignation 
of the finance minister, Gaspar, as well as increasingly drawn-out 
negotiations with the troika. Tax reforms, in particular, put a strain on 
workers, which ‘created a political problem and then the ownership of 
the programme deteriorated,’ Strauch said. 

As relations broke down, Portugal took a different view from the euro 
area institutions on whether or not it should apply for a precautionary 
programme to ease its return to market access. At the time, Teixeira 
dos Santos, whose government lost the elections shortly after the 
programme’s start in May 2011, said he favoured a precautionary 
instrument because ‘Portugal would have been more protected.’ In 
hindsight, he says he is glad that ‘market developments were positive 
and there was no need for it.’ 

304  European Commission, Directorate-General for Economic and Financial Affairs (2013), ‘The 

Economic Adjustment Programme for Portugal: Seventh review – winter 2012/2013’, European 
Economy Occasional Papers 153, June 2013.  
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp153_en.pdf 

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Albuquerque, who took over as finance minister from Gaspar, defends 
Portugal’s decision not to use it. In her view, the country’s progress 
on meeting targets during the programme, restoring credibility, and 
regaining market access meant the country had more options as its 
assistance period ended. 

Even several years on, she still believes it was a good decision to 
hold back from another programme. ‘A follow-up or precautionary 
programme can be very important if market access is fragile,’ she said. 
‘On the other hand, if you can complete the programme like Ireland 
did, like we did, having regained credibility and full market access, 
then the need for a precautionary or a follow-up programme is not 
obvious,’ Albuquerque said. ‘It’s seen as a lack of confidence. There’s a 
lot of psychology involved.’

There was also the question of whether or not the euro area partners 
wanted to authorise use of the new instrument. Misgivings included 
uncertainty about what new conditionality might entail, and how that 
might complicate internal deliberations, as well as questions about 
whether or not the benefits of such a short-term facility outweighed 
the negative signal its uptake would send to markets, according to 
the independent EFSF/ESM financial assistance: Evaluation report 
published in June 2017305. 

Germany and other countries were against Portugal seeking a 
precautionary credit line, a view reinforced in 2016 by Germany’s 
then-Finance Minister Schäuble. ‘Portugal did not do so, and I 
thought it made the right decision,’ he said. Nevertheless, he noted that 
progress on banking sector reforms and on bringing down high levels 
of corporate and public debt got harder after the programme ended. ‘I 
am aware that post-programme surveillance became weaker without a 
precautionary credit line.’ 

Albuquerque disputes this. Portugal was already due for extra 
scrutiny as a result of its rescue package and adjustment programme. 
It faced a series of post-programme reviews and the EU’s European 
semester process of national budget coordination. She says the 
precautionary programme would not have meant much change, and 
the government’s decision against using it was not taken to avoid 
extra oversight. 

305  Tumpel-Gugerell, G. (2017), EFSF/ESM financial assistance: Evaluation report, Publications 

Office, Luxembourg. https://www.esm.europa.eu/sites/default/files/ti_pubpdf_dw0616055enn_
pdfweb_20170607111409.pdf 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

At the European Commission, officials held a much blunter assessment 
of Portugal’s prospects for going it alone. ‘With Portugal we had 
strong doubts that it would be wise to go out without a follow-up,’ 
said the Commission’s Buti. ‘There was a devilish alliance between 
the country itself and the hardliners. Why? Because the country itself 
wants to declare victory and the hardliners, they don’t want to push 
a precautionary programme through their parliament. Moral hazard 
and taking the jump without a parachute, this is a risk that could come 
back to haunt us.’ 

As the decision drew near, ESM officials joined the technical team 
of monitors and took a bigger role in working with country officials 
on the economic programme. This move reflected the institution’s 
growing expertise and its role as one of Portugal’s largest creditors. 

From this front-line perspective, the firewall had a clear view of what 
was at stake as Portugal’s decision approached. 

‘Since Ireland had already managed to exit the programme without 
any follow-up, treating or pushing Portugal too much not to follow 
the same approach would be extremely costly,’ said Rojas, head of the 
ESM’s economic and market analysis team, who also served as ESM 
country coordinator for Portugal. ‘It was basically a political decision.’

Portugal did not have the same quality of ready market access that 
Ireland or Spain enjoyed. Rojas said this was in part because of how it 
traditionally sold its debt, through syndication that relied on a small 
group of would-be buyers. It was also generally more vulnerable to 
contagion when there was a crisis flare-up in Greece or elsewhere in 
the euro area. ‘Portugal was borderline at the time,’ Rojas said. ‘In the 
case of Ireland, market access was decent. In the case of Portugal, it 
was less so.’ 

Even with the precautionary programme option now a distant 
memory, Portugal has remained more susceptible to financial market 
shockwaves than Ireland or Spain. Portugal’s debt levels remain high 
and potential growth weak, burdened in part by a banking sector that 
is still recovering from the crisis. A government push to recapitalise 
banks helped the financial sector; however, banks remained a source 
of instability after the programme, in part because of weaker economic 
conditions, which reduced their asset quality and capital. 

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The reform efforts in Portugal had lost traction even before the 
programme ended, especially given a constitutional court decision 
requiring some public sector wage cuts to be rolled back. This made the 
‘clean exit’ decision all the more difficult to digest for the monitoring 
institutions. 

In the end, not only did Portugal not seek a precautionary aid 
programme, it even skipped its final IMF and EFSM disbursements 
because it never completed its last review. This came after its 
constitutional court overturned a law, without which it couldn’t 
meet the conditions necessary to unlock the aid. ‘At the end of the 
programme, I would have preferred if we had completed the last 
review as scheduled, instead of having it end through the lapse of time. 
I would have preferred a proper closure,’ Albuquerque said. The last 
EFSF disbursement that Portugal received came in April 2014.

The next milestone will come in a few years’ time, when Portugal 
begins to pay down its EFSF loan306. Following a full repayment of its 
IMF loan, Portugal has committed to do so earlier than expected307. It 
is currently under the ESM’s early warning system aegis, allowing the 
firewall to keep a close eye on its finances and economic management. 
A key test will be if the country is able to continue reducing its debt 
levels and managing the costs of rolling over its existing stocks of 
marketable debt.

‘In any case, things are looking brighter. We are at a more advanced 
stage now, where we can see the bigger picture, see how the economy 
and its banking system are recovering and what this means for its 
capacity to repay,’ said Sušec, the ESM’s deputy head of strategy and 
institutional relations, who also serves as mission chief in Portugal. 
In that context, the significant reduction in the fiscal deficit has been 
very encouraging.

‘Portugal has made great progress in restoring its public finances and 
fixing its banking sector. One of the issues which we still follow closely 
is the high level of sovereign debt, which makes the country vulnerable 
to sudden changes in market conditions.’

306  European Commission (n.d.), ‘Financial assistance to Portugal’.  

https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-
financial-assistance/which-eu-countries-have-received-assistance/financial-assistance-portugal_en 

307  EFSF (2018), ‘EFSF approves waiver of Portugal’s mandatory repayment of EFSF loans’, Press 
release, 4 December 2018. https://www.esm.europa.eu/press-releases/efsf-approves-waiver-
portugal’s-mandatory-repayment-efsf-loans

 
Ensuring repayment:  
the ESM’s  
early warning system

33

The ESM does more than just finance rescue 
loans. With its early warning system, it monitors 
former programme countries’ capacity to pay back 
their loans as agreed.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

Just as a private sector lender keeps tabs on the financial health of 

the borrower throughout the duration of the loan, the ESM needs 
to pay close attention to the balance sheets of the countries it 
assists. That is why governments mandated in the 2012 founding ESM 
Treaty that the fund ‘shall establish an appropriate warning system to 
ensure that it receives any repayments due by the ESM Member under 
the stability support in a timely manner’308.

An early warning system procedure was approved by the ESM Board 
on 24 March 2014, after a 9 December 2013 Eurogroup decision 
to apply the system to EFSF loans as well. It requires the ESM to 
continuously track former programme countries’ cash flow, ability to 
borrow on the open market, medium- to long-term sustainability of 
public debt, and banking system risks. This monitoring complements 

308  Treaty Establishing the European Stability Mechanism, 2 February 2012.  

https://www.esm.europa.eu/sites/default/files/20150203_-_esm_treaty_-_en.pdf

2 8 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

the fiscal and debt sustainability analyses of the European 
Commission and ECB, with the ESM concentrating on the loan 
repayment outlook.

‘It’s like with a bank – when the bank considers giving you a mortgage 
it must assess the ability of the borrower to repay the loan,’ said Rojas, 
the ESM’s head of economic and market analysis. The only difference 
is that the ESM’s monitoring is ongoing. ‘This is basically our tool to 
make sure that countries repay.’

Under the EU Treaty, the Commission and national government 
representatives are responsible for post-programme surveillance of 
countries that receive aid. However, the ESM needs a monitoring role 
to keep watch over repayment prospects and make sure recipient 
countries can fulfil their responsibilities in a timely manner. After all, if 
a country were to miss a scheduled payment, it could call into question 
the ESM’s ability to act in a future crisis by affecting the firewall’s 
financial capacity and creditworthiness. The ESM must maintain its 
fiduciary duty to its Members and bondholders.

To flag any potential repayment problems, the ESM continuously 
tracks the due dates for interest, fees, and principal repayments at least 
12 months in advance. At the same time, it looks a year ahead at each 
country’s budget and economic outlook, taking the Commission’s 
analysis into account. On a quarterly basis, former programme 
countries provide a cash flow overview that indicates how payments 
will be made.

‘Looking at the budget and economic outlook always means looking 
at policies, but it does not mean that we will in any sense negotiate 
policies,’ said ESM Managing Director Regling. ‘We only have to 
monitor and make sure no problems show up.’

The task will keep the fund busy long after most current employees 
have moved on: ESM guidelines require it to carry out repayment 
risk assessments under the early warning system until loans are fully 
repaid, which will be into 2070 in the case of Greece. In contrast, the 
Commission’s euro area post-programme surveillance of economic 
and fiscal policy ends after 75% of the loan is paid back. 

If the ESM’s internal risk committee determines that there might be 
doubt on a timely repayment that could lead to a payment default to 
the ESM, it would then escalate the oversight process. In that event, the 
ESM would consult with the Commission and the ECB to assess the 

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  2 8 7

situation and its potential consequences in more depth. As a further 
escalation, the ESM would inform its Members, through the Board of 
Directors, of the repayment risk. Talks would take place immediately 
on a confidential basis. 

To be sure, the ESM’s diversified funding strategy would help protect the 
firewall in the event of a delayed or missed payment. The rescue fund has 
flexible timing and instruments to ensure it always stays liquid.

A practical example of how the early warning system functions can 
be found in Ireland. In an important sense, the EFSF’s first client has 
been an unqualified success story, showing that a country can turn its 
fortunes around quickly if it commits to reforming its economy. 

At the same time, Ireland can’t let down its vigilance. The post-
programme assessment309, published in February 2018, found 
downside risks to the economy, particularly due to the uncertain 
effect of the UK’s decision to pull out of the EU. While welcoming 
the near-elimination of the deficit and early repayment of bilateral 
loans from Denmark, Sweden, and the IMF, the report urged the Irish 
authorities to work harder to boost the ‘shock resilience’ of public 
finances. Overall, however, it concluded that, thanks to improved 
debt sustainability and other factors, the risks for Ireland’s capacity to 
service its EFSF and ESM debt ‘remain low’.

That sort of intelligence isn’t obtainable only by sifting through 
economic data back in Luxembourg. To gain a nuanced, first-hand 
impression of the state of a country’s economy and government 
finances, the ESM needs experts who can be on the ground.

As with many ESM tools, the early warning system has been adapted 
and updated as the firewall gained experience. Originally, due diligence 
analyses were staggered according to each country’s repayment 
schedule. But varying dates for repayment led some countries to be 
examined more often than others. Portugal’s repayments were spread 
over the year, leading to frequent assessments, whereas Spain made 
only one payment a year, in December. ‘So, in the case of Spain, we 
were monitoring the repayment capability less often,’ Rojas said. ‘This 
is risky because, if something happens outside of this time period, 

309  European Commission (2018), ‘Post-programme surveillance report: Ireland, autumn 2017’, 
European Economy Institutional Paper 074, Publications Office, Luxembourg, February 2018. 
https://ec.europa.eu/info/sites/info/files/economy-finance/ip074_en.pdf 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

then we could have a problem.’ As a result, the new policy provides for 
quarterly monitoring, regardless of payment due dates. 

There was a similar logic to lengthening the time horizon of the early 
warning system assessment to a full 12 months from the five that 
were initially specified. It is thus no longer theoretically possible for a 
country to meet its December payment obligations and then run into 
trouble a few months later.

‘We didn’t want to take the risk of having a ripple after a repayment,’ 
Rojas said. ‘Even if a particular country doesn’t have to repay to us, 
the fact that a particular country defaults on some loans to other 
institutions, for instance, could trigger a default clause for our loans.’

Data-reporting standards also have been refined. At first, countries 
provided cash flow data in a variety of formats, sometimes lacking 
sufficient detail, making it hard for the ESM to obtain the complete 
picture. Now all use the same template. ‘One time, we got the 
projections in such a way that the information was almost completely 
irrelevant,’ Rojas said. ‘A goal of the new guidelines was also to send 
a message of, look, for something as fundamental as this, we must all 
take a standard professional approach.’

The changes were approved by the ESM Board of Directors on 
18 March 2016. 

The ESM worked closely with each country’s debt management office 
to identify which numbers it would need to see. Given the role of bank 
recapitalisation in aid programmes, the ESM also needed access to 
more banking data. The exposure of banks to sovereigns and vice versa 
means that troubles in the financial sector can have repercussions for 
national budgets. At first, some countries worried that their banking 
data could fall into the wrong hands, especially since they were still 
getting used to watching the ECB’s Single Supervisory Mechanism pore 
over the sector’s books, but the ESM was able to put safeguards in place 
to reassure them. 

‘Banking issues are usually very delicate,’ Rojas said. ‘We were able 
to overcome these concerns by including in the new guidelines 
statements saying that the projections a country sends us can only be 
used for the risk assessment activities of the ESM, and that only those 
people involved in risk assessment activities can access the data.’ 

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C H A P T E R   3 3   —   EN S U R I N G   R E PAyM E N T : T H E   E S M ’ S   E A R Ly   W A R N I N G   Sy S T E M      

  2 8 9

Independent
Evaluator
appointed by the
ESM Board 
of Governors

Evaluation Report

The first independent 
evaluation report of EFSF 
and ESM programmes 
made a series of 
recommendations, including 
on the early warning 
system’s effectiveness.

Untitled-1   3

1/6/17   11:39

As much as possible, the ESM uses publicly available data. Only when 
a specific risk is identified does the ESM contact supervisors to drill 
deeper into the figures. 

How will the early warning system evolve from here? A 2017 
evaluation report310, commissioned by the ESM Board of Governors, 
recommended a review of its effectiveness, noting that its ‘scope and 
enforcement power is limited’.

For more on the evaluation report, see Chapter 39. 

‘The EWS relies on moral persuasion, peer pressure, and the powers of 
other institutions to achieve its purpose,’ the report found.

310  Tumpel-Gugerell, G. (2017), EFSF/ESM financial assistance: Evaluation report, Publications 

Office, Luxembourg. https://www.esm.europa.eu/sites/default/files/ti_pubpdf_dw0616055enn_
pdfweb_20170607111409_1.pdf 

EFSF/ESMFinancial Assistance 
 
 
  
 
 
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In terms of its mission to monitor programme countries’ ability to 
repay, the report said that the early warning system was ‘adequate’, 
but questioned what would happen if risks arose. It suggested that the 
system could do little to prevent a rollback or even reversal of reforms. 
Furthermore, it noted that the early warning system is ‘limited to 
programme countries, which does not allow it to capture systemic 
risks.’ One way to prevent future crises could be to expand the early 
warning system monitoring process beyond the countries that are 
paying back aid. This would involve changing the ESM’s remit, and 
it would make it easier to combat the next crisis if problem spots are 
identified sooner. 

The euro area is in the midst of shaping the future of its institutions. 
Towards the end of 2018, Member States agreed to broaden the 
mandate of the ESM beyond aid programmes while respecting the 
mandate of the European Commission related to surveillance and 
economic policy coordination.

‘Just in case’:  
the direct bank 
recapitalisation tool

34

Our toolkit is sufficient for our core mandate. 
Even instruments like the direct recapitalisation 
instrument, which have never been used,  
are good to have just in case something  
goes terribly wrong.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer 

The euro area established a direct channel to banks – a major 

advance for the monetary union – when the ESM’s toolbox was 
expanded to include a direct recapitalisation instrument (DRI). 

First conceived in 2012, the DRI was seen as a way to prevent further 
crisis escalation in the event of a heavily indebted country having to 
take on more loans to save a systemically important bank.

At the time, there were few public avenues for stabilising a failing 
bank and little consensus on when and whether troubled financial 
firms should be propped up or shut down. Now the EU has clear 
rules for those contingencies, and the banking union features a Single 
Resolution Board, backed by its own resolution fund, with the power 
to dismantle a systemic bank safely. 

When Europe’s crisis-fighting strategy was a work in progress, the 
development of the DRI served as reassurance for the banking system, 
especially between 2012 and 2014.

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‘At the time, it was really important to dispel or reduce the fears that 
Europe was unable to manage the crisis. For that, the instrument was 
useful. The probability of this instrument being used is now close to 
zero,’ said Sutt, the ESM’s head of banking from 2013 to 2016. 

Had it been available at the time, direct recapitalisation could have 
suited Ireland, whose state bank guarantee led to a substantial spike in 
government debt, damaging the overall economy. The Irish experience, 
which came as exposure to US subprime debt was forcing governments 
in Germany, France, the UK, and elsewhere to prop up their banks, 
exploded market fears about linked bank-sovereign finances.

Nonetheless, it took more than two years – from a summit pledge in 
June 2012 until the last details were ironed out in December 2014 – for 
the euro area to declare the tool ready for ESM deployment. During 
that time, negotiations were shaped by the success of indirect ESM 
lending to stabilise Spain’s banks and a broader shift in the European 
regulatory backdrop.

In the original 2012 commitment, euro area leaders had tied use of the 
DRI to a series of conditions, including compliance with the EU’s state 
aid rules. By autumn 2012, those conditions took on more emphasis: at 
a 25 September meeting in Helsinki, the finance ministers of Germany, 
the Netherlands, and Finland stressed that the ESM would step in only 
‘as a last resort’ and at a member state’s request. 

The first line of defence, the three ministers said in a statement311, 
would be bank shareholders and creditors and the budget of the 
member state concerned. ESM intervention, in other words, wouldn’t 
take place overnight.

In their view, intervention was warranted for problems on a euro 
area scale, not to rectify the failures of national bank supervision. The 
statement clearly showed how difficult this kind of assistance was for 
some countries to accept. 

‘There was a great deal of discussion on the direct recapitalisation of 
banks. These proposals clashed with the reluctance of many to share 
risks,’ said de Guindos, the Spanish finance minister through much of 
the crisis and now the vice president of the ECB.

311  Finland, Ministry of Finance (2012), ‘Joint statement of the ministers of finance of Germany, the 

Netherlands and Finland’, Press release, 25 September 2012.  
https://vm.fi/en/article/-/asset_publisher/joint-statement-of-the-ministers-of-finance-of-germany-
the-netherlands-and-finland 

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A key condition regarding the use of the DRI is that the bank 
concerned should be systemically important, rendering its rescue 
indispensable to safeguard the financial stability of the euro area. The 
European Commission would also have to judge that an ESM-backed 
recapitalisation and restructuring would restore the bank to viability. 

Political agreement on the operational framework for direct ESM 
banking intervention was reached at a Eurogroup meeting in 
June 2014312. ‘It was hugely controversial among [the ESM] Members,’ 
Sutt said. ‘The conservative view was that this was too risky. From the 
southern part of Europe, the idea was “this is exactly what we need.”’

Finance ministers said the ESM could use up to €60 billion of its total 
capacity on the DRI. The actual drain on ESM resources, however, 
would be greater because the provision of direct financial assistance to 
distressed banks carries higher risks than lending to a cash-strapped 
government. Use of the tool would reduce the ESM’s lending capacity, 
possibly by as much as €180 billion off the ESM’s overall lending 
ceiling of €500 billion. However, by preventing further crisis escalation, 
the benefits were thought to outweigh this potential drain.

A government applying for a direct recapitalisation programme 
would have to show that it would be saddled with excessive debt if it 
borrowed from the ESM in order to pass the funds on to the troubled 
bank, as Spain had done. The purpose of the direct ESM injection is to 
bypass the government and avoid increasing its sovereign debt. While 
the Spanish example was a success story, it might have been trickier for 
a country whose debts were larger relative to the size of its economy.

The creation of the direct bank intervention tool marked the ESM’s 
biggest departure yet from the IMF’s crisis-lending model. With 
this new step, the euro area rescue fund took on duties similar to 
those performed by the European Bank for Reconstruction and 
Development or the World Bank’s International Finance Corporation. 

‘Historically, we only lend money to sovereigns, as the IMF does. On 
the other hand, as a crisis-fighting institution it could make sense to 
go into the private sector like multilateral development banks.’ ESM 
Managing Director Regling said. 

Following the political go-ahead from the Eurogroup, it fell to the ESM 
to draw up the operations manual for direct recapitalisations. Regling 
brought in David Vegara, a former deputy finance minister in Spain and 

312  Statement by the president of the Eurogroup, 10 June 2014.  
https://www.consilium.europa.eu/media/28065/143163.pdf 

 
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IMF veteran, as a senior advisor in September 2012. In December, Vegara 
moved to the Management Board and, alongside Frankel, became a 
deputy managing director, in recognition of the scope of his experience. 

Vegara was tasked with overseeing the building up of an ESM team 
capable of managing large-scale bank holdings across Europe. At  
that time, it was clear that banking issues would be an increasingly 
central issue for the ESM and there was a clear need for Vegara’s 
particular expertise.

‘It’s a huge amount of work. You’re looking at taking on the 
management and oversight of a bank or even several banks,’ Vegara said. 

Thanks to Vegara’s technical and management skills, the ESM was 
able to build its banking department from scratch and make sure it 
could be fully operational when needed. But, when the DRI became 
ready to use in December 2014, it also became clear that the tool 
would be unlikely to be deployed. Vegara moved back to his old role as 
special advisor before departing from the ESM in February 2015, his 
assignment complete.

The ESM’s General Counsel, David Eatough, said: ‘The idea is that 
you take the sovereign out of the credit equation, and rather than the 
sovereign owning the money and then lending it, you buy shares in the 
banks and directly recapitalise the banks. It would have been a massive 
change from anything the institution had done before.’ 

To wield the new instrument, the ESM needed staff expertise to assess 
whether a bank is viable or needs to be split and resolved, taking into 
account conditions in the relevant national banking market. ESM 
experts would have to master a given bank’s valuation metrics and the 
due diligence required. 

Besides recruiting public and private banking professionals, the ESM 
put together a project group drawn from across the organisation. It 
spent six months developing a clear understanding of how to assess, 
structure, and execute a transaction while maintaining the safeguards 
to underpin the ESM’s high credit rating.

One of the additions was Mike Hesketh, hired from the European Bank 
for Reconstruction and Development and one of the ESM’s principal 
banking experts. ‘The concept of direct recapitalisation, putting a large 
equity investment into the viable part of a bankrupt systemic bank, was 
challenging,’ Hesketh said. ‘My role was to help develop the processes 
and internal procedures for how to assess risk, and how we could best 
structure it to mitigate that risk.’

C H A P T E R   3 4   —   ‘ JU S T   I N   C A S E ’: T H E   D I R E C T  B A Nk   R E C A P I TA L I S AT I O N  T O O L   

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The point wasn’t to create a full-time bank-intervention department. The 
ESM decided that, in a crisis, it would supplement the core banking team 
with staff on secondment from other international financial institutions, 
and that it would hire consultants for detailed due diligence work. 

It was also decided to create a subsidiary body within the ESM to carry 
out the bank recapitalisation. This format won out over using a special 
purpose vehicle under Luxembourg law, which had been considered 
earlier but did not pass legal muster.

Planning was also essential for the financial risks associated with bank 
shareholdings, given the potential for tremendous year-to-year volatility. 
For a conservatively managed institution such as the ESM, the prospect 
of losses or share markdowns would be a dramatic change. 

‘What we could insist upon was that the costs we would incur, to 
arrange the funding and certain other costs, could be passed back to 
the beneficiary Member State,’ Hesketh said. ‘At least we wouldn’t be 
incurring operational costs. But we would take the pure equity risk of 
the investment.’

Dealing with that risk would impose further limitations on the 
potential use of the tool. ESM Treaty rules could lead it to a call on 
Members to provide more capital if losses on equity holdings were to 
reach a certain limit – a controversial proposition.

As it issues bonds on the public markets, the ESM’s need to provide 
regular transparency on its financial position also ruled out the use of 
deferred-loss accounting methods, which are common with nationally 
managed bank recapitalisation funds. 

‘Let’s assume that we make a loss on the equity holdings and that 
directly affects the ESM’s equity,’ Hesketh said. ‘Then we’re actually 
obliged to make a call to the shareholders. And, as Klaus memorably 
said: “That would be a painful call to make.”’

The new tool could not be deployed until the Single Supervisory 
Mechanism for euro area banks was up and running. Its debut took place 
on 4 November 2014313. Shortly afterwards, in December 2014, the ESM 

313  ECB (2014), ‘ECB assumes responsibility for euro area banking supervision’, Press release, 
4 November 2014. https://www.ecb.europa.eu/press/pr/date/2014/html/pr141104.en.html

 
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declared the new instrument operational. By this time, however, the crisis 
had subsided and European bank regulation was moving on314. 

New rules for resolving troubled banks – the bank recovery and 
resolution directive – took effect at the start of 2015, although it would 
be another year before its creditor-loss hierarchy would be phased in. 
But the creditor-loss protocols kicked in immediately for any bank 
seeking ESM direct recapitalisation, giving member states another 
consideration to ponder.

In parallel, the euro area had equipped the ECB to become the 
common banking supervisor for systemic banks. The central bank 
had also in October 2014 conducted a comprehensive assessment of 
bank balance sheets, revealing total capital needs of only €24.6 billion 
across 25 out of the 130 largest banks315. The review revealed that the 
euro area’s most important banks were in much better shape than at 
the start of the crisis, and less likely to fall back on the newly minted 
ESM tool. 

‘The results of the recent asset quality review and stress tests confirm 
that the use of the new instrument seems unlikely,’ Regling said on 
8 December 2014, when the ESM unveiled the direct recapitalisation 
tool316.

While the tool has remained on the shelf, the financial sector expertise 
gained along the way has served the ESM well. Not only is the 
knowledge essential for ongoing programme monitoring, in the future 
there will be close coordination between the rescue fund and the Single 
Resolution Board because in 2018 the euro area agreed to make the 
ESM its backstop for the Single Resolution Fund and to phase out the 
direct recapitalisation tool once that arrangement is in place.

314  ESM (2014), ‘ESM direct bank recapitalisation instrument adopted’, Press release, 8 December 2014.  
https://www.esm.europa.eu/press-releases/esm-direct-bank-recapitalisation-instrument-adopted 

315  ECB (n.d.), ‘Results of the 2014 comprehensive assessment’.  

https://www.bankingsupervision.europa.eu/banking/tasks/comprehensive_assessment/2014/html/
index.en.html. 

316  ESM (2014), ‘ESM direct bank recapitalisation instrument adopted’, Press release, 8 December 2014.  
https://www.esm.europa.eu/press-releases/esm-direct-bank-recapitalisation-instrument-adopted 

C H A P T E R   3 4   —   ‘ JU S T   I N   C A S E ’: T H E   D I R E C T  B A Nk   R E C A P I TA L I S AT I O N  T O O L   

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Focus  
Carlo and Hugo

The ESM’s banking team staged two trial runs of the bank recapitalisation 
tool, to test it out in practice. The drills were called Project Carlo and Project 
Hugo, named after the streets around the ESM’s headquarters that honour 
the Luxembourgish economist Carlo Hemmer and the Luxembourgish-
American inventor and science fiction publisher Hugo Gernsback.

‘It was really a demanding exercise because we were under enormous 
pressure, as if it were really happening and not just a test,’ said Sutt, former 
ESM head of banking. 

Activating the instrument would involve the entire banking team, supported by 
most of the rest of the ESM. For the first dry run, Project Carlo in March 2014, 
the ESM also worked with a financial advisory and asset management 
company, to prepare the exercise and a 600-page handbook on the tool. 

The practical tests revealed that the tool had unexpected drawbacks. 
One of the principle takeaways was that the tool would not be the rapidly 
deployable emergency instrument that had been intended. Distressed 
banks would need to have their national government lodge a formal request 
with euro area finance ministers, the ESM’s directors and governors, the 
relevant directorates-general of the European Commission, and the ECB. In 
some cases, Members would need to follow their national parliamentary 
procedures. The ESM also would have to conduct a full analysis of the bank 
to assess the likelihood of recovering its investment. 

Project Carlo, the first test exercise, was based on a real bank in one of 
the programme countries, but with the data changed for the purposes of a 
purely hypothetical exercise. Under the simulation, the bank’s home country 
requested the instrument’s aid to recapitalise one of its big banks. The ESM 
team had two and a half days to analyse the bank’s financial situation, come 
up with a workable investment structure, and perform due diligence: stress 
tests, entry equity valuations, exit routes, and potential exit valuations. To 
make things even more interesting, the exercise facilitators changed some 
of the external events halfway through, in keeping with how the crisis had 
played out in real life.

Instead of granting the requested amount of aid for the troubled bank, the 
ESM team found it needed to split the bank and provide a large amount of 
funding, most likely in the form of a regular loan to the country. This led to 
‘a very small equity investment for direct recapitalisation and a very high 

 
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probability that the country was going to have to request a full economic 
adjustment programme,’ said Hesketh of the ESM banking department. Since 
the direct recapitalisation instrument was designed to help a country in lieu 
of a standard programme, the realisation that it would work only alongside a 
full programme was a surprise.

‘We all know it would not have been just one bank that needed to be resolved, 
but probably would result from an overall situation that would have affected 
the state itself,’ said Jansen, former ESM general counsel.

Project Hugo followed in September 2014. It too featured a simulated bank 
based on real programme country data and a straightforward request for 
direct aid, but this time with the Commission taking part and other simulated 
external actors, such as the media. The ECB was invited, but it was too busy 
conducting its real-life comprehensive banking review to take part. 

Bringing in these outside actors highlighted how direct bank investments 
would dramatically change the ESM’s negotiating role, over and above the 
political difficulties of getting a direct recapitalisation programme in place. 
The acquisition of a stake in a private company would compel the ESM 
to protect its investment and negotiate for higher returns on behalf of its 
shareholders. This might mean navigating trade-offs between what is best 
for the bank and what regulators might request as part of their efforts to limit 
taxpayer liability. One example might be whether or not to sell subsidiaries, 
which might have long-term value to the institution but could also generate 
upfront cash.

Project Hugo led to the same conclusion as its predecessor: even though 
the request was for one specific bank, there would be too much contagion 
for the country to avoid a full macroeconomic programme. The bulk of the 
programme would probably entail an indirect recapitalisation facility. Direct 
aid would be a smaller component, at a higher cost. 

‘The conditions that we would impose for direct recap are very burdensome 
on the Member,’ Hesketh said. ‘Essentially, they lose control of a systemically 
important bank in their country. We make a small equity investment but we’re 
probably taking 70% to 80% of the shares.’

In that scenario, a Member would probably opt not to pursue a direct aid 
investment. Instead it could aim for a larger indirect facility and maintain 
control of its banks. 

Safeguarding the capital: 
building a modern, strategic 
investment architecture

35

The liquidity and credit quality of the capital 
are there to ensure the ESM’s creditworthiness, 
so that the funds used to lend can be raised, in 
optimal conditions, at any time.

Carlos Martins 
ESM/EFSF Investment and Treasury Portfolio Manager

The ESM’s ability to safeguard financial stability is anchored by 

the paid-in capital provided by its Members. Preserving this 
capital is therefore essential to fulfilment of the ESM’s mission.

Initially the firewall was due to receive its capital gradually over 
five years. However, to show their determination to make the ESM a 
credible support mechanism for the common currency, the euro area 
countries accelerated the contribution schedule that had originally 
been set out in the ESM Treaty and rapidly created a large pool of cash 
to invest. The capital thus came in over an 18-month period, with the 
first two instalments paid simultaneously in autumn 2012, and the 
final three came on a schedule of one every subsequent six months 
through spring 2014. 

By the end of 2018, the ESM had received €80.5 billion of paid-in capital. 
When the last additional expected instalments from all ESM Members 
are received in 2027, the paid-in capital will total €80.8 billion. The 
ESM has a remit to safeguard these funds, maintain the highest possible 

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credit rating, and support the euro area in times of market stress. These 
investment principles have remained unchanged since the firewall began.

When the permanent ESM was created, there was at first no clear 
roadmap for specifically how to manage the holdings of this new 
kind of institution. The overarching goal – to preserve liquid holdings 
and the long-term value of its capital – needed to be translated into 
investment guidelines that would spell out the universe of potential 
investments. The fund also had to find the right people to carry out 
this strategy and create the right systems for them to use.

While the capital’s main purpose is to ensure the ESM’s highest 
creditworthiness, it can also be used in emergencies to cover any 
liquidity needs. Therefore, the ESM’s investment guidelines in part 
resemble those used by central banks to manage their foreign exchange 
reserves. This means a focus on investing in high-quality securities 
and keeping a tight rein on market and credit risk. At the same time, 
the ESM must also maintain its credit rating, in the manner of those 
international financial institutions that issue debt.

‘In deciding how to invest its funds, the ESM is somewhere between a 
central bank and an international financial institution. The investment 
rules need to be relatively similar to those of central banks, but the 
ESM must also make sure it has the highest credit rating to raise funds 
on financial markets,’ said Lévy, the institution’s head of investment 
and treasury. ‘In practice, this means that we need to define our own 
approach and we need to make sure proposed solutions are agreeable 
to all our 19 shareholders.’ 

The ESM strives for a portfolio of safe, diversified assets that could be 
easily converted into cash. Transactions are calibrated so they can be 
absorbed by the market without having adverse effects on asset prices. 
As part of its long-term strategy, the ESM aims to avoid large-scale 
purchases or sales that would disrupt market prices. 

In the EFSF’s early days, there was no formal investment department. 
At the start, a team at the Frankfurt-based German Finance Agency 
handled EFSF debt operations, and this team was initially in charge 
of investing the short-term liquidity. It also purchased some securities 
on behalf of the EFSF related to the early Portuguese and Irish 
programmes, in order to provide investors with additional guarantees. 
Liquidity management became a bigger part of operations once the 
EFSF adopted its diversified funding strategy in 2011 and was able to 
raise money on an independent schedule from its disbursements.

C H A P T E R   3 5   —   S A F E G U A R D I N G  T H E   C A P I TA L : 
B U I L D I N G   A   M O D E R N ,   S T R AT E G I C   I NvE S T M E N T  A R C H I T E C T U R E  

  3 0 1 

Once the euro area committed to creating the permanent ESM, it was 
clear that investment activities would grow, in particular when its paid-
in capital started to flow in. The firewall began relocating its funding 
and investment activities in-house. 

During the course of 2012, the organisation hired portfolio managers, 
set up the investment framework, and built the necessary information 
technology infrastructure. The first head of investment and treasury 
came from the French central bank, while portfolio managers were 
recruited from banks, asset managers, public financial institutions, and 
central banks. The resulting mix of backgrounds reflected the ESM’s 
effort to bridge worlds and to put together a diverse team – but first the 
team needed to get organised. 

‘It was very surprising at first. We thought we were recruited to manage 
assets and instead the first thing we had to do was to come up with an 
investment framework, test the IT system, and establish policies,’ said 
Carlos Martins, an ESM portfolio manager. 

When setting the investment guidelines, the ESM concentrated on debt 
securities issued by highly rated public entities. At first, the investments 
were mainly focused on bonds issued in euros by supranational 
institutions, euro area governments, and public agencies that had 
a minimum rating equivalent to at least an AA. Over time, as the 
organisation gained traction, the guidelines have been expanded to allow 
broader types of investments such as covered bonds and non-euro area 
issuers, while remaining in line with the original core principles.

The paid-in capital had to be invested in line with these principles and 
guidelines as it flowed in. For each lump sum, the team developed a 
ramp-up strategy to place the funds without pushing up asset prices. 
After all, market participants were generally alert to when the money 
was due and tried to anticipate the ESM’s operations. ESM Managing 
Director Regling said: ‘We had to make sure they couldn’t front run us.’

To avoid disrupting markets, the investment team purchased smaller-
than-expected amounts and kept its timing flexible, if necessary 
holding on to the cash until the market was better able to absorb 
the flows. On average, trade sizes were about €30 million and each 
instalment was invested over a period of three to four months. 

‘It was very important to deploy the paid-in capital in such a way that it 
did not leave a large footprint in the market,’ recalled Ivan Semerdjiev, a 
former Bank of Canada staffer who is now an ESM portfolio manager. 

 
 
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‘Everybody knew it was coming and everybody knew that it would 
be invested, but generally nobody knew over what period it would 
be deployed. We didn’t want to make any real ripples and overall we 
achieved this objective.’

From the start, the investment team closely monitored portfolio 
allocation and performance, keeping the Management Board apprised 
of all major events affecting the positions. ‘When I joined, I was 
pleasantly surprised to discover that the ESM had already implemented 
a detailed performance-monitoring and attribution system. This type 
of capacity usually comes later,’ said Lévy. 

Senior ESM staff meet monthly to review macroeconomic and 
financial developments and define the investment strategy for the 
coming months. This structure was present from the beginning and 
would be refined as the investment strategy evolved and matured. By 
checking in regularly, they can analyse recent market developments 
and adjust the portfolios accordingly. These meetings ensure a robust 
investment decision-making process.

As the range of instruments expanded, the growing investment  
team reconsidered its internal organisation. The team manages the 
ESM’s two main investment pools – one for day-to-day liquidity and 
one for long-term capital holdings – as well as the EFSF portfolios. 
Over time, the initial everyone-does-everything approach was 
reaching its limits. The team considered dividing responsibilities 
between asset classes and maturities, yet eventually settled on a 
geographical breakdown.

‘We initially couldn’t find a good approach to distribute assets in a way 
that would be easy to implement operationally and logical financially. 
We reviewed many possible options and finally, we thought: “Let’s just 
split euro area issuers by country and create a specific diversification 
portfolio for non-euro-area issuers and supranationals,”’ Lévy said. 
‘The objective was to create a structure where we would collectively 
be responsible for the whole investment strategy, but implementation 
would be divided up in a practical way to enable team members to 
focus on a particular market segment.’

In establishing itself as a professional investor, the ESM built up a 
network of counterparties to conduct transactions. As early as 2012, 
the ESM was working with more than 20 international counterparties, 
ensuring broad access to the European bond market. This network 
would eventually expand to include more than 35 counterparties, 
active across different markets.

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Portfolio management posed another set of questions for the institution. 
The ESM had to determine how to apply professional asset management 
principles, which required regular market operations, but again without 
interfering with euro area bond market prices.

‘It was not very clear how active the ESM was supposed to be in the 
market,’ Martins said. ‘A good illustration of this occurred the first time 
a portfolio manager sold a bond. The sale raised eyebrows. It was even 
reported to the internal risk committee; people wanted to understand 
the rationale behind such an operation.’

To help make its case, the ESM consulted established international 
financial institutions with extensive fund management expertise. 
Representatives of the World Bank came to Luxembourg to work with 
the ESM’s team and provided assurances that the firewall was adhering 
to best practices. The investment team worked hard to convey the 
importance of active management to the ESM shareholders.

‘We had to explain what it means to be active in the market as a public 
institution, and not as a market maker or an active fund manager. We 
had to reassure the shareholders that it was essential for the ESM to 
be present in the market and to be ready to act if and when a market 
intervention was required to provide liquidity,’ said Frankel, ESM deputy 
managing director and CFO. 

Active portfolio management brings a number of benefits. By adjusting 
the ESM’s asset allocation in response to economic and market 
conditions, the ESM can contain some of the financial risks and enhance 
returns, building a cushion on top of the paid-in capital to augment the 
firewall’s financial strength. 

For example, when the ECB implemented its quantitative easing 
programme in January 2015, there was a dramatic change in market 
conditions. In response, the ESM reconsidered its asset allocation, 
switching out of some securities deemed to be over-priced and into 
others with better return prospects. The ESM also lengthened its 
maturity investment profile when yields turned strongly negative. 

The ESM also needed in-depth market knowledge and capacity to ensure 
it could tackle the challenges that might come from the implementation 
of a secondary market purchase programme, where the ESM intervenes 
in financial markets to purchase securities of an eligible country. To be 
able to act for the euro area when needed, the ESM put together a team 
able to trade securities not only in normal conditions but also in periods 
of market stress and low liquidity. 

 
 
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This instrument has never been used. However, all the preparations 
were carried out so a programme could be put in place quickly when 
called upon. As early as 2012, the ESM had built a full set-up with the 
ECB and the French central bank, the Bank of France. This required 
special procedures, secure communication networks, and close 
cooperation between the three institutions. Later, this framework was 
reviewed to include only the ESM and the Bank of France, as the ECB 
and the ESM needed to ensure a clear separation of duties.

‘It was essential for the success of the ESM to work closely with these 
well-established institutions, to have our intervention capacity ready. 
Initially, it was difficult to coordinate well, but, after two test runs, 
we knew we were ready to take on our responsibilities,’ said Maria 
Kartcheva, the ESM’s portfolio manager responsible for this project.

The ESM has been reviewing its investment guidelines regularly, 
leading to changes in strategy as conditions dictated. In 2013, it became 
clear that the initial investment framework was working but it was 
excessively conservative and rigid, even given the ESM’s mandate. 
Broadening the range of investments was becoming necessary to 
reinforce the ESM’s long-term financial strength in a time of falling 
yields, without generating significant risk. 

‘By then, it had already become increasingly difficult to meet 
the diversification requirement included in the investment 
guidelines, which require 30% of the paid-in capital to be invested 
in supranational or non-euro area issuers, to reduce the overall 
concentration on the euro,’ Semerdjiev said. ‘At the time, we could 
only buy euro-denominated securities. So, we approached a number 
of supranational entities and asked them to issue some private 
placements, which we purchased. This flexibility was essential to enable 
us to comply with the requirement set by our shareholders.’

In one instance in 2015, the ESM undertook a short-term private 
placement with the EU, an eligible supranational entity, which used it 
to provide a bridge loan to Greece. 

For more on the bridge loan, 
see ‘Focus — An unusual money market transaction’ in Chapter 37.

Lévy, who joined in November 2014, took on responsibility for the 
further diversification of the fund’s holdings. Yields were falling at 
the time and, to avoid losses, the ESM had to expand its investment 

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universe. Scenario analysis performed in 2015 showed that more 
needed to be done because of the negative interest rates on most 
eligible assets. The risk of losses was looming, to the point of possibly 
threatening the ESM’s long-term creditworthiness. 

All changes had to be reviewed internally and approved by the 
19 members of the Board of Directors. The investment team explained 
for each proposal how the revision would reinforce the institution 
without generating undue risk. This proved to be a lengthy process.

The first modifications, in 2015, were incremental, broadening the 
number of issuers eligible for ESM investments. 

‘For a very long time, there was no internal agreement. There was a 
lot of passion about what the ESM could and could not do,’ Lévy said. 
‘Ultimately, we went for a shortcut. We just changed a few lines in the 
annex, but those changes made quite a big impact.’

These changes increased the amount the ESM could invest in certain 
eligible issuers like AAA covered bonds or public agencies with a 
minimum rating of AA. More ambitious revisions of the investment 
guidelines took another year, and these 2016 changes helped to 
mitigate the impact of negative interest rates, while minimising overall 
portfolio risk. 

The ESM’s investment universe would eventually extend to a wider 
range of bond issuers, including some with slightly lower ratings than 
had previously been allowed. In particular, the ESM was allowed in 
2016 to invest €75 billion of its capital at a rating equivalent to or 
above AA- instead of the previous AA rating. The rules also expanded 
to offer the possibility of investing in covered bonds, sub-sovereign 
government issuers, and a broader geographical range of issuers, and 
it enabled the ESM to fully deploy derivative instruments to manage 
foreign exchange and interest rate risk. 

To invest most effectively, the ESM needed to build its investment 
capacity, so it launched a number of initiatives in parallel. Initially, the 
only result was a logjam; none of the projects were getting finished. For 
Lévy, the question was how to prioritise the initiatives the investment 
team was working on. 

‘People were trying to achieve a massive project, called “new 
instruments”, and were starting to get frustrated at the lack of progress,’ 
Lévy recalled. ‘We decided to change the approach and target some 

 
 
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quick wins. We managed to convince the different teams that it would 
be more efficient to cut the project into more digestible chunks 
and focus on short-term non-euro investments traded with public 
institutions, without collateral. That worked.’ 

Within six months, the first of the new instruments – foreign exchange 
swaps and forwards – were coming on board, enabling the ESM to 
conduct the first non-euro investments. By the end of 2015, the ESM 
had invested about €2.0 billion in Danish kroner and Japanese yen, 
hedged into euros to avoid the currency risk, helping to diversify 
holdings and improve returns. The ESM also laid the groundwork for 
investing in assets denominated in nine major countries’ currencies: 
Australia, Canada, Denmark, Japan, Norway, Sweden, Switzerland, the 
UK, and the US. 

By 2016, the ESM could enter into repurchase agreements (repos) to 
broaden its investment capacity and to raise liquidity in emergencies. 
This capability was phased in over time. At first, permission was 
limited to reverse repos, the equivalent of a collateralised deposit. Later 
on, the ESM added traditional repo operations, lending out securities 
from the portfolio to receive cash.

‘If we need to introduce a new type of instrument to fulfil our mandate, 
we will act on it; we have a ‘can-do’ approach,’ ESM Chief Risk Officer 
Pacciani said. ‘We also have a strong risk culture and a prudent 
approach. So, we always look at best market practices to build our own 
standards, our own limits, and methodologies. We aim to be modern 
and prudent at the same time and we reflect these two dimensions in 
our risk management framework.’ 

In 2015 and 2016, one of the principal strategies to enhance the 
portfolio’s performance was to move into cash. At the time, the ESM’s 
paid-in capital was fully invested in securities, but plunging interest 
rates necessitated a re-allocation. Drawing on its eligibility to leave 
funds at the Bundesbank at 0% interest, even when deposit rates went 
well below that, the ESM swung heavily into cash – €45 billion at the 
end of 2015 and €60 billion at the end of 2016. This reduced the ESM’s 
interest rate sensitivity in a depressed market environment.

‘When yields started to fall into negative territory, we had an incentive to sell 
our bonds and leave the cash at 0% instead of keeping assets with negative 
interest rates. We never thought we would end up selling about three 
quarters of our portfolio’s assets. We looked for alternative investments, but 
very few eligible assets could offer a positive return,’ Lévy said. 

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However, these exceptional conditions did not last for the ESM and 
EFSF. In late 2016, the ECB informed the ESM that it would be treated 
like many other public institutions and that the cash left in euro area 
national central banks would be charged the ECB’s deposit facility 
rate, set at -0.40% at the time. The ESM and EFSF started paying these 
charges in early 2017. 

With these conditions still relatively more favourable than short-term 
securities, which offered investment returns close to -0.50%, the ESM 
kept a large part of its assets in cash. It had to count on its accumulated 
reserves to absorb the expected losses. 

Germany and France stepped in to ease the burden. Concerned that 
these charges might affect the financial strength of the rescue fund, 
the finance ministers from these countries pledged to reimburse, for a 
temporary period, the negative interest paid to their national central 
banks. In 2018, France and Germany made good on that commitment, 
reimbursing interest paid by the ESM to their national central banks 
the previous year.

‘Capital preservation in a negative yield environment is arguably the 
restriction that is the most challenging to comply with,’ Semerdjiev 
said. ‘We have proposed other solutions to address this issue but, in the 
end, it will be the responsibility of our shareholders to decide where 
they would like the balance to be between risk and return.’

In 2017, after three years of preparation, the ESM began to conduct 
cross-currency swaps, facilitating investments in foreign currency 
assets without the accompanying currency risk. To do so, the ESM 
updated the risk framework and the information technology system. 
This was a difficult task, because the crisis had left regulations in flux 
and public institutions without a standardised approach. The ESM had 
to define its own approach. In doing so, the ESM became one of the 
first public international financial institutions to implement a bilateral 
collateralisation for its derivative operations, providing the ESM with 
broad access to market liquidity and competitive pricing. Other public 
institutions are currently considering this framework. 

Overall, the investment strategy has succeeded. However, constant 
vigilance is essential. In 2017, with the pressure of negative interest 
rates, the capital recorded a loss of €124 million317. The agreement to 

317  ESM (2018), ESM annual report 2017, p. 46, 21 June 2018, Publications Office, Luxembourg. 

https://www.esm.europa.eu/sites/default/files/ar2017final.pdf

 
 
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reimburse the ESM for the negative interest paid to some euro area 
national central banks is temporary, by nature. In these conditions, the 
ESM and its shareholders will have to review its investment framework 
regularly to make sure it remains fit for purpose.

‘The portfolio needs to stand up to stress testing,’ Pacciani said. ‘For 
example, what if interest rates go back to past historical levels? What if 
they stay in negative territory for longer than expected? We need to test 
the resilience of the institution and build capacity to withstand further 
challenging times.’ 

From 2012 to 2017, the ESM’s capital recorded an accumulated 
return of more than €1.2 billion, which has been kept in reserves, to 
cover the ESM’s future needs and help it achieve its goal of long-term 
capital preservation. This gain is more than €750 million above the 
performance of the ESM’s benchmark portfolios over the same period. 

‘This shows that, in the end, all the efforts of the ESM to build its 
investment capacity and enhance return in a prudent manner brought 
some tangible results, for the whole institution,’ Lévy said. 

Focus  
Hedging against risk

As its operations have grown, the ESM has turned to derivatives to help it 
manage financial risks. In 2017, for example, the ESM took further steps to 
expand its investor base, manage the interest rate risk on Greece’s ESM loans, 
and preserve its capital. Specifically, it conducted the short-term debt relief 
measures for Greece at the behest of euro area finance ministers, issued its 
first non-euro bond, and broadened its investment universe geographically. 

All these actions could have exposed the rescue fund to detrimental shifts 
in interest rates or foreign exchange rates. But derivatives, which are 
financial instruments whose price fluctuates based on an underlying asset, 
can help protect against such risks. The ESM put in years of preparatory 
work by its legal, risk, technology, funding, investment, and asset liability 
management teams to set up a framework for derivatives, and then it 
expanded their use in 2017.

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The ESM uses derivatives such as interest rate swaps, foreign exchange 
swaps and forwards, and cross-currency swaps. In particular, the ESM 
deploys interest rate swaps to reduce the risk that Greece would have to pay 
a higher interest rate on its loans should market rates rise. In addition, for the 
US dollar bond issuance, the ESM hedged its US dollar cash flows from bond 
issues back into euros – the currency in which its programme country loans 
are denominated.

‘Derivatives are an important tool for us to mitigate certain risks related to 
our activities,’ said ESM Funding Officer Klaus, a former derivatives trader. 
‘We are not a bank. We are not here to speculate. The derivatives are not 
there to be structured in complex financial products. What we’re talking about 
are plain vanilla derivatives to mitigate risks.’

The ESM applies a prudent framework for its credit exposures to derivative 
counterparties, which include public sector entities and commercial banks 
with high credit ratings. For operations with commercial banks, all derivative-
related exposures are fully collateralised in cash or highly rated securities, on 
a daily basis. For lower-rated bank counterparties, the ESM can contractually 
request additional collateral to reduce credit risks.

Olivier Pujal, currently senior advisor to the ESM secretary general and former 
deputy head of the asset liability and management (ALM) team, said that, by 
using derivatives, the ESM reduced interest rate risk for Greece on its ESM 
loans. ‘Through derivative instruments, we try to limit variability of the ESM 
cost of funding by locking that cost in as much as possible at current long-
term rate levels,’ he said.

Questions that needed to be addressed included contract structure, 
collateral, and custodian arrangements. For the time being, the ESM has 
ruled out the use of central clearing facilities for derivatives transactions, as 
those facilities handle only certain kinds of trades. 

The ESM keeps its investing and funding books separate, by barring some 
data sharing between the departments. The solution was to pull together 
all derivatives transactions under one International Swaps and Derivatives 
Association Master Agreement, while the investment and funding teams 
each have their own credit support annexes with the commercial banks 
that serve as counterparties. Having two credit support annexes separates 
the day-to-day collateral needs of each book, while the single Master 
Agreement guarantees that all positions are netted if a counterparty 
defaults, keeping the ESM’s overall credit risk exposure at a minimum. 
Negotiations started in late 2016, and in February 2017 the ESM signed up 
its first group of banks.

 
 
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Within the rescue fund, in the context of the Greek measures, the ALM team 
developed the calculation tools to monitor the volumes, maturities, and 
pricing of the derivative transactions, while the funding team was responsible 
for the optimal execution on the market.  

‘Thanks to these tools developed in-house, the traders know at all times what 
operations can be done, and they can search for the best price within those 
parameters, while ALM checks that everything is done properly,’ Pujal said.

Programme countries aren’t the only potential beneficiaries of these 
instruments. Foreign exchange and interest rate derivatives have also 
widened the ESM’s borrowing flexibility and provided more avenues for the 
investment of the paid-in capital.

Derivatives made it possible for the rescue fund to sell its first dollar bond on 
24 October 2017. The 5-year bond raised $3 billion318, and the ESM executed 
cross-currency swaps to lock in a set foreign exchange rate over the life of 
the transaction. Using derivatives, the ESM can swap all funds back into 
euros as soon as they are raised, as well as convert euros into US dollars at a 
pre-set rate so that the ESM can make the coupon and principal payments on 
the US dollar bonds.

Likewise, foreign exchange derivatives are employed for the purchase of 
securities outside the euro area. Swaps made their debut in 2015 when the 
ESM began investing in Japanese yen and Danish krone bonds. For portfolio 
diversification purposes, the rescue fund can now conduct operations in nine 
currencies. By 2018, the ESM had invested more than €7 billion across eight 
non-euro currencies.

‘Everything has to be swapped back into euros to avoid currency risk,’ said 
ESM Portfolio Manager Semerdjiev. In the beginning, the firewall could buy 
non-euro-denominated securities only with maturities of two years and 
shorter. In the interim, the ESM worked up a more comprehensive derivatives 
strategy and is now capable of all necessary cross-currency trades. 

On the investment side, derivatives are included in a set of risk metrics 
employed to monitor the market risk of the ESM’s portfolios. In particular, 
they are fully integrated in the standard value-at-risk measures to ensure that 
the ESM’s overall investment risk remains within the limits defined by the 
ESM’s shareholders.

318  ESM (2017), ‘ESM debuts in dollar market, raises $3 billion’, Press release, 24 October 2017.  

https://www.esm.europa.eu/press-releases/esm-debuts-dollar-market-raises-3-billion 

Moving towards Grexit: 
at the cliff’s edge

36

In June 2015, Greece was very close to  
the edge. Grexit was very, very close, and  
I’m extremely happy that it was possible  
to prevent that.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer 

Greek voters, bitter over the wage and pension cuts required by the 

troika, sought change via Syriza, the party led by the charismatic 
newcomer Alexis Tsipras. He became prime minister on 
26 January 2015, with one month left in the second rescue programme 
and no prospect of an agreement on the final review in sight319.

Instead of plunging into negotiations with the creditors, however, 
Tsipras weighed his options. The Eurogroup realised that the newly 
installed government would need time to figure out a strategy. But 
Syriza was initially adamant that it wouldn’t ask for an extension to the 
existing rescue, since the whole premise of its campaign was to expel 
the troika.

319  Guardian (2015), ‘Alexis Tsipras sworn in as new Greek prime minister – as it happened’, 

26 January 2015. https://www.theguardian.com/world/live/2015/jan/26/greece-election-syriza-
victory-alexis-tsipras-coalition-talks-live-updates 

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25 January 
Syriza party wins parliamentary election in Greece, and Alexis Tsipras 
becomes prime minister the next day.

4 February 
ECB suspends eligibility of minimum credit rating requirements for 
Greek bonds used as collateral in Eurosystem monetary operations.

20 February 
Eurogroup agrees to Greek request to extend second programme. 
A week later, the EFSF Board of Directors approves four months of 
extra time.

8 April 
Prime Minister Tsipras goes to Moscow for talks with Russian 
President Vladimir Putin.

24 April 
Eurogroup’s Dijsselbloem says that there are ‘still wide differences’ 
between the creditors and Greece.

12 May 
To meet a €750 million debt repayment instalment to the IMF, Greece 
taps its IMF holding account.

4 June 
Greece informs IMF that it will delay a scheduled €300 million loan 
repayment.

22 June 
Emergency EU summit tentatively welcomes reform proposals but 
fails to reach agreement.

26 June 
Greece abandons talks with creditors.

27 June 
Eurogroup refuses to extend EFSF programme for Greece.

29 June 
Bank holidays and capital controls are introduced.

30 June 
EFSF financial assistance programme expires. Greece fails to make 
IMF loan repayment.

1 July 
Eurogroup reconfirms its refusal to extend EFSF progamme for Greece.

5 July 
In a referendum, voters reject creditors’ rescue conditions.

6 July 
Yanis Varoufakis resigns as finance minister and is replaced by 
Euclid Tsakalotos.

8 July 
Greece applies to the ESM for a new financial assistance programme.

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The new government was making a good-faith effort to reflect  
Greek voters’ frustration at the effects of the economic adjustment 
programmes, said Euclid Tsakalotos, one of Tsipras’s chief 
negotiators, who became finance minister in mid-2015. ‘I think  
that the Greek government in the first six months tried to change  
the agenda – they genuinely believed that we couldn’t just ignore  
a popular vote that said we needed change in direction and they  
tried to explain that to the Europeans,’ Tsakalotos said. ‘It was  
worth an attempt to change. It did raise many issues. Many of  
the issues we raised in the first six months are now being discussed 
quite seriously.’

The political shift spelled the end of the fragile cooperation with the 
international institutions that had helped the second programme 
make as much progress as it did. From the perspective of the euro area 
authorities, Greece in the first half of 2015 turned its back on its prior 
agreements and lost its way out of the economic quagmire.

‘The Greek authorities decided to no longer comply with the 
agreement with international institutions after they won the elections 
in early 2015. Therefore, the Greek support programme went 
completely off track,’ said Dijsselbloem, former Dutch finance minister, 
who was Eurogroup president and chairman of the ESM Board of 
Governors through the latter part of the crisis.

On 4 February, just over a week after Tsipras took office, the ECB 
cancelled its waiver of minimum credit-rating requirements for 
Greek bonds that had been used as collateral for the Eurosystem’s 
monetary operations320. In plain terms, given that Greece’s sovereign 
credit rating was below investment grade, Greek bonds would 
no longer be eligible for any of the central bank’s bond-buying 
programmes, nor could banks use them as collateral for ECB loans. 
The central bank said the decision – which took effect on 11 February 
– was a direct result of Greece’s inability to conclude its rescue 
programme review. 

This put Greek banks in a difficult spot. Without eligible collateral, 
they could no longer use the ECB’s normal system of bank lending. 
Instead, they would have to go to the Bank of Greece to request 
Eurosystem emergency liquidity assistance. In the past, emergency 

320  ECB (2015), ‘Eligibility of Greek bonds used as collateral in Eurosystem monetary policy 

operations’, Press release, 4 February 2015.  
https://www.ecb.europa.eu/press/pr/date/2015/html/pr150204.en.html

 
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liquidity had been a largely technical central banking operation with 
little or no public discussion, but now the Eurosystem’s decisions 
carried enormous weight and the markets reacted to the slightest 
fluctuations in the use of the funds. The vicious bank-sovereign circle 
was tightening around the Greek economy once again.

‘The developments we witnessed in the first half of 2015 were the 
results of deliberate political decisions, but the risk of crisis they 
created was also a stark reminder that there should be no complacency 
about the functioning of our monetary union,’ said Juncker, who was 
by this point the European Commission president. ‘Personally, I never 
believed that Greece could leave the euro, and I said so publicly.’

Personality conflicts compounded the negotiating dilemmas. 
As his government’s first finance minister, Tsipras picked Yanis 
Varoufakis, a UK-educated economist who had taught in the US and 
Australia. Varoufakis arrived at his inaugural Eurogroup meeting in 
February 2015 with a host of ideas for righting the Greek economy. 
Addressing fellow finance ministers for the first time, Varoufakis spoke 
out against budget cutting, backed an increase in the Greek minimum 
wage, was wary of privatisation – and asked for a bridge loan to tide 
Greece over the next few months. 

The Syriza government’s relations with creditors were often fraught. 
When it took office, the euro area had already given Greece a two-
month technical extension on the programme, and adding more time 
proved contentious. It was only after 10 further days of discussions 
that the Eurogroup granted a four-month extension of the second 
programme, rejecting Greece’s bid for six months321.

For a brief period, Varoufakis drew as much attention as Greece’s 
debt, bond yields, pension cuts, or asset sales. Critics accused him of 
squandering an opportunity to win concessions for the newly installed 
government. ‘He managed to have 18 enemies. That’s all he did,’ 
Hardouvelis, his predecessor as finance minister, was quoted as saying 
in the 3 August 2015 issue of the New Yorker322.

321  ‘Remarks by Jeroen Dijsselbloem at the press conference following the Eurogroup meeting of 

20 February 2015’, 20 February 2015.  
http://www.consilium.europa.eu/en/press/press-releases/2015/02/20/eurogroup-press-remarks/

322  New Yorker (2015), ‘The Greek warrior’, 3 August 2015.  

https://www.newyorker.com/magazine/2015/08/03/the-greek-warrior

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In response, Tsipras elevated negotiations over Greece’s fate to the 
highest level. It was unusual for heads of government to delve into the 
minutiae of the rescue negotiations, a task that had been the domain of 
the finance ministers and their subordinates. Tsipras’s brand of leader-
to-leader diplomacy won Greece few allies, given the huge gap between 
what Athens was seeking and what the euro area was prepared to grant. 

Euro area leaders yielded on a symbolic point, dropping the term 
‘troika’ and, with an interim stop at ‘quadriga’, redesignating the 
international authorities as ‘the institutions’. This was an effort to defuse 
the Greek public’s resistance to troika oversight. ‘The Greeks were 
obsessing over it. I thought, what’s in a name?’ said Wieser, former 
chairman of the Eurogroup Working Group. 

The name change also reflected the rescue management team’s 
expansion from the three original members to include the ESM. Once 
the third programme came into focus, the firewall took on a larger role 
in debt sustainability analysis and programme monitoring. By that 
point it also had built up substantial expertise on Greece – where the 
rescue fund had become the largest creditor – and in managing aid 
programmes generally.

The ESM’s mandate allowed it to focus on Greece’s finances and its 
risk of default, including how to define what that would look like 
and what sort of legal and financial consequences might result. The 
other institutions had taken a more general approach to monitoring 
macroeconomic data and Greece’s public finances. Giammarioli, who 
became the ESM’s Greece mission chief in January 2015, said the ESM’s 
viewpoint gave it additional credibility with euro area member states, 
since the firewall was keeping a close eye on how developments in 
Greece could in turn affect their finances. Increased monitoring began 
in the first half of 2015, as the second programme broke down, before 
evolving into a more formal role later in the year as the follow-on 
package took shape.

‘Around March to July we escalated the process, specifically for Greece,’ 
Giammarioli said. ‘We created an emergency situation room in case 
there was a default, with procedures on what legal acts would need to 
be signed, and so on. It was quite challenging. This was all to reassure 
the Members that we were prepared for any possible negative event.’ 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Also in early March, Greece submitted a new round of proposals 
to the Eurogroup, to a tepid response at best. As correspondence 
flew back and forth between Athens and the other capitals, financial 
markets were becoming more pessimistic. At the end of March, 
Fitch downgraded Greece to CCC from B, and a few weeks later 
Standard & Poor’s cut Greece to CCC+ from B, with Moody’s following 
suit soon afterwards323. During this period, Tsipras went to Moscow 
on 8 April 2015 for talks with Russian President Vladimir Putin324. The 
meeting didn’t yield much in the way of concrete developments, but it 
sent a signal that Tsipras was far from finished seeking alternatives to 
the euro area reform plan. 

Stournaras, who was appointed Bank of Greece governor in 
June 2014, said Varoufakis reacted to the growing tensions within the 
Eurogroup by invoking ‘Plan B’ scenarios rather than shifting into 
a more pragmatic gear. Talk of seeking money from Russia, parallel 
currencies, or even taking over the Greek central bank overshadowed 
negotiations with the euro area, eating into public confidence and 
further upsetting markets.

‘He thought that he could become a hero. He played save or destroy,’ 
Stournaras said. ‘But a finance minister must be careful and risk-
averse. He should not roll the dice as a way to determine the future  
of his country.’

Varoufakis thought Greece would hold a stronger negotiating hand 
if he could show how Grexit might be feasible. He later detailed this 
rationale in a book he wrote after the crisis325.

As April drew to a close, Dijsselbloem said there was still a wide gulf 
between Athens and its international creditors. Dijsselbloem felt that 
Syriza’s election campaign had set the stage for the unproductive talks. 
‘Undoubtedly the Greek government presented unrealistic promises 
in its election campaign, which created problems when they were in 
office,’ Dijsselbloem said.

Tsipras reshuffled his negotiating team in April, keeping Varoufakis 
as finance minister but replacing him with Deputy Foreign 

323  TradingEconomics (n.d.), ‘Greece – credit rating’. https://tradingeconomics.com/greece/rating. 
324  New York Times (2015), ‘Putin meets with Alexis Tsipras of Greece, raising eyebrows in Europe’, 
8 April 2015. https://www.nytimes.com/2015/04/09/world/europe/putin-russia-alexis-tsipras-
greece-financial-crisis.html 

325  Varoufakis, Y. (2017), Adults in the room, Penguin, London.

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Minister Tsakalotos as the chief go-between in day-to-day talks 
with the European institutions326. The move also brought in George 
Chouliarakis to serve on the Eurogroup Working Group of finance 
ministry deputies, replacing a Varoufakis ally. While the new team 
shared Tsipras’s politics, they practised a more low-key style that 
smoothed discussions at the technical level. For his part, Varoufakis 
continued to take an active role politically.

Progress remained elusive. With more than half the extension 
period gone, Greece was forced in May to tap into its IMF reserves 
holding account to meet a €750 million repayment instalment to 
the Washington-based lender, an unusual use of the funds that 
underscored the precariousness of Greek finances327. Greece’s relations 
with the IMF suffered. 

On 4 June, Greece told the IMF it would delay its next scheduled loan 
repayment of €300 million328. Meanwhile, talks with the euro area 
bogged down. Greece rejected creditors’ reform proposals and 
countered with another plan of its own. The IMF responded that there 
were ‘major differences’329 between the two sides. With an agreement 
nowhere in sight, technical talks in Brussels broke down. In mid-June, 
the Eurogroup urged Greece to make new proposals, saying ‘time is 
really running out’330. 

326  Guardian (2015), ‘Greek finance minister Yanis Varoufakis replaced as leader of debt talks’, 

27 April 2015. https://www.theguardian.com/world/2015/apr/27/greece-reshuffles-negotiating-
team-creditors-yanis-varoufakis;  
Reuters (2015), ‘Greece moves to sideline Varoufakis after reform talks fiasco’, 27 April 2015. 
https://www.reuters.com/article/us-eurozone-greece-varoufakis/greece-moves-to-sideline-
varoufakis-after-reform-talks-fiasco-idUSKBN0NI0VI20150427?feedType=RSS&feedName=wor
ldNews 

327  Reuters (2015), ‘Greek PM says time for action from lenders, IMF payment scrapes by’, 12 May 2015. 
https://uk.reuters.com/article/uk-eurozone-greece/greek-pm-says-time-for-action-from-lenders-
imf-payment-scrapes-by-idUKKBN0NX0QW20150512 

328  Guardian (2015), ‘Greece moves closer to Eurozone exit after delaying €300m repayment to IMF’, 

4 June 2015.  
https://www.theguardian.com/business/2015/jun/04/greece-delays-300m-payment-to-imf 
329  IMF (2015), ‘Transcript of a press briefing by Gerry Rice, director, communications department, 

International Monetary Fund’, 11 June 2015.  
https://www.imf.org/en/News/Articles/2015/09/28/04/54/tr061115

330  Press remarks by Eurogroup president following the Eurogroup meeting on 18 June 2015, 

18 June 2015. http://www.consilium.europa.eu/en/press/press-releases/2015/06/18/press-remarks-
eurogroup-president/ 

 
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In a bid to break the impasse, European Council President 
Donald Tusk – who had succeeded Van Rompuy in December 2014 
– launched a frenetic diplomatic initiative by calling euro area leaders 
to Brussels for an emergency summit on 22 June 2015. Greece pulled 
together another set of proposals in time for the summit, reaping 
a cautious welcome from the leaders. It was then up to Tsipras, the 
institutions, and Eurogroup finance ministers to nail down an accord 
before the second Greek programme ran out on 30 June.

It wasn’t to be. In a week of discussions among technical experts and 
finance ministers, punctuated by a regularly scheduled EU summit331, 
Greece mooted economic reforms and budget savings that didn’t 
go far enough for the creditors. Ideas were floated, but no plan for 
a new, comprehensive pact was formally presented. Late on Friday 
26 June, the Greek negotiators walked away from the table. Early in the 
morning of 27 June, Tsipras announced he would hold a referendum 
to let the Greek people decide whether or not to accept the creditors’ 
latest rescue conditions332.

That day, euro area finance ministers met, converting what had been 
scheduled as a final drafting session for the new programme into a 
discussion of an altogether different sort. There were four days left 
in Greece’s second rescue, even after the extension. Once it expired, 
Greece would lose not only its undisbursed funds, but also access to 
some of the other cash-boosting measures the euro area had granted, 
such as the sharing of central bank profits on Greek bonds held by the 
Eurosystem. Instead of a smooth path to a follow-on aid programme, it 
looked as if Greece might end up with nothing.

Greece dissented from that Saturday’s Eurogroup statement, 
reflecting the rupture between Athens and the rest of the currency 
union. ‘We stress that the expiry of the EFSF financial arrangement 
with Greece, without immediate prospects of a follow-up 
arrangement, will require measures by the Greek authorities, with  
the technical assistance of the institutions, to safeguard the stability 

331  Guardian (2015), ‘Greece bailout talks break down again’, 25 June 2015.  

https://www.theguardian.com/business/2015/jun/25/greece-bailout-crisis-last-minute-search-deal 

332  Eurogroup statement on Greece, Press release, 27 June 2015.  

http://www.consilium.europa.eu/en/press/press-releases/2015/06/27/eurogroup-statement-greece/ 

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of the Greek financial system’333, the statement by the other 
18 finance ministers said. They pledged to monitor conditions, stand 
ready to help Greece, and reconvene as needed. 

On Sunday, 28 June, Greece announced it would impose capital 
controls and a bank holiday when markets opened on Monday334. The 
next day, on Tuesday, the second rescue programme lapsed, taking 
with it the prospect of any further EFSF lending335. Greece missed an 
IMF payment336, the Eurogroup stood its ground, and Greek citizens 
faced an arduous week of no access to their banks and no prospect of 
international help. 

Private sector deposits and annual net deposit flows – Greece 
in € billions

320

280

240

200

160

120

80

40

0

End June 2015:
Greece imposes 
capital controls 
and EFSF 
programme expires 

2
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

9
0
0
2

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

Annual net deposit flows (right-hand scale)

Private sector deposits (left-hand scale)

50

40

30

20

10

0

-10

-20

-30

-40

-50

Speculation that Greece 
would abandon the euro led 
investors and depositors 
to move money elsewhere, 
forcing the Greek 
government to impose 
capital controls when the 
second programme lapsed 
in June 2015.

Note: All data is from the 
fourth quarter of each year

Source: ESM calculations 
based on Bank of Greece 
data

333  Euro area member states except Greece (2015), Ministerial statement on 27 June 2015, 

Press release, 27 June 2015.  
http://www.consilium.europa.eu/fr/press/press-releases/2015/06/27/ministerial-statement/ 

334  Guardian (2015), ‘Greek crisis: Banks shut for a week as capital controls imposed – as it happened’, 

25 June 2015. https://www.theguardian.com/business/live/2015/jun/28/greek-crisis-ecb-
emergency-liquidity-referendum-bailout-live 

335  ESM (2015), ‘EFSF programme for Greece expires today’, Press release, 30 June 2015.  
https://www.esm.europa.eu/press-releases/efsf-programme-greece-expires-today 

336  IMF (2015), ‘Statement by the IMF on Greece’, Press release, 30 June 2015.  

https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr15310 

 
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‘Capital controls were a crisis measure,’ ESM Managing Director 
Regling said. ‘They should not happen in a monetary union, although 
it was the second time – they also happened in Cyprus in 2013. And 
still it was a shock. It would have been better not to get into a situation 
where that becomes unavoidable. But given where Greece was, there 
was no choice.’

The referendum went ahead on 5 July337. Public anger was unequivocal: 
Greeks voted by a margin of 61% to 39%338 to denounce the 
international creditors and protest against the hardships that had 
befallen them since the extent of the government’s budgetary woes 
surfaced in 2009.

Immediately after the referendum, however, Tsipras relaunched his 
outreach to the creditors. He began by asking Varoufakis to resign 
as finance minister339, replacing him with the more diplomatic 
Tsakalotos340. ‘In the six months of the Varoufakis tenure, about 
€45 billion deposits left. That says everything,’ Stournaras said. ‘This 
led to capital controls with the declaration of the referendum.’

On 8 July, Tsipras sought a new ESM programme. Having given voice 
to public grievances over the distressed state of the economy and the 
privations resulting from five years of spending cuts, the Greek prime 
minister seized the opportunity for a fresh start. A day after requesting 
aid, Greece submitted a new set of reform plans that would anchor a 
third rescue programme. It was time to turn the page.

Greek programme history, which began in Chapters 3, 19, and 22,
 continues in Chapters 37 and 38.

337  Wall Street Journal (2015), ‘Greek referendum hangs on voters’ understanding of question’, 
30 June 2015. https://www.wsj.com/articles/greek-voters-to-decide-on-convoluted-bailout-
question-july-5-1435691134 

338  Guardian (2015), ‘Greek referendum: No campaign storms to victory with 61.31% of the vote 
– as it happened’, 6 July 2015. https://www.theguardian.com/business/live/2015/jul/05/greeces-
eurozone-future-in-the-balance-as-referendum-gets-under-way--eu-euro-bailout-live  

339  Reuters (2015), ‘Greek finance minister Varoufakis resigns – statement’, 6 July 2015.  

https://www.reuters.com/article/eurozone-greece-varoufakis/greek-finance-minister-varoufakis-
resigns-statement-idUSA8N0ZC02A20150706;  
Independent (2015), ‘Yanis Varoufakis resigns: His statement in full’, 6 July 2015.  
https://www.independent.co.uk/news/world/europe/yanis-varoufakis-resigns-live-greek-crisis-his-
statement-in-full-10368320.html

340  New York Times (2015), ‘Rift emerges as Europe gears up for new talks on Greece bailout’, 6 July 2015.  
https://www.nytimes.com/2015/07/07/business/international/yanis-varoufakis-abruptly-resigns-
as-greek-finance-minister.html 

Turning the corner: 
Greece’s  
third programme

37

Grexit would have been a disaster for Greece,  

a disaster. 

Yannis Stournaras 
Governor of the Bank of Greece (since June 2014) 
and Greek Finance Minister (July 2012–June 2014)

Greek banks were shut and in need of cash when the 

government at last requested a third programme. On 
10 July 2015, a Friday, the European Commission and the ECB 

responded favourably to the Greek request for an ESM loan, warning 
that ‘an uncontrolled collapse of the Greek banking system and of 
Greece as a sovereign borrower would create significant doubts on the 
integrity of the euro area as a whole’341. 

But the flipside was that some of Greece’s fellow euro countries were 
at their limit. On that same day, a proposal was circulating out of 
Germany that suggested Greece should leave the euro if it wouldn’t 
agree to more stringent reforms. Commission President Juncker 
had said earlier in the week that the EU had a Grexit plan ‘prepared 

341  European Commission (2015), ‘Greece – request for stability support in the form of an ESM loan: 
Assessment’, Online report, 10 July 2015. https://ec.europa.eu/info/sites/info/files/2015-07-10_
greece_art_13_eligibility_assessment_esm_en1_0.pdf

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12 July 
At euro area summit, leaders agree to move towards a third rescue 
programme, provided Greece meets a series of tough conditions – a 
deal that effectively prevents Grexit.

17 July 
EU approves €7 billion European Financial Stabilisation Mechanism 
bridge loan to Greece, facilitated by ESM private placement.

20 July 
Banks reopen after a three-week shutdown.

14 August 
Eurogroup agrees the third financial assistance programme of up to 
€86 billion. 

18 August 
Fitch upgrades Greek debt to CCC from CC, the first in a series of 
upgrades.

20 August 
First ESM disbursement (€13 billion).

20 September 
Election confirms Syriza as the largest party; Alexis Tsipras remains 
prime minister.

1 December 
ESM Board of Directors approves €2.7 billion disbursement to 
recapitalise Piraeus Bank, and a similar sum to National Bank of 
Greece a week later.

9 May 
Eurogroup welcomes Greek reforms, and agrees debt relief 
measures for Greece in the short, medium, and long term.

23 January 
ESM and EFSF approve short-term debt relief measures for Greece, 
which they implement throughout the year.

25 July 
Greece returns to international capital markets for the first time 
since 2014 with a 5-year bond sale, raising €3 billion.

22 June 
Eurogroup agrees to move ahead on medium-term debt relief 
measures for Greece, including maturity extensions and further 
deferral of EFSF interest.

20 August 
Greece successfully exits the ESM programme.

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in detail’342, but he had continued to advocate Greece’s place in the 
monetary union. The Friday proposal, shown to a select group of 
high-ranking officials, made it clear that leaving the euro, at least 
temporarily, was now on the table343.

Over the course of the weekend, negotiations would lead to an 
overnight debate to decide Greece’s fate – and if euro membership 
was as irrevocable as promised. In the end, Greece and the common 
currency would remain joined, but the path would not be easy.

On Sunday 12 July, European leaders gathered for another summit 
that would prove to be the deciding moment for Greece’s membership 
in the euro. The talks stretched on for hours. Tsipras met at least four 
times with the EU’s Tusk, France’s Hollande and Germany’s Merkel. 
Around 6.00, Merkel, Hollande, and Tsipras were ready to throw in 
the towel, but Tusk refused to let them step out of the room. ‘Sorry, 
but there is no way you are leaving this room,’ the former Polish prime 
minister said, according to a report in the Financial Times344. 

The talks resumed. After intense negotiations, the member states decided 
on Monday morning to move towards a third rescue programme, 
provided that Greece met a host of tough conditions. To allow time 
for these criteria to be met, the EU also prepared for a bridge loan that 
would tide Greece over until it could get its full programme up and 
running. The combination of the bridge loan and the next rescue would 
prevent Grexit, once the measures could be put in place.

Euro area leaders set out a list of ‘minimum requirements’ for 
proceeding with the talks.345 Just to start the process, Greece was 
granted 10 days – until 22 July346 – to pass legislation to broaden the 
tax base, streamline value added tax procedures, reform the pension 
system, ensure the independence of the statistical agency, implement 
EU budget oversight rules, update its Code of Civil Procedure, and 

342  European Commission (2015), ‘Result of the euro summit on Greece’, 8 July 2015.  

http://europa.eu/rapid/press-release_AC-16-1834_en.htm;  
Euractiv (2015), ‘Juncker: We have a Grexit scenario prepared in detail’, Video, 8 July 2015.  
https://www.euractiv.com/section/economy-jobs/video/juncker-we-have-a-grexit-scenario-
prepared-in-detail/ 

343  Guardian (2015), ‘Three days that saved the euro’, 22 October 2015.  

https://www.theguardian.com/world/2015/oct/22/three-days-to-save-the-euro-greece 
344  Financial Times (2015), ‘Greece talks: “Sorry, but there is no way you are leaving this room”’, 

13 July 2015. https://www.ft.com/content/f908e534-2942-11e5-8db8-c033edba8a6e 

345  Euro summit statement, SN 4070/15, 12 July 2015.  

http://www.consilium.europa.eu/media/20353/20150712-eurosummit-statement-greece.pdf 

346  Ibid. 

 
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enshrine the EU’s directive for handling bank failures in national law347. 
Greece would also need to commit to seeking further IMF aid in 2016, 
when its existing programme was due to expire.

The impositions were necessary because of ‘the need to rebuild trust 
with Greece,’ as the 12 July summit statement348 put it. Further aid 
was contingent on Greece grasping that the reforms were in its own 
interest, as then-German Finance Minister Schäuble explained. ‘If 
there is no ownership on the part of the government, it cannot work,’ 
he said, noting that, with Greece, there was ‘always the risk that 
decisions may not be implemented with sufficient determination or 
that they get watered down. A certain degree of basic support among 
the population is necessary as well.’

In the subsequent negotiations with the institutions, Greece was 
required to pursue ambitious further pension reforms, strengthen 
its banking sector, privatise its electricity transmission network, 
deregulate ‘closed’ professions such as ferry transport, modernise its 
labour bargaining system, and set up a fund to generate €50 billion 
from state-owned assets349. 

During those critical July days, Greece faced a serious cash crunch. 
Being late sending money to the IMF would prompt a scolding, while 
defaulting on an upcoming payment to the ECB would automatically 
shut off Greece’s access to funds. But, with ESM funds not yet available, 
how could Greece find the money it needed in the interim?

The solution came from the Commission’s European Financial 
Stabilisation Mechanism (EFSM), which had been used early in the 
crisis to help Ireland and Portugal. It had since been idle, but remained 
a suitable vehicle to provide a bridge loan to tide Greece over. 

347  Guardian (2015), ‘Greek parliament approves next phase in bailout reforms’, 23 July 2015. https://
www.theguardian.com/world/2015/jul/22/greece-ecb-emergency-assistance-ceiling-raised-
bailout-vote 

348  Euro summit statement (2015), SN 4070/15, 12 July 2015. 

http://www.consilium.europa.eu/media/20353/20150712-eurosummit-statement-greece.pdf

349  Ibid. 

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Unlike the ESM, run by euro nations with a stake in the currency’s 
stability, the EFSM is managed by the entire EU and underwritten by 
the EU budget. This meant securing the agreement of nine additional 
EU Member States, which were not part of the euro area. The UK 
held out350; after voluntarily participating in some of the first cobbled-
together responses to the euro crisis, its politicians wanted nothing to 
do with Greece’s latest travails. 

As a workaround, the EU’s civil service drafted plans to protect the 
non-euro countries with collateral on the off-chance that disaster 
struck while the loan was in place. To shield euro area taxpayers from 
potentially footing the collateral bill, the loan was based on central 
bank profits from holdings of Greek bonds, which had been promised 
to Greece and could be rerouted to cover an unexpected loss. This 
broke an impasse between the UK and the euro area.

As it happens, the ESM has been a central part of managing these 
profits since the Eurogroup agreed to set them aside for Greece. In 
2013, Jasper Aerts, an ESM legal officer who would later become 
deputy general counsel, helped design the system for the ESM to hold 
and monitor these funds. The firewall has worked closely on the use 
of these funds with euro area member states and the ECB over the 
years, as well as on this detail of the bridge loan. ‘Both at the back and 
in the front, the ESM was involved in this innovative piece of financial 
engineering,’ Aerts said.

Once the EU Member States approved the bridge loan to Greece, the 
EFSM’s next task was to line up financing on capital markets. The 
Commission’s fund was designed to borrow from the markets, but it 
did not have a large liquidity pool on-hand and was not a regular large 
issuer of bonds. How would it raise €7 billion virtually overnight? The 
answer came from the ESM putting together a massive short-term 
private placement.

‘We could help in such a tight situation in a way that one might not 
have expected,’ said ESM Managing Director Regling. ‘We could help 
and were willing to do that within our standard framework.’

350  Financial Times (2015), ‘UK angered by moves to help fund Greek bailout’, 13 July 2015.  

https://www.ft.com/content/0c789340-296a-11e5-acfb-cbd2e1c81cca

 
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Under ESM guidelines, the firewall is required to invest in high-
quality, short-term securities to preserve and protect its permanent 
capital. Since the EFSM enjoyed the exemplary credit reputation of the 
entire EU, which had ratings equivalent to AAA from Moody’s and 
Fitch, its debt was eligible for ESM investments under the firewall’s 
strict investment guidelines. This allowed the ESM to offer the funds 
quickly, sparing the EFSM a last-minute scramble for financing from 
the market. And it allowed Europe to focus on the key task at hand, 
instead of worrying where the short-term financing would come from. 

For more on the bridge loan, 
see ‘Focus — An unusual money market transaction’ 
later in this chapter.

On 16 July, the Eurogroup endorsed the third rescue programme in 
principle351. A day later, the 28-strong EU approved the bridge loan, 
with a term of up to three months352. Greece then used the money to 
pay the ECB on time and clear its arrears with the IMF.

The ESM’s role in the transaction didn’t become public until 
September, when it was reported in the media353. By that time Greece 
had repaid the money, and the firewall’s unusual step of showing up on 
both sides of the balance sheet no longer made the waves it would have 
in the heat of the moment. It was one of the ESM’s most important 
contributions to the funding chain, and one of its most unsung. 

Regling said there was ‘zero doubt’ that the ESM was in a position to 
extend the financing that would, in turn, allow the three-week bridge 
loan to go forward. 

‘It was certainly something exceptional – we don’t usually invest 
€7 billion in a single week,’ he said. ‘We used the scope that we  
had because it was in everyone’s interest. It was in our interest, as 
Greece’s largest creditor, that the country get out of this status of a 
“defaulting” country.’ 

351  Eurogroup statement on Greece, Press release, 16 July 2015.  

http://www.consilium.europa.eu/en/press/press-releases/2015/07/16/eurogroup-statement-greece/ 

352  EFSM: Council approves €7bn bridge loan to Greece, Press release, 17 July 2015.  

https://www.consilium.europa.eu/en/press/press-releases/2015/07/17/efsm-bridge-loan-greece/ 
353  Bloomberg (2015), ‘EU squeezed $7.8 billion Greek bridge loan via ESM loophole’, 8 September 2015. 
https://www.bloomberg.com/news/articles/2015-09-08/eu-squeezed-7-8-billion-greece-bridge-
loan-through-esm-loophole

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  3 2 7

Third Greek programme (2015–2018)

Initial programme amount: €86 billion

Total amount disbursed: €61.9 billion 

Lender: ESM 

Final weighted average maturity: 32.35 years

Key legislated reforms: value added tax, income tax, pension system, 
insolvency law, out-of-court debt workout, sales and servicing of loans 
(NPLs), public revenue collection, product markets, management of state 
assets, public administration, social protection 

After a three-week shutdown, Greek banks reopened on 20 July354. 
The capital controls remained in place, but getting the banks open 
again was a crucial step towards restoring Greek financial stability. 

Greece’s third euro area financial assistance programme was finally 
approved on 14 August 2015355. It envisaged a financing envelope of 
up to €86 billion, including up to €25 billion to recapitalise the banks 
and a cushion for unexpected needs. In contrast to past programmes, 
in which the ESM had played a supporting role, the firewall became an 
active participant in the negotiations.

‘It was a logical step for the ESM to become closely involved in the 
negotiations concerning financial support,’ former Eurogroup chief 
Dijsselbloem said. ‘The knowledge and expertise on beneficiary 
countries and on financial markets, as well as the specifics of the 
ESM toolkit are valuable in discussions on the implementation of 
support programmes.’ 

For its part, the IMF stepped back. Voicing concerns about Greece’s 
long-term debt outlook, the IMF declined to contribute financially to 

354  UK, Government website (2015), ‘Greece updates: advice for UK citizens and businesses’, 

29 June 2015.  
https://www.gov.uk/government/news/greece-updates-advice-for-uk-citizens-and-businesses 

355  Eurogroup statement on the ESM programme for Greece, Press release, 14 August 2015.  

http://www.consilium.europa.eu/en/press/press-releases/2015/08/14/eurogroup-statement/ 

 
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the third programme, although it would later, in 2017, agree to a stand-
by arrangement to be in place through the end of the ESM package356.

On 18 August 2015, Greece began to reap market benefits, earning a 
Fitch upgrade to CCC from CC. On 20 August357, the ESM approved 
the first programme tranche, a €26 billion lump sum that included 
€10 billion for the banks and money to pay back the bridge loan358. 
Securing the payouts from this tranche would be another tightly 
managed process, contingent on Greece carrying out reform pledges 
over time. Greece got €13 billion in August to meet its immediate cash 
needs and the bank money held in reserve to be made available upon 
request, subject to approval by the ESM Board of Directors.

10-year government bond yield — Greece 
in %, monthly average

30

25

20

15

10

Greece’s ESM programme 
and debt relief agreed 
by the Eurogroup put the 
economy back on track, 
pushing interest rates down 
to pre-crisis levels.

5

0

Source: European  
Central Bank

August 2015: 
The third financial 
assistance 
programme is 
agreed

June 2018: 
Medium-term 
debt relief 
measures 
endorsed 
August 2018: 
Greece exits ESM 
programme

January 2017: Short-term debt relief measures 
approved by ESM and EFSF

8
0
0
2
y
r
a
u
n
a
J

9
0
0
2
y
r
a
u
n
a
J

0
1
0
2
y
r
a
u
n
a
J

1
1
0
2
y
r
a
u
n
a
J

2
1
0
2
y
r
a
u
n
a
J

3
1
0
2
y
r
a
u
n
a
J

4
1
0
2
y
r
a
u
n
a
J

5
1
0
2
y
r
a
u
n
a
J

6
1
0
2
y
r
a
u
n
a
J

7
1
0
2
y
r
a
u
n
a
J

8
1
0
2
y
r
a
u
n
a
J

9
1
0
2
y
r
a
u
n
a
J

356  IMF (2017), ‘Greece: Request for stand-by arrangement – press release; staff report; and statement 

by the executive director for Greece’, 20 July 2017.  
https://www.imf.org/en/Publications/CR/Issues/2017/07/20/Greece-Request-for-Stand-By-
Arrangement-Press-Release-Staff-Report-and-Statement-by-the-45110

357  Reuters (2015), ‘UPDATE 1-Fitch upgrades Greece to ‘CCC’ after new bailout agreed’, 18 August 2015.  

https://www.reuters.com/article/eurozone-greece-ratings-idUSL3N10T52X20150818 

358  ESM (2015), ‘ESM Board of Directors approves first loan tranche of €26 bn for Greece’, Press 
release, 20 August 2015. https://www.esm.europa.eu/press-releases/esm-board-directors-
approves-first-loan-tranche-€26-bn-greece;  
ESM (2015), ‘ESM Board of Governors approves ESM programme for Greece’, Press release, 
19 August 2015. https://www.esm.europa.eu/press-releases/esm-board-governors-approves-
esm-programme-greece 

 
 
 
 
 
 
 
 
 
 
 
 
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  3 2 9

From the beginning, the euro area didn’t expect Greece to need all 
€86 billion in aid. For one thing, the currency union was counting on 
Greece eventually striking a new deal with the IMF. For another, the 
€25 billion envelope for the banks was an upper-end estimate. Experts 
including the ESM were convinced it would be a lot less, but Europe 
was determined to stay ahead of the markets. 

‘We established this envelope of €25 billion, but without expecting that 
there would be anything like that amount required,’ said Hesketh, of 
the ESM’s banking department. ‘The worst thing to do is to come back 
and ask for more money.’

The ECB’s stress tests turned up a total shortfall of €14.4 billion in 
October under the adverse scenario but, in the end, Greek banks didn’t 
use up their initial €10 billion tranche. All of the four systemic banks 
were able to raise private capital, as two covered their capital needs 
entirely and €5.4 billion of ESM funds covered the residual needs of 
the other two359.

With the banks back in business and in better health, Greece began to 
find some stability. In September, parliamentary elections confirmed 
Syriza as the leading party, providing much-needed political continuity. 

Greece implemented sufficient reforms to obtain a €2 billion 
disbursement from the remaining general-purpose funds in its 
approved tranche in November, and it also moved ahead with the bank 
recapitalisation360. Of the two banks that required ESM assistance, 
Piraeus Bank received €2.7 billion on 1 December361 and National 
Bank of Greece received a very similar sum a week later362.

It was important for the Greek bank recapitalisation to take place 
before new European bank rescue rules went fully into force at the start 
of 2016. The new rules, known as the bank recovery and resolution 
directive, specify the circumstances in which public funds can be used 
to assist banks in distress. A core principle of the directive is that public 

359  ECB (2015), ‘ECB finds total capital shortfall of €14.4 billion for four significant Greek banks’, Press 

release, 31 October 2015.  
https://www.bankingsupervision.europa.eu/press/pr/date/2015/html/sr151031.en.html;  
ESM (n.d.), ‘Greece – financial assistance’. https://www.esm.europa.eu/assistance/greece 

360  ESM (2015), ‘ESM Board of Directors approves €2 billion disbursement to Greece’, Press release, 
23 November 2015. https://www.esm.europa.eu/press-releases/esm-board-directors-approves-
%E2%82%AC2-billion-disbursement-greece 

361  ESM (2015), ‘ESM Board of Directors approves €2.72 billion disbursement to recapitalise Pireaus 
Bank’, Press release, 1 December 2015. https://www.esm.europa.eu/press-releases/esm-board-
directors-approves-€272-billion-disbursement-recapitalise-piraeus-bank

362  ESM (2015), ‘ESM Board of Directors approves €2.71 billion disbursement to recapitalise National 
Bank of Greece’, Press release, 8 December 2015, https://www.esm.europa.eu/press-releases/esm-
board-directors-approves-€271-billion-disbursement-recapitalise-national-bank

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

funds cannot be used before a minimum of 8% of the bank’s liabilities 
are bailed in to cover capital shortfalls.

The Greek banks had very few liabilities outstanding following the 
private sector involvement of 2012, meaning they would have had 
to bail-in uncovered deposits of more than €100,000 to achieve the 
minimum bail-in requirement. As these deposits were mainly held 
by small businesses rather than rich individuals, there was a strong 
concern that in this case bail-in could be financially destabilising for 
the economy and counter productive.

The flexibility of the older framework meant that Greek banks had an 
extra safeguard when they went to the markets to raise capital. Had the 
recapitalisation effort failed, the banks might have been able to work 
with regulators more flexibly than under the rigid structure that would 
be required later on. 

Greece obtained another €1 billion of the first tranche in late 
December 2015363. From there, Greece tackled reforms step by step, 
winning approval in May 2016 for a €10.3 billion second tranche and 
in June 2017 for a third tranche of €8.5 billion364. Greece also regained 
favour with the IMF, thanks to its reforms and Eurogroup pledges of 
future debt relief. The IMF approved in principle a €1.6 billion stand-
by arrangement365, although it ran until 31 August 2018 without Greece 
drawing on it because of ongoing IMF concern over debt sustainability.

When Greece unlocked a disbursement in March 2018, it was hailed 
as a sign that the programme would conclude on a high note. Valdis 
Dombrovskis, the European Commission’s vice president for the euro 
and social dialogue, said the step strengthened confidence in the Greek 
economy. ‘Moving closer to the end of programme, Greece’s interest is 
to show that it has reached the point of no return’,366 he said.

363  ESM (n.d.), ‘Greece – financial assistance’. https://www.esm.europa.eu/assistance/greece;  

Germany, Federal Government (n.d.), ‘Go-ahead for the second tranche of loans’.  
https://www.bundesregierung.de/Content/EN/Artikel/2016/05_en/2016-05-24-eurogruppe-
einigung-griechenland-zweite-tranche-kredite_en.html 

364  European Commission (2016), ‘Compliance report: The third economic adjustment programme 

for Greece – first review’, 9 June 2016.  
https://ec.europa.eu/info/sites/info/files/cr_full_to_ewg_en1.pdf;  
ESM (2017), ‘ESM Board of Directors approves €8.5 billion loan tranche to Greece’, Press 
release, 7 July 2017. https://www.esm.europa.eu/press-releases/esm-board-directors-approves-
%E2%82%AC85-billion-loan-tranche-greece

365  IMF (2017), ‘IMF executive board approves in principle €1.6 billion stand-by arrangement for 

Greece’, Press release, 20 July 2017. https://www.imf.org/en/News/Articles/2017/07/20/pr17294-
greece-imf-executive-board-approves-in-principle-stand-by-arrangement 

366  Dombrovskis, V. (2018), Tweet, 27 March 2018. https://twitter.com/vdombrovskis/

status/978604388766937089?s=12

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As the programme wound down, Greece twice tapped the bond 
market, burnishing its credibility with investors. On 25 July 2017, it 
raised funds on the market for the first time in three years, selling 
€3 billion in 5-year bonds367. Greece borrowed another €3 billion with 
the sale of 7-year bonds on 8 February 2018.

‘Greece’s approach is what we’ve seen in the other countries that went 
through a programme – they did not wait until the last day of the 
programme to return to the market,’ Regling said. ‘After so many years 
of market absence, it’s important to go back slowly’368.

In parallel, the Greek government gradually loosened the capital 
controls it had imposed in June 2015 to prevent money from draining 
out of the country. 

Greece’s cumulative efforts over eight years – topped off by 450 policy 
steps during the ESM programme alone, as tallied by the Portuguese 
finance minister, Mário Centeno, who took over as head of the 
Eurogroup in January 2018 – led to a 22 June 2018 Eurogroup 
declaration that the country would soon be on its own again.

At a conclusive meeting in Luxembourg, euro area finance ministers 
welcomed Greece’s completion of 88 final policy actions, accepted 
Greece’s commitment to further fiscal and structural reforms, 
authorised a final ESM disbursement, and came through with 
previously promised medium-term debt relief for Greece.

The wrapping up of the programme was the occasion for relief and 
reflection, mingled with self-criticism. ‘We have managed to deliver a 
soft landing of this long and difficult adjustment,’ Centeno told a press 
conference369. ‘There will be no follow-up programme in Greece.’

In a later interview with Spiegel Online, Regling looked back at the 
crisis management learning curve. ‘It would be arrogant to say we did 
everything right in Greece,’ he said. ‘There was no script for this crisis, the 
worst since the Great Depression’370. He said that a decision to conduct 

367  Greece, Prime Minister’s Office (2017), ‘Issuance of a Hellenic Republic government bond’, Press 

release, 24 July 2017. https://primeminister.gr/en/2017/07/24/18369 

368  For a fuller assessment of how four programme countries approached the restoration of 

market access, see Strauch, R., Rojas, J., O’Connor, F., Casalinho, C., de Ramón-Lapa Clausen, P., 
Kalozois, P. (2016), Accessing sovereign markets: The recent experiences of Ireland, Portugal, Spain, 
and Cyprus, ESM, Discussion Paper 2, 20 June 2016.  
https://www.esm.europa.eu/sites/default/files/esmdp2final.pdf 
369  ‘Eurogroup press conference of 22 June 2018’, Video, 22 June 2018.  

https://video.consilium.europa.eu/en/webcast/a71523e7-b839-4931-9f5b-ae7cf93ad00a
370  Spiegel Online (2018), ‘Klaus Regling in interview with Spiegel Online’, 14 August 2018, ESM 

English translation, available at:  
https://www.esm.europa.eu/interviews/klaus-regling-interview-spiegel-online 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

the bond writedowns earlier, instead of waiting until 2012, could have 
subdued the crisis more quickly. Regling also expressed appreciation for 
the Greeks’ self-sacrifice in order to stay in the euro area, saying: ‘I wish 
that this adjustment was more appreciated in Germany.’

On 6 August 2018, the ESM made its fifth and final disbursement to 
Greece, a sum of €15 billion to be used for debt service and the build-
up of the government’s cash reserve371. 

When the programme formally ended on 20 August 2018, Greece 
was projected to have €24 billion in cash, enough to cover around 
22 months of the government’s financing needs – and giving it more 
time to cultivate the confidence of market investors.

During the three-year programme, Greece borrowed €61.9 billion 
from the ESM, well below the maximum €86 billion that had 
been authorised by the ESM Board of Governors. Combined with 
earlier support of €52.9 billion from the Greek Loan Facility and 
€141.8 billion from the EFSF, plus €32.1 billion from the IMF in 
parallel with those two programmes, Greece obtained emergency loans 
worth about €289 billion over eight years, a sum without parallel in 
modern financial history. 

Greece has made significant progress, said Camilleri, Malta’s 
representative in the working group of finance ministry deputies, 
hailing the reforms undertaken in recent years. At the same time, he 
said, the Greek government and the institutions still need to tackle 
many issues and to address the social dimension of the adjustment, 
showing that the situation remains grey instead of black or white. 
‘That is where the worth of the institutions and matching governments 
really have to withstand a very real and significant test – when you’re 
faced with significantly more difficult issues and challenges,’ Camilleri 
said. ‘Let’s not forget the people, because ultimately every adjustment 
programme has a human face.’

A host of statistics document Greece’s progress from the early depths of 
the crisis. An economy that shrank 5.5% in 2010 grew 1.4% in 2017; a 
budget deficit of 15.1% in 2009 turned into a surplus of 0.8% in 2017; the 
current account deficit narrowed from 12.5% in 2009 to 0.9% in 2017.

Employment, always a lagging indicator, gradually turned the corner, 
although the improvement was partly due to emigration and declining 
workforce participation. Rising joblessness was, in part, a direct but 

371  ESM (2018), ‘ESM disburses final loan tranche of €15 billion to Greece’, Press release, 6 August 2018. 
https://www.esm.europa.eu/press-releases/esm-disburses-final-loan-tranche-€15-billion-greece

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  3 3 3

unavoidable result of the reforms that were essential to modernising 
Greece’s economy. In order to clean up its finances, the government 
cut the number of civil servants by 18% between 2009 and 2015372. The 
jobless rate peaked at an average of 27.5% in 2013 and in the first half 
of 2018 had fallen to 19.5%. 

Unemployment rate and employment growth – Greece 
in %

30

25

20

15

10

5

0

4
0
0
2

5
0
0
2

6
0
0
2

7
0
0
2

8
0
0
2

9
0
0
2

0
1
0
2

1
1
0
2

2
1
0
2

3
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

Employment growth (right-hand scale)

Unemployment rate (left-hand scale)

4

2

0

-2

-4

-6

-8

8
1
0
2
-
2
Q

Greece’s unemployment 
rate peaked in 2013, and 
then declined steadily as 
economic reforms bore 
fruit. 

Source: Eurostat

In a speech to the European Parliament on 11 September 2018, Prime 
Minister Tsipras summed up Greece’s transformation. Greece ‘is a 
different country,’ he said. ‘Today we stand on our feet once more 
and look towards the future with optimism. We escaped the spiral of 
recession and brought the economy back on track towards growth’373.

For the future, Greece has pledged to continue its policy of budgetary 
rigour, committing to a primary surplus of 3.5% of GDP until 2022 
and around 2.2% from 2023374. Efforts must continue to strengthen 

372  Eurofound (2016), ‘Greece: Reducing the number of public servants – latest developments’.  

https://www.eurofound.europa.eu/el/publications/article/2016/greece-reducing-the-number-of-
public-servants-latest-developments 

373  Greece, Prime Minister’s Office (2018), ‘We need a new social contract for social cohesion and the 
prosperity of our peoples’, Speech by Prime Minister Alexis Tsipras, in the plenary session of the 
European Parliament on the future of Europe, 11 September 2018.  
https://primeminister.gr/en/2018/09/11/20532

374  ESM (2018), ‘Explainer on ESM and EFSF financial assistance for Greece’, 20 August 2018.  

https://www.esm.europa.eu/assistance/greece/explainer-esm-and-efsf-financial-assistance-greece 

 
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bank balance sheets, render the public administration more efficient, 
and foster a business-friendly environment. Greece will remain under 
the full scrutiny of the ESM until all loans have been repaid.

‘Greece will not be on its own,’ Regling said in a video message on 
the day Greece regained its financial independence375. ‘The ESM will 
be a long-term partner of Greece. We have an interest that the Greek 
economy does well in the future.’

Focus  
An unusual money market transaction

When the EU’s emergency funding vehicle, the EFSM, was authorised to 
provide a bridge loan to Greece, it had a top credit rating but virtually no 
time to raise the money on the financial markets. ‘We arranged the private 
placement with a very small team between the ESM and the Commission. 
In the end, the spirit and cooperation were exceptional,’ said ESM General 
Counsel Eatough. 

ESM Head of Investment and Treasury Lévy remembers intense 
brainstorming leading up to the operation: ‘This question arose of whether 
we could provide €7 billion at very short notice.’ The investment team worked 
out the mechanics of the transaction, while the political negotiations on the 
bridge financing details proceeded. The EU was already on the authorised 
issuer list for ESM investments, and the ESM was a regular buyer of EU 
bonds in the market. However, investing in a private placement entailed 
additional logistical complications, from crafting and signing a bilateral legal 
agreement with the EU to making changes to the information technology 
system to process the transaction. 

From a technical perspective, the ESM needed to decide which of its internal 
portfolios would be invested in the transaction and whether or not to split 
it into in a series of tranches. Regling agreed it would be simpler and more 
effective to do it all in one operation. 

375  ESM (2018), ‘Statement by Klaus Regling on the conclusion of the ESM programme for Greece’, 

Video, 19 August 2018. https://www.youtube.com/watch?v=5jtKFmC-Xms 

 
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At one point, ESM experts wondered if the transaction was the right thing 
to do, but the alternative – leaving the EFSM looking elsewhere for funding 
as Greece teetered – was considered a greater risk. The ESM’s investment 
management committee set extra conditions and conducted a thorough 
review, making sure the investment decisions could be validated by all senior 
ESM staff members.

‘It was in July. There was a lot of stress around this operation,’ Lévy said. 
‘Personally, I was concerned about the technical execution, because this was 
the biggest one-off, single-sum investment that we had ever done. So, to 
ensure that all aspects of the decision were taken into account, we had a full 
review process.’

The money market transaction, as it was eventually called, was finally underway.

On the technical side, talks between the ESM and the European Commission 
went smoothly. Market conditions posed a challenge, however, because 
short-term interest rates for an issuer like the European Commission were 
close to -0.20%, while the ESM was not permitted, at the time, to invest at an 
interest rate of less than 0%. The Commission accepted this as a condition 
because, even though its implied funding rate was negative, there were 
no readily available alternatives. The ESM also offered an early repayment 
option – so, while the transaction had a maturity of three months, it could 
be paid back as soon as the bridge financing was no longer needed, which 
turned out to be a matter of weeks.

‘We lent the money to the Commission, not Greece, and on the basis that it 
matched our own investment framework. We invested in EU paper and then 
we were repaid as soon as the money was unlocked,’ Eatough said. ‘If we 
hadn’t succeeded, it would have been game over.’ 

Tight timing was a hallmark of the operation. ‘We got the green light very 
late,’ Lévy said. ‘The money was needed on a Monday morning, but by Friday 
we still didn’t know whether or not the EFSM bridge loan to Greece would be 
approved. All of the contracts were ready and the weekend approaching, but 
we were not authorised to sign the documents. Luckily both the European 
Commission and the ESM have offices in Luxembourg.’

In the end, one of the institutions signed on the Friday night and the second 
one over the weekend, to make sure the effective date matched the political 
agreements. One of the ESM’s lawyers went to collect the signatures. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

‘We took pictures with the contract signed on that day, because it was a 
big thing,’ Lévy said. ‘It was very exciting; we knew we were involved in 
something important.’

When the time came to input the amounts and account numbers into 
the system, there was no room for error. The ESM had to send money to 
the EFSM, the EFSM had to forward it to Greece, and then Greece had to 
make the crucial payment to the ECB. Martins was the investment team 
member tasked with entering the trade in the system, outside the ESM’s 
normal business hours.

‘We had to make sure the system was open earlier than usual, that we 
had front office managers, back office managers, and middle office 
managers there first thing in the morning,’ Lévy said. ‘As I recall, Carlos 
arrived at 7.00, because we needed all of the operations to be done 
by 8.00 or 8.30. I distinctly remember Carlos meticulously checking the 
screens to make sure he had all the numbers right.’ 

Martins knew it was a momentous step. ‘That day, that time, I decided 
to not simply double-check – as I usually do – but to triple-check the 
zeros in the transfer amount, as I was fully aware that another important 
page of the ESM was being written right there. And so I clicked to finalise 
the transfer.’

Greek programme history, which began in Chapters 3, 19, 22, and 36,
continues in Chapter 38.

Debt relief:  
‘real savings for Greece’ 

38

A sober look at the facts shows that Greece’s 
debt situation does not have to be cause for alarm. 
We would not have lent this amount if we did not 
think we would get our money back. Of course, 
reforms must continue.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

G reece emerged from its programme in August 2018 with 

outstanding debt of €190.8 billion to the euro area rescue 
funds. As holders of 53.2% of Greek central government debt 
at the end of 2018376, the EFSF and ESM are by far the country’s largest 
creditors. Since the latest debt relief measures agreed in June 2018, 
the last EFSF loans are not scheduled to be retired until 2070, making 
Greece the longest-term partner of the firewall.

Managing and paying down debt until then – through economic 
and interest rate cycles that are beyond any reasonable forecasting 
horizon – will pose a generational challenge for Greek society. It is 

376  Greece (2018), ‘Hellenic Republic public debt bulletin’, No. 92, December 2018.  

www.pdma.gr/attachments/article/2048/Bulletin%20Νο_92.pdf

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worth noting, however, that without the burden-sharing policies put 
in place by European creditors – from the first interest rate abatements 
in March 2011 to the later relief offered by the Eurogroup – the debt 
would be higher. None of these money-saving steps breaks with euro 
area strictures that require Greece to repay the principal amount of the 
loans in full.

Total budget savings for all programme countries 
in % of GDP 

Ireland

Greece

EFSF

Deferred interest

ESM

Spain

Cyprus

Portugal

2011

2012

2013

2014

2015

2016

2017

2018

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.1

0.3

1.6

1.6

0.0

0.0

0.0

0.0

0.4

0.3

4.1

3.7

0.4

0.0

0.2

0.7

0.6

0.3

5.0

4.3

0.7

0.0

0.2

1.6

0.7

0.3

5.2

4.4

0.7

0.2

0.2

1.9

0.7

0.3

6.2

4.7

0.7

0.8

0.2

2.0

0.7

0.3

6.6

5.0

0.6

1.1

0.2

2.0

0.7

0.2

7.0 

5.0

0.7

1.3

0.1

1.9

0.7

While every programme country saved money by borrowing from the rescue funds, Greece was the 
leading beneficiary.

Note: The ESM estimates these savings by comparing the effective interest rate payments on ESM and EFSF 
loans with the interest payments these countries would have paid had they covered their financing needs in the 
market. First, we estimate the direct budget savings per disbursement by comparing the ESM and EFSF rate to 
the 10-year bond yield, used as a proxy long-term market rate. We apply a cap of 6.4% on market rates, which 
from experience of the crisis suggests significant market stress and imminent loss of market access. Second, 
we calculate the indirect benefits. For each disbursement, the ESM calculates the gains from the previous 
year’s reduced financing needs, making the same market rate assumptions as for direct budget savings.

Source: ESM calculations based on ECB and Eurostat data

‘When I look at what happened in the past, it’s quite significant that 
not everybody may be aware how much debt relief has already been 
granted by private and official creditors,’ ESM Managing Director 
Regling said. ‘These are real savings every year, and a very large 
amount of money. It may not be so evidently visible, but it’s really 
there, and therefore the debt service in the Greek budget, in terms of 
GDP, is less than in many other countries.’

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To be sure, the debate over Greek debt sustainability looks set to 
continue. The IMF declined to take part in the third programme out 
of concern over Greece’s debt, pressing the European creditors for 
more concessionary terms. In the final weeks of the programme, the 
IMF hailed Greece’s budget-cutting efforts and virtual elimination of 
economic imbalances, while remaining unconvinced about the long-
term debt-repayment outlook. Relief offered by European creditors 
‘has significantly improved debt sustainability over the medium term, 
but longer-term prospects remain uncertain,’ the IMF said in an 
assessment published on 29 June 2018, just after the latest Eurogroup 
debt relief agreement377. ‘[I]t could be difficult to sustain market access 
over the longer run without further debt relief.’

Debt-to-GDP projections — Greece 
in %

210

190

170

150

130

110

90

70

50

2018

2022

2026

2030

2034

2038

2042

2046

2050

2054

2058

Before medium-term measures

After medium-term measures

Greece is reaping 
significant savings from 
debt-relief measures 
offered by the Eurogroup. 

Source: European 
Commision — Compliance 
Report. ESM Stability 
Support Programme for 
Greece, Fourth Review —
July 2018

377  IMF (2018), ‘Greece: Staff concluding statement of the 2018 Article IV mission’, 29 June 2018. 

https://www.imf.org/en/News/Articles/2018/06/28/ms062918-greece-staff-concluding-statement-
of-the-2018-article-iv-mission 

 
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Gross financing needs-to-GDP projections — Greece 
in %

30

25

20

15

10

5

0

Debt relief isn’t a one-off 
transaction. Greece will see 
decades of benefits from 
Eurogroup measures to 
ease the repayment burden.

Source: European 
Commision — Compliance 
Report. ESM Stability 
Support Programme for 
Greece, Fourth Review —
July 2018

2018

2022

2026

2030

2034

2038

2042

2046

2050

2054

2058

Before medium-term measures

After medium-term measures

From the ESM’s perspective, what matters is that the debt sustainability 
analysis (DSA) by European institutions concluded in June 2018 that 
Greece’s gross financing needs will remain manageable378. The DSA is 
conditional on Greece receiving additional savings from the medium-
term debt relief measures and on Greece following through on its 
economic commitments.

‘We can safely say based on the DSA of the institutions that Greek debt 
is sustainable going forward,’ Eurogroup chief Centeno told reporters 
after the finance ministers met in June 2018379.

378  Eurogroup statement on Greece of 22 June 2018, 22 June 2018. https://www.consilium.europa.eu/

en/press/press-releases/2018/06/22/eurogroup-statement-on-greece-22-june-2018/ 

379  Eurogroup (2018), ‘Main results’, 21 June 2018.  

https://www.consilium.europa.eu/en/meetings/eurogroup/2018/06/21/ 

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ESM/EFSF debt redemption profile – Greece 
in € billion 

12,000

10,000

8,000

6,000

4,000

2,000

0

9
1
0
2

1
2
0
2

3
2
0
2

5
2
0
2

7
2
0
2

9
2
0
2

1
3
0
2

3
3
0
2

5
3
0
2

7
3
0
2

9
3
0
2

1
4
0
2

3
4
0
2

5
4
0
2

7
4
0
2

9
4
0
2

1
5
0
2

3
5
0
2

5
5
0
2

7
5
0
2

9
5
0
2

1
6
0
2

3
6
0
2

5
6
0
2

7
6
0
2

9
6
0
2

1
7
0
2

ESM

EFSF Master Financial Assistance Facility Agreement

EFSF private sector involvement/bond interest

Greece doesn’t have to start paying down rescue loan principal until 2023, and the final instalment isn’t due until 2070.

Source: ESM

EFSF and ESM loans to Greece have over 30 years average maturity – 
in some cases over 40 – and carry very favourable interest rates. ESM 
economists estimated that these advantageous conditions alone save 
Greece around €12 billion in debt servicing annually, which was equal 
to 6.7% of GDP in 2017380. 

ESM expertise has been crucial in shaping and executing the 
relief policies, starting with short-term measures envisaged by the 
Eurogroup in May 2016 and carried out in 2017. The objective was 
to facilitate Greek access to the bond markets, spread out repayments 
over time, sustain Greece’s economic adjustment once the programme 
ended, and insulate Greece from the interest rate increases in financial 
markets that are expected in the long term381.

380  ESM (2018), ‘Greece successfully concludes ESM programme’, Press release, 20 August 2018. 
https://www.esm.europa.eu/press-releases/greece-successfully-concludes-esm-programme 

381  Eurogroup statement on Greece, Press release, 9 May 2016.  

http://www.consilium.europa.eu/en/press/press-releases/2016/05/09/eg-statement-greece/

 
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‘The short-term debt measures will have a significant positive 
impact on the sustainability of Greek debt,’ the Eurogroup said in a 
5 December 2016 announcement that entrusted implementation to 
the ESM382. There was a last-minute hitch when Greece made some 
spending commitments without getting clearance from the institutions. 
The process resumed after Finance Minister Tsakalotos said in a 
23 December 2016 letter to the ESM and Eurogroup that Greece was 
‘fully committed to pursue the agreed fiscal path’383.

One feature of the short-term package was the use of a bond 
exchange scheme and interest rate derivatives to improve Greece’s 
debt sustainability and prevent future unexpected increases in the 
cost of its official loans, without additional costs to other programme 
countries. The bank recapitalisation component of the EFSF and ESM 
programmes, for example, had been financed with notes that came 
with floating interest rates. These short-term measures included an 
exchange of these floating-rate notes with funds backed by long-term 
fixed-rate issuances. For the ESM, there were also swap contracts 
implemented for some of the remaining ESM loan tranches, to peg 
Greece’s costs close to the historically low levels at which it borrowed 
during the crisis. These measures serve as a fiscal shield that make 
Greece’s budget planning more predictable.

Other measures at that time included bringing the weighted average 
maturity of Greece’s EFSF loans back up to the original 32.5 years and 
spacing out loan repayments due in the 2030s and 2040s. Creditors also 
waived for 2017 a scheduled ‘step-up’ interest rate margin of 200 basis 
points on an €11.3 billion tranche that had been connected to Greece’s 
debt buy-back in the second programme384. 

Greece was benefiting from the first round of cost savings when, on 
15 June 2017, euro area finance ministers sketched out the medium-
term measures that would be on the table once the programme ended. 
Already, the Eurogroup noted in a statement, the short-term measures 
had contributed to a ‘substantial lowering’ of Greece’s gross financing 
needs and the smoothing out of its future payments trajectory385.

382  Eurogroup statement on Greece, Press release, 5 December 2016.  

http://www.consilium.europa.eu/en/press/press-releases/2016/12/05/eurogroup-statement-greece/

383  Greece, Ministry of Finance (2016), ‘Letter from Euclid Tsakalotos to Jeroen Dijsselbloem and 

Klaus Regling’, 23 December 2016. http://www.tovima.gr/files/1/2016/12/27/TSAKALOTOS11.pdf 

384  Eurogroup statement on Greece, 5 December 2016.  

http://www.consilium.europa.eu/en/press/press-releases/2016/12/05/eurogroup-statement-greece/ 

385  Eurogroup statement on Greece, 15 June 2017.  

http://www.consilium.europa.eu/en/press/press-releases/2017/06/15/eurogroup-statement-greece/ 

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The medium-term proposal was part of efforts encouraging 
Greece to stay the course of budgetary prudence and economic 
modernisation beyond the life of the programme. As proposed, it 
covered the elimination of the ‘step-up’ interest rate margin tied to the 
second programme debt buy-back instalment; the release of central 
bank profits on Greek securities withheld in 2014; the restoration 
of those profit transfers as of 2017; further ‘liability management 
operations’ within the ESM programme envelope; and the further 
extension of Greece’s EFSF maturities and deferral of interest 
payments, as long as this didn’t create an additional burden on the 
countries providing EFSF guarantees.

Eurogroup ministers pledged to carry out these medium-term 
measures ‘to the extent needed’ at the end of the programme, and 
left the door open to further adjustments if the Greek economy 
suffered another downside shock386. For the long term, ‘in the case of 
an unexpectedly more adverse scenario, a contingency mechanism 
on debt could be activated,’ the Eurogroup said. Steps could 
include further EFSF re-profiling, as well as capping or deferring 
interest payments. 

By the summer of 2018, all the moving parts came together when 
the Eurogroup made good on medium-term pledges. The new debt 
relief for Greece was agreed to be a further 10-year deferral of interest 
and amortisation and a 10-year extension of the maximum weighted 
average maturity on €96.4 billion of EFSF loans, and the ‘step-up’ 
interest rate margin on the debt buy-back instalment was conditionally 
scrapped until 2022 and permanently thereafter. 

Greece, which is projected to have had debt of 188.6% of GDP 
in 2018387, stands to reap considerable benefits. Building on the 
savings brought about by the short-term measures in 2017, the 
European institutions estimate that the medium-term measures 
of 2018 are likely to reduce Greece’s debt ratio by 30 percentage 
points in 2060, to 96.8% of GDP, and its gross financing needs by 
eight percentage points, to 19.8%388.

386  Ibid. 
387  European Commission (2018), ‘Compliance report: ESM stability support rogramme for Greece – 

fourth review’, p. 42, 9 July 2018.  
http://www.consilium.europa.eu/media/36299/compliance_report_4r_2018-06-20-docx.pdf

388  EFSF (2018), ‘EFSF approves medium-term debt relief measures for Greece’, Press release, 

22 November 2018.  
https://www.esm.europa.eu/press-releases/approval-medium-term-debt-relief-measures-greece 

 
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But it didn’t end there: in a tribute to the long-term nature of Greece’s 
financial commitments, the Eurogroup pledged to examine ‘whether 
additional debt measures are needed’ when Greece starts paying down 
the principal on its EFSF loans in 2032. And it underlined a willingness 
to intervene earlier if the Greek economy stumbled389.

There were, however, no giveaways. Greece will remain under 
surveillance by the Commission and ESM, and key features of the 
debt-relief package are contingent on the Greek government upholding 
its economic pledges. Greece’s recovery of central bank profits from 
its bonds, for example, hinges on the fulfilment of a host of policy 
commitments made at the June 2018 Eurogroup meeting390.

Enhanced surveillance ‘is appropriate, given the large amount of 
money that has been disbursed, and also the unprecedented debt 
relief,’ Regling told the media after that meeting. ‘Therefore, the post-
programme monitoring is tighter than in the other cases’391.

The ESM’s view is that, as long as Greece remains fiscally prudent 
while shoring up the economy, the debt can be paid back on schedule. 
Eurogroup steps have eased Greece’s debt repayments, but the ultimate 
success of the programme lies in the Greek government’s continued 
reform implementation.

‘It is very unusual to make such long-term plans. But it follows from 
the very unusual situation in Greece. No other country has ever 
received so much money from its partners,’ Regling said. ‘The amounts 
were unprecedented – this has never happened anywhere in the world 
before – and the terms were extremely favourable. We want to help 
Greece regain debt sustainability and we want Greece to have a strong, 
healthy economy, with good growth, where employment is returning 
and jobs are created.’

389  Eurogroup statement on Greece of 22 June 2018, Press release, 22 June 2018. 

http://www.consilium.europa.eu/en/press/press-releases/2018/06/22/eurogroup-statement-on-
greece-22-june-2018

390  Specific commitments to ensure the continuity and completion of reforms adopted under the ESM 

programme, Annex to Eurogroup statement on Greece of 22 June 2018.  
http://www.consilium.europa.eu/media/35749/z-councils-council-configurations-ecofin-
eurogroup-2018-180621-specific-commitments-to-ensure-the-continuity-and-completion-of-
reforms-adopted-under-the-esm-programme_2.pdf

391  ESM (2018), ‘Klaus Regling at Eurogroup press conference’, Transcript, 22 June 2018.  

https://www.esm.europa.eu/press-releases/klaus-regling-eurogroup-press-conference-9

Beyond the troika:  
the ESM’s evolving role

39

The ESM’s role has evolved into a full 
participant in monitoring the programmes, 
together with the European Commission, the ECB, 
and the IMF. With the crisis behind us,  
we are pursuing new, more effective ways of 
working together.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

During the crisis, the ESM grew to become one of Europe’s 

established institutions with economic and financial expertise, 
offering a reliable safety net to the now 19 members of the 

monetary union. As the euro moves into its next stage of development, 
the firewall has earned its place at the table with its fellow 
international organisations. 

The ‘troika’, as the initial group of three institutions was called, shared 
responsibility for preparing and monitoring the euro area rescue 
programmes. The European Commission worked closely with the ECB 
and the IMF to make sure the programmes would succeed.

As the ESM matured, it gained a seat at the crisis management table 
and it became an indispensable part of Europe’s financial safety net. 
The firewall has always been able to tap financial markets to make 
sure aid programmes have ready cash to disburse when called upon. 

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Furthermore, from the early days, the rescue funds have used their day-
to-day knowledge of the financial markets to inform the effort to help 
countries regain market access. 

‘What was first a troika, became a quartet. Despite occasional 
differences of opinion, cooperation was good,’ Managing Director 
Regling said in an op-ed for the Greek newspaper Kathimerini in 
August 2018 as Greece’s ESM programme came to a close392. 

The ESM has been part of an effort to strengthen debt management 
standards for the euro area. In setting up the permanent firewall, 
countries pledged that they would include uniform collective action 
clauses in their future bonds, in a move to ensure these clauses would 
be applied throughout the euro area and have an identical legal impact 
across all members. Such clauses are now standard, a change that 
happened quickly and efficiently after the requirement was made part 
of the ESM Treaty. The precedent set by the clauses has since been 
recognised as a key reference point by the Court of Justice of the 
European Union393.

Through its funding and investment activities, constant contact with 
financial markets has made the ESM well placed to gauge reactions to the 
euro area’s crisis containment measures and to the reforms in borrowing 
countries. The firewall also has devised a system to monitor rescue loans 
over their entire lifetime, not just during the active phase of a rescue 
programme, in order to anticipate any repayment difficulties and to 
assess debt sustainability. The ESM also gained a strong knowledge of 
the banking sector, as banks played a critical role in every programme 
country’s crisis-fighting strategy. Taken together, these developments 
show the expertise the ESM has acquired since its creation.

Now, after the crisis, each of the institutions that fought the turmoil 
must assess and reflect on how it handled things. In the wake of this 
tumultuous period, each must decide how to prepare for the next 
disruption, which, inevitably and regrettably, will come someday. 

As the euro enters its next era, the monetary union is reflecting on how 
it will work with the IMF going forward, how the ESM and the European 
Commission will best coordinate their roles, and how the Eurogroup sees 
the roles of the institutions evolving. On a parallel track, the ESM has led 

392  Kathimerini (2018), ‘Op-ed by Klaus Regling’, Online article, 19 August 2018.  

https://www.esm.europa.eu/interviews/op-ed-klaus-regling-kathimerini-greece

393  CJEU (2018), ‘Judgment in Case C-308/17 Leo Kuhn v Hellenic Republic’, Press release 177/18, 

15 November 2018.  
https://curia.europa.eu/jcms/upload/docs/application/pdf/2018-11/cp180177en.pdf 

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a drive of regional rescue funds to enhance cooperation with each other 
and with the IMF, thereby strengthening the global safety net.

Looking back, the ESM and its fellow institutions found that 
personal relationships were essential for getting through the toughest 
moments of the euro crisis. Regling, who had held senior posts at the 
Commission, the IMF, and the German finance ministry, knew many 
of the individuals involved personally. As a result, the firewall made 
a contribution from its earliest days: the Commission’s Buti said the 
EFSF quickly earned a reputation as an honest broker. ‘The troika was 
uncomfortable for everybody. Every institution was uncomfortable,’ he 
said. ‘It was good to have Klaus there to help discipline the discussions.’

The other institutions also faced a learning curve, requiring negotiators 
to find solutions whenever possible and a way forward when 
differences of opinion remained, said the IMF’s Lagarde.

‘The confrontation of views was sometimes difficult and awkward. And 
people did not like it so much. But equally it enabled, and it required, 
the settling of differences until and unless differences could not be 
settled, which has happened on occasion,’ Lagarde said.

A case in point was the argument between the Commission and the 
IMF over Greece’s long-term financial viability. The ESM was seen 
as a trusted source of debt projections that could be used to shape 
responsible policies, helping craft a new approach that was acceptable 
to all, said former German Finance Minister Schäuble.

‘It hasn’t reinvented the wheel, but it has provided high-quality, well-
informed input. Of particular note is its analysis of sustainability using 
a market-oriented approach,’ Schäuble said. 

Going forward, the ESM will inevitably take on a bigger role because of 
the global changes wrought by the last round of financial turmoil, said 
former US Treasury Secretary Geithner.

‘We now live in a world where the capacity of central banks to provide 
a protection against the extreme threat is much diminished,’ Geithner 
said. In his view, this is true of the US, Japan, and Europe but ‘it matters 
more in Europe because of the immaturity of the fiscal arrangements 
and financial arrangements. It’s likely to create more of a burden on 
governments and the collective funding mechanisms like the ESM.’

Within Europe, there’s also a hope that the euro’s rescue architecture 
can become strong enough to stand on its own. While the IMF’s 
knowledge base will always be a valued partner, the euro area might 
benefit if, in the next crisis, it does not need to turn to outside funding. 

 
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A more self-reliant euro area would be a very good development for 
Europe if the political outlook shifts in a way to make that possible, 
said the European Commission’s Verwey. ‘I don’t think it’s healthy for 
the continent to permanently depend on support from an international 
institution. The goal must be to become independent,’ Verwey said. 
‘With all the experience we now have, with all the institutions we have 
established, we are close to the moment when we can let go.’

A turning point came in 2018, when the ESM and the Commission 
reached a new understanding of how they will work together, in times 
of calm as well as times of crisis. The new course of collaboration 
means ESM’s expertise will be put to broader use, following financing 
conditions not only in countries that have received aid, but also in 
countries outside the aid framework. In this way, the ESM will always 
be in position to work alongside the Commission to design a new 
programme on short notice, if needed.

‘The close collaboration between the Commission and the ESM in 
recent years has demonstrated that we can act successfully and with 
determination in the interest of the euro area in times of crisis’,394 
said Pierre Moscovici, European commissioner for economic and 
financial affairs, taxation and customs, when the move was announced. 
‘By strengthening the foundations of our crisis management, we are 
sending a signal of confidence and stability.’

The agreement with the Commission took shape over the course of the 
year, beginning with a memorandum of understanding signed in April, 
laying out the foundations of the cooperation in line with how it had 
been evolved over recent years. As a result, the two institutions were 
also able to collaborate on a way forward, in light of the ESM’s broader 
mandate. Euro area finance ministers sealed the deal at their December 
meeting, welcoming the agreement and setting the stage for EU leaders 
to take the next steps in augmenting euro area oversight. The deal 
paves the way for the Commission and the ESM to make the most of 
their respective expertise.

‘We intend to work very closely together, particularly on debt issues 
and market access,’ Regling said.

To cement their cooperation, the ESM and the Commission will meet 
informally at least twice a year to share assessments and analysis of 

394  ESM (2018), ‘European Commission and European Stability Mechanism lay down principles of 

cooperation’, Press release, 27 April 2018.  
https://www.esm.europa.eu/press-releases/european-commission-and-european-stability-
mechanism-lay-down-principles-cooperation

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  3 4 9

Sustainable fashions: IMF 
Managing Director Christine 
Lagarde sports an ESM 
T-shirt after a meeting with 
ESM Managing Director 
Klaus Regling in Luxembourg 
in 2015.

Credit: ESM

macro-financial risks. When it makes sense from a policy perspective, 
the ESM will also be invited to join Commission staff on their missions 
to member states395. 

The two institutions also will work together to assess eligibility for 
precautionary credit lines, and to negotiate the aid conditions for any 
future assistance programmes. The ESM’s role will focus specifically on 
analysing market access for countries considering an aid request, and it 
will play a central role in preparing the debt sustainability analysis that 
accompanies the consideration of a potential programme. 

The ECB will continue to play its role among the institutions, the 
finance ministers said in endorsing the ESM-Commission agreement. 
The euro area also will continue to work with the IMF, although its role 
is likely to be less prominent than during the early crisis years.

The ESM is working with other regional financing arrangements 
(RFAs) to develop best practices for working on their own and in 
collaboration with the IMF, in order to strengthen the global financial 

395  ESM (2018), ‘Future cooperation between the European Commission and the European Stability 

Mechanism,’ 14 November 2018. https://www.consilium.europa.eu/media/37324/20181203-eg-1b-
20181115-esm-ec-cooperation.pdf

 
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safety net396. Since October 2016, the RFAs have met annually at the 
IMF annual meetings, and they now engage in a regular dialogue 
throughout the year. The organisations also are working together on 
topics of common interest relevant to economic surveillance and crisis 
management. Shortly after its fifth anniversary in October 2017, the 
ESM signed formal agreements to reinforce collaboration in areas of 
common interest with Fondo Latinoamericano de Reservas (FLAR) 
and with the Association of Southeast Asian Nations+3 Macroeco-
nomic Research Office (AMRO). Also in 2017, the IMF published 
its own policy on how it will exchange documents with the regional 
organisations.

The ESM and four of its fellow RFAs called for a more formal set of 
guidelines for how the IMF will work with the regions going forward, 
in an October 2018 joint discussion paper397. Such a framework could 
be particularly helpful in areas such as training, capacity building, 
and information sharing. The RFAs endorsed the IMF’s proposal of a 
generally flexible approach to future collaboration, given the differences 
in activities and missions in each regional institution’s part of the world. 
But they said that more details might be helpful in selected areas, such 
as how collaboration would work in ‘the run-up to the crisis period’ and 
how a regional institution might function as the lead agency on a rescue 
programme. The more planning takes place in non-crisis periods, the 
better the response will be when urgent action becomes necessary.

‘The resolution of the euro area debt crisis provided a new field to test 
the collaboration between the regional institutions in Europe and the 
IMF,’ the discussion paper said. The IMF worked hand in hand with the 
EU and the euro area on rescue design and aid negotiations, and also 
joined forces for reviews during and after aid programmes. The report 
said: ‘Overall, this in-crisis collaboration worked well. However, it also 
shed light on the areas that would require future improvement.’

The IMF is also in the process of weighing its options. Lipsky, who 
was the IMF’s deputy managing director and then acting managing 
director in the early phase of the crisis, said the euro area now has 
a rescue apparatus that could be rapidly expanded in an emergency. 
‘There’s not a reason in the world, objectively, why Europe should need 
IMF funding to support a specific Member State,’ Lipsky said. There 
might be a political need for the IMF to put some of its own funds on 

396  Arab Monetary Fund, AMRO, Eurasian Fund for Stabilization and Development, European 

Commission, ESM, FLAR (2018), ‘IMF-RFA collaboration: Motives, state of play, and way forward: 
A joint RFA staff proposal’, Discussion Paper 4 - special issue, October 2018.  
https://www.esm.europa.eu/sites/default/files/esmdiscussionpaper4.pdf 

397  Ibid. 

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the line as an endorsement of Europe’s efforts, but ‘in objective terms, 
I can’t see – except in the most exceptional circumstances – that there 
would be a need in the future for IMF funding in the euro area.’

This approach reflects a change in outlook among the IMF 
membership over the course of the crisis. As the euro crisis neared 
its peak, the international lender came under pressure from its non-
European members to limit its lending to wealthy euro area countries, 
and divisions over Greece led it to scale back further the prospect 
of additional lending to that country. This backlash over the IMF’s 
successive – and successively smaller – interventions in Europe has 
changed the outlook for future cooperation, particularly now that 
Europe has a robust permanent firewall.

The joint discussion paper from the RFAs highlights the political 
advantages of working with the IMF. In some cases, regions ‘may need 
to rely on the IMF to alleviate moral hazard risks given that IMF 
lending tends to come with policy adjustment.’

This view is shared by many ESM Members. ‘The IMF’s involvement 
in the completed programmes for Ireland, Cyprus, and Portugal 
clearly improved the quality of the programmes. These successes 
speak for themselves,’ Schäuble said. ‘It is also better for Greece if its 
transformation into a more robust economy is supported by the IMF. 
In Germany, the IMF’s participation increases political support for the 
Greek rescue package.’

Former programme countries are less keen, however, as they view 
the IMF to be overly focused on financial targets and not sufficiently 
sensitive to the wider economic and social impact of economic reforms. 
Greece welcomed the IMF for its first rescue programme, in 2010, 
before a euro area support mechanism existed. By 2015, when Greece 
was negotiating the third programme with the permanent ESM, many 
Greeks saw the IMF as unduly critical and out of touch. When asked if 
popular acceptance of the programme was made easier because the IMF 
didn’t participate financially, Greece’s Stournaras said: ‘Yes. Absolutely.’

The Eurogroup has sought to take stock of the range of views among 
its membership and of the ESM’s overall performance in its first years 
of existence. To this end, it commissioned an evaluation conducted by 
former Austrian central banker Gertrude Tumpel-Gugerell, a member 
of the ECB’s Executive Board from 2003 to 2011. The evaluation was 
released in mid-2017 after more than a year of work.

The report said the ESM should urge countries that are requesting aid 
to take stronger ownership of required conditions, in order to make 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

aid programmes more credible398. It said rescue programmes should 
be built with clear objectives and priorities in mind, so that beneficiary 
nations can return to market financing and adopt structural reforms 
on a practical schedule, and it said countries might benefit from 
seeking programmes earlier. ‘The ESM should pre-empt delays in 
programme requests when problems cannot be effectively solved at 
national level,’ the report said. 

These recommendations cut across the wide range of public sentiment 
over when and how aid requests are appropriate. As Germany’s 
Schäuble said, countries should avoid requesting aid unless they are 
truly in dire straits, and in general ESM aid is granted only as a last 
resort. Likewise, countries in trouble may not want to seek aid until 
they are sure they have exhausted every possible alternative.

‘No government, no people would go for an adjustment package 
willingly. That is something I’ve seen,’ Malta’s Camilleri said. ‘The cycles 
of all the different countries undergoing these adjustment packages – I 
mean, none of them walked in and signed on to a package very, very 
willingly. They all took great, great pains to avoid it, so let’s not fool 
ourselves. I haven’t seen one single country gallivanting wanting to go 
into some adjustment programme.’

But, once a country is on board with a programme, its reforms and 
helping hand can make a big difference. For example, Ireland won 
praise for accepting responsibility and embracing the necessary 
reform, said Giammarioli, the ESM’s head of strategy and institutional 
relations, who was the rescue fund’s Ireland country coordinator 
from 2013 to 2015. 

In contrast, Greece faced a different set of constraints in combatting 
a crisis of a different magnitude. According to Greek Finance 
Minister Tsakalotos, Greece took some actions it strongly believed in, 
some it was unsure about, and some that were imposed on it by the 
international authorities. Because of the severity of Greece’s problems, 
it had no choice but to comply even when it disagreed with the chosen 
policy, he said. ‘If I was not a minister of finance of an indebted 
country, I would have done things differently. In my view, that would 
have been more socially just and actually more economically efficient.’ 

398  Tumpel-Gugerell, G. (2017), EFSF/ESM financial assistance: Evaluation report, Publications 

Office, Luxembourg. https://www.esm.europa.eu/sites/default/files/ti_pubpdf_dw0616055enn_
pdfweb_20170607111409_0.pdf 

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All of these experiences have contributed to the euro area’s next steps 
in mapping out its crisis-fighting system. The working methods within 
what are now widely called ‘the institutions’ will continue to adapt to 
euro area needs, while also serving as an example of IMF cooperation 
with regional organisations worldwide. 

Lipton, the first deputy managing director of the IMF, said: ‘I see it as a 
very valuable, new and imaginative collaboration and interaction, and 
think that we’ll all be evaluating how that’s worked, and how it might 
best work in the future, and how lessons from our interaction with the 
ESM could be used in shaping good modes of cooperation with other 
institutions and other regions.’ 

 
The ESM:  
taking on new tasks

40

If we fail to implement the agenda to deepen  
the monetary union now, the next crisis will force 
us to do so. If we do what we know needs  
to be done, we have the potential to save jobs  
and economic heartache.

Klaus Regling  
ESM Managing Director and EFSF Chief Executive Officer

E uro area countries forged a new shield for monetary union over 

the course of 2018, making the most of a period of reflection 
on how to deepen and strengthen their ties. Work that began 

in 2015 with the EU’s ‘Five Presidents’ report’399 progressed through a 
series of proposals that culminated in an important step to enhance 
Europe’s Economic and Monetary Union.

European leaders, at a summit in December 2018, endorsed a wide-
ranging push to deepen Economic and Monetary Union that broadens 
the ESM’s mandate and will require euro area member states to change 
the treaty governing the firewall. The plan includes steps to adapt the 

399  Juncker, J.-C., Tusk, D., Dijsselbloem, J., Draghi, M., Schulz, M. (2015), Completing Europe’s Economic 

and Monetary Union, European Commission, 22 June 2015. https://ec.europa.eu/commission/
publications/five-presidents-report-completing-europes-economic-and-monetary-union_en 

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firewall’s toolkit, strengthen the way the firewall works with its fellow 
institutions, and create a backstop for helping the financial sector 
handle a major bank failure. When these steps are implemented, the 
firewall will become an important part of the euro area’s banking 
union and it will continue to be a provider of last-resort financing for 
countries that lose their ability to borrow on private markets.

European Council President Tusk hailed the agreements on banking 
and crisis prevention: ‘These two decisions – which mean changing the 
ESM Treaty as soon as possible – significantly strengthen the monetary 
union,’ he said after the meeting400.

The December decisions showed the growing political support for the 
ESM from member states across the euro area, drawing support from 
countries that received aid as well as countries that had been sceptical 
of the whole process. 

Slovakia, an early critic of the rescue funds, is now one of the voices 
calling for the ESM to play a central role in constructing a stronger 
euro area financial architecture. In 2016, Slovakia spearheaded a 
discussion on shock-absorbing mechanisms during its time at the helm 
of the EU’s rotating presidency, and the country has since continued to 
advocate euro area integration.

The currency union needs institutions, rules, and instruments designed 
to fortify all of the euro area, in order to shield economies and financial 
sectors in the member states from harm, according to Slovak Finance 
Minister Peter Kažimír. ‘We need to transform the ESM,’ he said. ‘What 
we need to achieve is a more resilient, better functioning euro area 
with a clear strategic direction.’

The firewall should be at the heart of the monetary union’s next steps, 
said Albuquerque, former finance minister of Portugal, which was 
one of the pioneers in undergoing a rescue programme. ‘We would 
like to see the evolution of the ESM as the central element of a new 
institutional framework inside Europe and particularly in the euro 
zone – clearly continuing to exist and becoming more relevant, with 
a bigger role than it has now,’ she said. ‘There is the need to create a 
different institutional framework making ESM evolve into something 

400  Remarks by President Donald Tusk after the European Council and Euro summit meetings on 

14 December 2018, Statement and remarks 799/18, 14 December 2018.  
https://www.consilium.europa.eu/en/press/press-releases/2018/12/14/remarks-by-president-
donald-tusk-after-the-european-council-and-eurosummit-meetings-on-14-december-2018/pdf 

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that could be called European Monetary Fund or anything else. This is 
for lack of a better designation and so that people understand what we 
are talking about.’

In 2016, momentum was building towards strengthening the euro 
area. As former European Commissioner Rehn, now governor of the 
Bank of Finland, said at the time: ‘The future of the ESM is related 
to the overall reform of euro zone governance. We have to continue 
the reconstruction of the euro zone even though for the moment 
there is not much appetite for that because of several immediate 
pressing concerns.’

Heading into 2019, the appetite for positive change is much improved. 
The ESM is a well-established firewall, all euro area countries that 
received aid have exited their rescue programmes, and the banking 
union is off to a solid start. The next challenge will be to strengthen the 
foundations of the euro – to prepare for the next crisis before it hits 
instead of after the fact. 

‘The European reaction to the crisis was arguably slow at first, but 
when you look back you see we have come a long way in filling in the 
holes of the initial set-up of the euro,’ said Centeno, chairman of the 
ESM Board of Governors and Eurogroup president. ‘In times of crisis, 
the temptation to look inwards is strong. But European governments 
agreed to pool resources at the ESM to defend our currency in a 
way that was unimaginable at the onset of the euro. That boosted 
confidence in our currency. No wonder the ESM became a beacon for 
further integration in the euro area.’

The achievements of 2018 bear this out. Over the course of the year, 
the euro area was able to break deadlock on a wide range of policy 
issues. The Eurogroup assembled all the elements of the deal in early 
December, meeting in an inclusive format that includes non-euro 
countries as well.

One of the biggest steps forward involves the euro area’s banking 
union, which began in 2012 when countries agreed to create a 
common bank supervisor to oversee cross-border, systemic banks – 
and to create a new framework for dismantling them safely if needed. 
The ESM has in parallel stood by to help safeguard the euro area’s 
financial sector, and now it stands poised to join forces formally with 
the banking union’s other main institutions.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Banking union depends on three main elements: supervision, 
resolution, and deposit insurance. The euro area has harmonised 
its rules on how countries must provide deposit insurance, and it 
created a pair of new institutions to handle the other duties: the 
Single Supervisory Mechanism to keep an eye on the big banks, and 
the Single Resolution Mechanism to stand ready to take them apart. 
To help prevent a liquidity crunch, the Single Resolution Board is 
collecting fees from banks to build up a resolution fund that can be 
tapped in an emergency. However, this fund on its own was not seen as 
a strong enough bulwark.

At the start of the euro area effort, the ESM was directed to develop the 
capacity to provide targeted aid to a country’s financial sector, either 
by offering government aid with a banking focus or by stepping in to 
help banks directly. Between 2012 and 2014, the ESM made sure that 
all of its tools would be fully operational when called upon, and in the 
process it acquired substantial expertise. Once the heat of the crisis had 
passed, euro nations sought to harness these capabilities more fully.

In June 2018, euro area leaders struck a provisional deal for the 
ESM to take over permanent bank backstop duties, which had been 
temporarily assigned to a series of national credit lines. At that 
meeting, leaders also agreed to ‘start on a roadmap for beginning 
political negotiations’ on a European deposit insurance scheme, 
another important pillar of the banking union project401. The speed 
at which this can be implemented will depend on the progress made 
by euro area governments in other areas, such as dealing with non-
performing loans.

By December 2018, euro area resolve had solidified around the plan. 
The ESM and the European Commission had worked out how they 
will cooperate going forward, in times of calm as well as times of 
turmoil, and the euro area had also delved more deeply into the various 
proposals for shoring up the monetary union. Not only would the ESM 
take on a new role regarding banking, it also would take a fresh look 
at its lending toolkit to make sure it could offer the euro zone the best 
possible help.

‘It was important for us to have a comprehensive reform, not only 
focusing on the operation of the ESM in connection with what’s 

401   Euro summit meeting (29 June 2018) – Statement, 29 June 2018.  

https://www.consilium.europa.eu/media/35999/29-euro-summit-statement-en.pdf 

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being called a backstop, but also encompassing things that will enable 
the ESM in the future to address debt sustainability and will see to 
it that the ESM’s precautionary instruments can be designed more 
effectively,’ Germany’s Chancellor Merkel said at a press conference 
after the meeting402.

Only two of the ESM’s six available aid tools have been used so far: 
long-term loans for Greece, Ireland, Cyprus, and Portugal and indirect 
aid to help Spain recapitalise its banking sector. Euro area leaders used 
their December summit to reach agreement on how they want that 
toolbox to look in the future.

The precautionary tools – which are similar to instruments that the 
IMF has – were at the centre of a vigorous debate about how they 
should be used and what changes might be needed. Although they 
have not been used yet, they may some day be needed and the euro 
area has embarked on a plan to bolster their capabilities. The goal is 
to help the euro area stave off a crisis before it becomes entrenched, 
allowing the euro zone to bounce back more quickly and avoid the 
worst parts of the cycle.

Before the summit, Eurogroup finance ministers released ‘term sheets’, 
or technical blueprints, for the ESM enhancement proposals. In the 
case of the precautionary tools, the aim was to make them more 
effective for countries that have well-managed economies but are 
nevertheless hit by an adverse shock beyond their control. 

As a result, the euro area has pledged to clarify how it determines 
whether or not a country has pursued sound economic and financial 
policies, and it affirmed that countries will always need to show the 
sustainability of their general government debt.

‘The eligibility process will be made more transparent and predictable,’ 
the Eurogroup said. In its term sheet403 on ESM reforms, it said 
eligibility for such a credit line would be reviewed at least every six 
months, and if conditions worsened then the country needing support 
might have to move to an enhanced conditions credit line or a full 
macroeconomic adjustment programme.

402  ‘European Council - National briefing Germany - December 2018, Press conference,’ Video, 

14 December 2018. https://ec.europa.eu/avservices/video/player.cfm?ref=I165257

403  Term sheet on the European Stability Mechanism reform, 4 December 2018.  

https://www.consilium.europa.eu/media/37267/esm-term-sheet-041218_final_clean.pdf

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Coupled with the bank backstop, the strategy when implemented 
promises to offer an additional level of protection and cooperation.

The euro area’s plan for the ESM also calls for changes to other rescue 
offerings. When the ESM takes over the bank backstop, that mission 
will replace direct bank recapitalisation in the firewall’s toolkit. The 
ESM will provide a credit line for the Single Resolution Fund when 
needed, to make sure the resolution fund has enough cash to handle 
the meltdown of a large financial firm. Any non-euro countries that 
join the banking union would be expected to provide their own 
revolving credit lines alongside the euro area bank backstop404.

Should the resolution fund or its backstop ever be used, outlays would 
be paid back by raising levies on European banks. If called upon, 
the ESM could make the difference in helping the system work as 
designed. The new system will be up and running no later than 2024, 
or earlier, depending on how other elements of the strategy progress.

‘With the highest paid-in capital of all international financial 
institutions and substantial firepower, the ESM can also provide a 
credible backstop to banking union,’ Centeno said already in a message 
in the 2017 ESM annual report405.

In their summit statement406, euro area leaders asked their finance 
ministers to prepare the necessary ESM Treaty amendments by 
June 2019. They said the ESM enhancements would be a core element 
of an effort to ‘significantly strengthen’ monetary union. Their 
comprehensive package also directed the Eurogroup to design a euro 
area budget instrument for competitiveness and convergence that 
could be incorporated into the EU’s multi-year fiscal framework, and it 
endorsed Commission efforts to strengthen the role of the euro in the 
international financial system.

Taken together, all these developments will strengthen the euro area and 
its firewall, and set the stage for future considerations. ‘This is part of a 
wider debate about fiscal risk sharing,’ Regling said during a July 2018 

404  Terms of reference of the common backstop to the Single Resolution Fund, 4 December 2018. 

https://www.consilium.europa.eu/media/37268/tor-backstop_041218_final_clean.pdf

405  ESM (2018), ESM annual report 2017, p. 12, Publications Office, Luxembourg, 21 June 2018. 

https://www.esm.europa.eu/publications/esm-annual-report-2017

406  Statement of the euro summit of 14 December 2018, Press release 790/18, 14 December 2018. 
https://www.consilium.europa.eu/en/press/press-releases/2018/12/14/statement-of-the-euro-
summit-14-december-2018/pdf 

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ESM management board 
and heads of division

Credit: Steve Eastwood/ESM

workshop at the ECB407. While controversial, there is also talk about 
common area fiscal tools such as a rainy-day fund or a joint fund for 
investments. These are all linked to discussions about a possible future 
sovereign debt restructuring framework, which would make settlements 
with private creditors more transparent and more predictable. The ESM 
could play a constructive role by providing debt sustainability analyses 
and by facilitating talks between creditors and debtors. ‘In my view, we 
don’t need to have a more rigid approach but a more transparent one,’ he 
said. ‘And the ESM can play a role in such a framework.’

The December 2018 decisions will allow the euro area to make the 
most of the strength it built during the crisis years. Even so, there 
remains room for the ESM, and the euro area’s overall architecture, to 
develop further. To prepare, the euro area has embarked on an 
ambitious period of reflection and change. The monetary union’s 
recent achievements are significant, but the euro area’s defence system 
is still not as solid as it could be. Those who lived through the crisis 
negotiations know the euro area would be better served if the 
remaining deficiencies were fixed now, rather than when the next crisis 
hits. This includes building public support for euro area reforms, as 
well as designing better rules and sturdier safeguards.

‘Our Economic and Monetary Union remains incomplete. There is a 
need to consolidate and complement the unprecedented measures we 
took during the crisis and make them more socially and democratically 
legitimate,’ said European Commission President Juncker. 

407  ESM (2018), ‘The role of the ESM in a deeper monetary union – speech by Klaus Regling’, Speech, 
4 July 2018. https://www.esm.europa.eu/speeches-and-presentations/role-esm-deeper-monetary-
union-speech-klaus-regling

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

The ESM has plenty to do in the meantime. The firewall must continue 
to manage the financing and repayment of the rescue programmes that 
took place, and it must consider how best to rebalance its workforce as 
it takes stock of its expanded mandate. The ESM also will continue to 
develop its investment and funding side, and to adjust its workforce to 
best handle the fund’s ongoing duties.

‘We have to prepare for a steady-state period where there is less 
excitement, more routine work,’ Regling said.

From the outset, the ESM has been mindful of attracting a diverse 
range of investors and it is constantly looking for ways to tap new 
funding sources. It has added private placements and non-euro 
issuance to the regular presence with liquid euro benchmarks. These 
are needed not only to keep up with their current liquidity needs, 
but also so that the ESM can offer a new programme at a moment’s 
notice. ‘We are a crisis mechanism,’ said Ruhl, ESM head of funding 
and investor relations. ‘We have to be ready and able to act in difficult 
market situations to raise additional money.’

The investment team aims to expand its capacity by making use of 
additional financial instruments, such as non-euro assets and short 
money market futures. The team also continuously aims to refine its 
asset allocation and benchmarking to improve the quality of its asset 
management. In parallel, it participates in discussions with shareholders 
to explore potential framework revisions, to increase the ESM’s long-
term investment performance. Finally, the team is adjusting to ongoing 
changes: the reduced liquidity of the European bond market requires 
improved monitoring of market conditions; the development of 
responsible investment may lead to the introduction of new investment 
principles, and; regulatory changes, such as the revision of Libor rates, 
lead to the adaptation of existing instruments and contracts.

‘Our responsibility to our shareholders is to make the most of the 
funds we manage, within a tight framework,’ said Frankel, ESM deputy 
managing director and CFO. ‘We don’t want to shut ourselves off from 
opportunities by not having the right product mix.’

Given its crisis experience, the ESM is now better placed than ever to 
monitor all of the countries that received financing support during the 
crisis, to make sure they can repay their loans as agreed, and to assist 
in the euro area’s efforts to protect the monetary union from future 
shocks. This reflects the institution’s growth since its inception on the 
way to its current maturity.

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Managing Director Klaus Regling and the ESM staff at the fund’s fifth anniversary. The team is ready to 
take on new mandates following the December 2018 euro summit.

Credit: Steve Eastwood/ESM

‘It has earned its credibility,’ said Malta’s Camilleri. ‘The ESM is an 
institution which is alive and kicking, quite dynamic, and it is growing 
over time. Initially its participation in certain negotiations was 
substantially less than it is now. Its presence is much more visible now.’ 

The rescue fund fits in a broader framework of strengthening growth, 
increasing resiliency and protecting against future shocks, said 
Dijsselbloem, former chairman of the ESM Board of Governors and 
former Dutch finance minister. ‘All that would make it less likely that 
ESM programmes are needed again anytime soon,’ he said. ‘However, 
as crises do happen in our economic system, it is good to know that 
the ESM is the euro area’s stability anchor – an anchor the euro area 
will always be able to rely on.’

One day, the ESM may be fully integrated in the EU framework, 
through an amendment of the EU treaties. Like the EIB, the ESM could 
have its own protocol within the EU Treaty, while also keeping its 
capital and key features of its governance structure. In the meantime, 
the firewall will continue to strengthen and improve, in order to fulfil 
all of the missions its Members have envisaged.

‘The ESM’s place is in the EU treaties and I’m sure that one day it will 
be,’ said Regling. ‘Although we are intergovernmental for the time 
being, at our core, we are an EU institution. Created by a great showing 
of European solidarity, we are one of the Union’s key defences and will 
remain so for the future.’ 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

ESM organisational chart
(2018)

MANAGING
DIRECTOR

Head of 
Communications/
Chief Spokesperson

General Counsel

Head of 
Internal Audit

Deputy 
General Counsel

Chief Risk Officer/
Head of Risk and 
Compliance

Head of HR and
Organisation

Secretary General

Deputy MD and
Chief Finance Officer

Chief Economist

Chief Corporate
Officer

Head of Funding 
and Investor Relations

Head of Investment 
and Treasury

Head of Economic 
and Market Analysis

Head of 
Middle and Back Office 
and Portfolio Performance

Head of 
IT and Operations

Head of 
Finance and Control

Head of Asset and 
Liability Management 
and Lending

Head of 
Corporate Governance
and Internal Policies

Head of
Strategy and 
Institutional Relations

Head of 
Banking

Commercial 
Legal and 
Procurement

Coordination

Member of the Management Board

Secondary reporting line

The ESM by 2018 had grown into a mature organisation, establishing a management structure  
that was both practical and well suited to its operational needs.

Source: ESM

Epilogue

This is exactly what we wanted to achieve: calm the 

markets and make sure that our support is no longer 
needed. Although we have indeed helped to do so, we 
cannot afford to relax.

Klaus Regling 
ESM Managing Director and EFSF Chief Executive Officer

T he ESM produced this book as part of its mission to protect the 

euro. It is intended both to commemorate the currency union’s 
endurance, and to ensure that the lessons of recent history are 

not forgotten.

Drawing on the experience of the EFSF, the permanent rescue fund 
was created by Europe’s policymakers in response to the greatest 
economic shock not only in the life of the euro, but also in the entire 
post-World War II era of European integration. It was, to be sure, 
an economic and financial crisis, but also a crisis of the imagination: 
the euro was set up in 1999 without a rescue fund. The risk that a 
country that uses the euro could plummet towards default was seen as 
negligible, or not seen at all.

It thus took time, even in the interdependent euro area economy of 
the 21st century, for the continent-wide consequences of financial 

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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

woes in individual countries to sink in. The crisis-response strategy 
that emerged, gradually, was in keeping with Robert Schuman’s dictum 
in 1950 that the institutions and governance of a more united Europe 
would not ‘be made all at once, or according to a single plan.’

In that sense, the rescue fund that exists today was the product of three 
evolving ‘plans,’ from the bilateral arrangements of the Greek Loan 
Facility in April 2010, to the EFSF later that summer, and on to the 
fully fledged ESM in October 2012. For many, especially in countries 
seeking relief, progress seemed painfully slow. But on the broader 
timescale of European integration, the record is more impressive. After 
all, it took a half century, punctuated by a false start in the early 1970s, 
for European nations to move from the first notions of monetary 
union to a single currency.

‘Who would have thought, only 10 years ago, that Europe would have 
put in place a European Stability Mechanism?’ said IMF Fiscal Affairs 
Director Vítor Gaspar, who served as Portuguese finance minister 
during the crisis. ‘The progress was quite remarkable. The results were 
not instantaneous but they could not have been expected to be so.’

Together with fiscal and structural reforms at the European and 
national level, the ECB’s unconventional monetary policy and the 
creation of a banking union, the rescue funds saw off the worst of the 
crisis and made monetary union more resilient.

‘Three things saved the euro zone,’ Greek central banker Yannis 
Stournaras said. ‘The first was the creation of the EFSF, and later the 
ESM. The second was [ECB President] Mario Draghi’s decision to do 
‘whatever it takes.’ The third, of course, was the governments of the 
programme countries which took very, very difficult decisions.’

Underlying these three courses of action was a shared approach 
to economic policy, and a recognition that Europe is better off 
with a single currency than without one. Rescue fund lending, 
ECB intervention, and programme country reforms were mutually 
supportive, and each cannot be conceived of without the others. 

The EFSF and ESM were dedicated to safeguarding the stability of the 
euro area as a whole, by providing financial assistance in return for 
economic, structural, budgetary and financial sector reforms. Over 
the course of the crisis, the EFSF’s total financial assistance package 
reached  €185.6 billion, alongside €109.6 billion from the ESM.

EP I L O G U E  

  3 6 7

As bonds sold to finance this aid come to maturity, the rescue funds 
will issue new bonds as necessary until all the programme countries 
have paid back their obligations. In carrying out this day-to-day 
business of refinancing the loans, the rescue funds are operating in a 
financial market environment that has been transformed by decisions 
taken during the crisis. From the EFSF’s first bond sale, the rescue 
funds have enjoyed a reputation as top-rated borrowers, in turn 
underpinning sovereign borrowers across post-crisis Europe. The 
ESM, backed by its Members’ capital and now with an established 
track record, is at the centre of the architecture sustaining the euro 
area’s strength.

While it would be best if the ESM’s aid is never again needed on 
such an extensive scale, the euro area must maintain the capacity to 
act when required. ‘It’s better to be safe than sorry. It’s an essential 
element of the euro zone economic governance framework,’ said Rehn, 
Finnish central bank governor since July 2018, who was European 
commissioner for economic and monetary affairs and the euro 
during the crisis.

During 2017 and 2018, the euro area enjoyed strong economic 
growth. Budget deficits narrowed significantly, and debt fell overall. 
Growth is benefiting countries across the board, with some of the 
former programme countries in particular displaying the strongest 
economic performance thanks to the reforms they undertook. Four 
of the five countries helped by the EFSF and ESM are economic 
successes. The fifth programme country, Greece, has also made great 
strides. It successfully exited its third programme on 20 August 2018 
and now needs to continue with its reform agenda to strengthen its 
growth potential. 

The crisis proved the mettle of the ESM as an institution, anchoring 
it in the euro area landscape. But there was a personal side to this as 
well. It is impossible to write of the ESM’s contribution to the European 
project without acknowledging the commitment of its employees, who 
bring a wide range of professional expertise to the common goal of 
defending the single currency.

Especially at the start, the hours were long and it was hard to tell 
whether going to work for a special purpose vehicle in Luxembourg 
was the right career move. But in the words of Chief Economist Rolf 
Strauch, echoing the view inside the ESM, the effort was worth it. 
‘Personally for me, there is absolutely zero regret. This is probably 

 
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a once in a lifetime unbelievable roller coaster type of experience,’ 
Strauch said. 

When Schuman proposed pooling French and German coal and steel 
production as a first step towards European economic unity all those 
years ago, one of his initial goals was ‘the aim of contributing to raising 
living standards and to promoting peaceful achievements’408.

This effort resounds down through the history of what is now the EU, 
with the ESM standing as the latest example of the practical problem-
solving that paves the way for a more prosperous future. As the ESM 
prepares to take up a new set of challenges envisaged by European 
leaders, it will strive to do what is right for the citizens of the euro area. 

A more robust monetary union contributes to the betterment of all. 
As ESM Managing Director Regling says: ‘All euro area countries and 
their citizens benefit.’ 

408  Schuman, R. (1950), ‘The Schuman Declaration’, 9 May 1950.  

https://europa.eu/european-union/about-eu/symbols/europe-day/schuman-declaration_en

ANNEXES

Biographies
Timeline
EFSF and ESM disbursements
EFSF and ESM rating history
Loan re-profiling for Greece, Ireland, and Portugal
Acronyms and abbreviations
Index

  A N N ExE S  

  3 7 1

Biographies

Maria Luís Albuquerque 

Ms Albuquerque is a member of the Portuguese Parliament and a non-executive 
director at UK-based Arrow Global. She was Portugal’s Minister of State and 
Finance between 2013 and 2015, when she oversaw the final implementation and 
successful exit in May 2014 of Portugal from its financial assistance programme. 
During this time, Portugal received support from the EFSF, the EU, and the IMF. 
Ms Albuquerque has been in government since 2011, initially as Deputy Minister 
of the Treasury. Before that, she was Head of Issuing and Markets at the Portuguese 
Debt Management Agency. 

Kalin Anev Janse

Mr Anev Janse is Secretary General of the ESM and EFSF and the Management 
Board member responsible for Funding and Investor Relations, IT and Operations, 
Asset Liability Management and Lending, and Corporate Governance and Internal 
Policies. He previously worked for the European Investment Bank, where one of his 
tasks was to coordinate setting up the EFSF. Prior to this, he was a corporate finance 
advisor for McKinsey & Company.

Benjamin Angel

Mr Angel is Director for Treasury and Financial Operations at the European 
Commission. During the financial crisis, he was Head of Unit in charge notably of 
the creation of the European sovereign firewalls, the EFSF, the ESM, and the EFSM, 
and the macro-prudential supervision body, the European Systemic Risk Board. He 
has worked at the European Commission since 1994.

Françoise Blondeel

Ms Blondeel is the ESM’s Chief Corporate Officer and the Management Board 
member responsible for the Middle Back Office and Portfolio performance, Strategy 
and Planning, Procurement, and promoting diversity within the ESM. Before 
joining the EFSF in 2012, Ms Blondeel worked as Head of Middle and Back Office 
at the French debt management office and at CADES, the French agency responsible 
for redeeming social security debt.

Marco Buti 

Mr Buti has been the Director-General for Economic and Financial Affairs at 
the European Commission since 2008, during which time all six EFSF and ESM 
financial assistance programmes were agreed upon. He began his career at the 
European Commission in 1987 and served in a variety of senior roles.

 
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Alfred Camilleri

Mr Camilleri has been Permanent Secretary at the Maltese Ministry for Finance 
since 2006. He has served as Chairman of the Compensation Committee of the ESM 
since 2014. In a public service career spanning 40 years, he has served as Director at 
the Central Office of Statistics, and Director General at the National Statistics Office. 
He is also a visiting lecturer in statistics and public policy at the University of Malta.

Kevin Cardiff

Mr Cardiff is the non-executive director of KBC Bank Ireland, a member of the 
European Court of Auditors, and the current Chairperson of the external Board 
of Auditors of the ESM. He served as Secretary General in Ireland’s Department of 
Finance from 2010 to 2012. He helped to oversee Ireland’s application for financial 
assistance in November 2010 and the programme’s initial implementation. The 
programme was the EFSF’s first. 

Mário Centeno

Mr Centeno has been the Chairperson of the ESM Board of Governors and the 
President of the Eurogroup since January 2018. He has also served as the Portuguese 
Minister of Finance since 2015, after being elected as a Member of the Parliament in 
the same year. Previously, he was an economist at the central bank of Portugal and a 
university professor. 

Luis de Guindos 

Mr de Guindos is the vice president of the ECB. From 2011 to 2018, he served as 
Spain’s Minister of Economy, Industry and Competitiveness. He negotiated the 
ESM’s banking sector programme, overseeing its implementation and successful 
conclusion in December 2013. In addition to previous senior posts in the Spanish 
government, he has private sector experience with PricewaterhouseCoopers and 
Lehman Brothers. 

Jeroen Dijsselbloem

Mr Dijsselbloem served as President of the Eurogroup from February 2013 to 
January 2018 and, simultaneously, as Chairman of the ESM Board of Governors. He 
was also the Dutch Minister of Finance from 2012 to 2017. From 2000 to 2012, he 
was a member of the Dutch House of Representatives. 

Mario Draghi

Mr Draghi has been President of the European Central Bank since 2011. Previously, 
he was Governor at the Bank of Italy from 2006 to 2011, while also serving as the 
Chairman of the Financial Stability Forum (later the Financial Stability Board). He 
was Director of the Italian Treasury from 1991 to 2001.

  A N N ExE S  

  3 7 3

David Eatough

Mr Eatough is the General Counsel of the ESM and the EFSF and the Management 
Board member responsible for the legal affairs of both institutions, and for Human 
Resources and Organisation. He joined the ESM in 2013, having worked for more 
than 20 years in several major financial centres around the world, both in investment 
banking and as a partner at a leading international law firm. He is qualified as a 
solicitor in Ireland and as a solicitor and barrister in England and Wales.

Christophe Frankel

Mr Frankel has been the Deputy Managing Director and CFO of the ESM since its 
foundation and CFO and Deputy CEO of the EFSF since its 2010 creation. He is the 
Management Board member responsible for Investment and Treasury, and Finance 
and Control. Previously, he was Head of Financial Markets at Crédit Foncier de 
France in Paris and beforehand CFO for CADES, the French agency responsible for 
redeeming social security debt. 

Mitsuhiro Furusawa

Mr Furusawa has been Deputy Managing Director at the IMF since 2015. He was 
also IMF Executive Director from 2010 to 2012. Other key positions include: Vice 
Minister of Finance for International Affairs at the Japanese Ministry of Finance 
from 2013 to 2014 and Special Advisor to Japanese Prime Minister Shinzo Abe. 

Vítor Gaspar

Mr Gaspar is Director of the Fiscal Affairs Department of the International 
Monetary Fund. He was Portugal’s Minister of State and Finance from 2011 to 2013. 
In this role, he oversaw the initial implementation of the Portuguese assistance 
programme, which was agreed just before he assumed office. He previously served 
in senior policy positions at the Portuguese central bank and headed the European 
Commission’s Bureau of European Policy Advisers from 2007 to 2010.  

Timothy Geithner

Mr Geithner is President of the private equity firm Warburg Pincus. He was US 
Secretary of the Treasury from 2009 to 2013, helping to successfully guide the US 
through the financial crisis. Previously, he served as President of the Federal Reserve 
Bank of New York for five years, after a career at the US Treasury and the IMF. 

Vittorio Grilli 

Mr Grilli is Chairman of the Europe, Middle East and Africa operation of J.P. 
Morgan’s Corporate & Investment Bank. He was the Italian Minister of Economy 
and Finances from 2012 to 2013. He previously served in multiple roles with the 
Italian Treasury and on the EU’s Economic and Financial Committee from 2009 to 
2012, of which he ultimately became Chairman. 

 
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Georges Heinrich

Mr Heinrich is the Secretary General at the Banque de Luxembourg. He was the 
EFSF’s first sole director, and was Chairman of the EFSF Board of Directors from 
2012 to 2014. He also served as Treasurer-General at the Ministry of Finance 
of Luxembourg.

Deborah Henderson

Ms Henderson owns and runs Centre for Inspired Leadership, which specialises in 
workplace culture and leadership for organisations in the financial sector. In late 
2011, Ms Henderson was hired as a coach to the Management Team of the EFSF. 
A culture initiative she helped design was rolled out in phases throughout 2012 
and 2013.

Ralf Jansen

Mr Jansen was the first General Counsel of the ESM and the EFSF and a member of 
the Management Board for more than six years until 2016. Previously, he worked for 
HSBC and a Bank of New York Mellon asset management affiliate. He has since left 
the ESM to set up in private practice.

Jean-Claude Juncker

Mr Juncker has been European Commission President since 2014. From 2004 
to 2013, he served as the first President of the Eurogroup, and therefore as the 
first Chairman of the ESM Board of Governors. During his tenure as Eurogroup 
President, the EFSF programmes for Ireland, Greece (II), and Portugal, as well as the 
ESM programmes for Spain and Cyprus were agreed upon. In the 18 years prior to 
his appointment as European Commission President. He was Luxembourg’s Prime 
Minister, during much of which he also served as Luxembourg’s Finance Minister. 

Peter Kažimír

Mr Kažimír has been Finance Minister of Slovakia since 2012. In addition, from 
2012 to 2016, and again from 2018, he has also served as Deputy Prime Minister. 
From 2010 to 2012, he was a Member of Parliament and Vice-Chairman of the 
Finance and Budget Committee. Since 2010 he has also been the Vice-Chairman of 
Social Democracy (SMER-SD). From 2006 to 2010, he served as State Secretary of 
the Finance Ministry.

Christine Lagarde

Mme Lagarde has been the Managing Director of the IMF since 2011. She was 
French Finance Minister from 2007 to 2011, when the EFSF was created, and also 
served as Minister of State for Foreign Trade for two years. She entered politics after 
a career as an anti-trust and labour lawyer at Baker McKenzie, an international law 
firm, where she was global chairman. 

  A N N ExE S  

  3 7 5

John Lipsky 

Mr Lipsky is the Peter G. Peterson Distinguished Scholar at the Henry A. Kissinger 
Center for Global Affairs and a Senior Fellow at the Foreign Policy Institute, both 
of the Paul H. Nitze School for Advanced International Studies at Johns Hopkins 
University.  Mr. Lipsky was First Deputy Managing Director of the IMF from 2006 
to 2011 and Acting Managing Director from May to July 2011. He worked for 
the IMF early in his career before joining the private sector. Prior to rejoining 
the IMF, he was Vice Chairman of J.P. Morgan Investment Bank and J.P. Morgan’s 
Chief Economist. 

David Lipton

Mr Lipton has been the IMF’s First Deputy Managing Director since 2011. 
Previously, he was Special Assistant to US President Barack Obama, Senior Director 
for International Economic Affairs at the National Economic Council and National 
Security Council at the White House. Under President Bill Clinton, he served as 
Under Secretary for International Affairs at the US Treasury, and before that as 
Assistant Secretary.

George Papaconstantinou

Mr Papaconstantinou is a Professor at the European University Institute and works 
in an advisory capacity in the private sector. He served as Greek Finance Minister 
from 2009 to 2011. In May 2010, during his tenure as Greek Finance Minister, 
euro area member states and the IMF granted Greece its first financial assistance 
programme. He is also a former Minister for the Environment, Energy and Climate 
Change. 

Klaus Regling

Mr Regling is the first Managing Director of the ESM. He is also the CEO of the 
EFSF, a position he has held since its creation in June 2010. An economist, he 
worked at the IMF for a decade and at the German Ministry of Finance for another 
decade, where he helped prepare for European Economic and Monetary Union. 
From 2001 to 2008, he was Director General for Economic and Financial Affairs at 
the European Commission.

Olli Rehn

Mr Rehn is Governor of the Bank of Finland. He was the European Commissioner 
for Economic and Monetary Affairs and the Euro during much of the financial 
crisis from 2010 to 2014. Earlier, he was Commissioner for Enlargement and 
Commissioner for Enterprise and the Information Society. He served as Finland’s 
Minister for Economic Affairs from 2015 to 2016, and was a Member of Parliament 
and a Member of the European Parliament in the 1990s and 2010s. 

 
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Michael Sarris 

Mr Sarris was the Finance Minister of Cyprus on two separate occasions. During his 
first term, from 2005 to 2008, he helped to prepare Cyprus for the adoption of the 
euro. In his second term, he negotiated Cyprus’s financial assistance package from 
the ESM and IMF in 2013. He previously worked at the Central Bank of Cyprus and 
for the World Bank. 

Wolfgang Schäuble 

Mr Schäuble is the President of the German Parliament. He was Germany’s Finance 
Minister from 2009 to 2017, when both the EFSF and the ESM were created and all 
six of their financial assistance programmes were agreed upon. Previously, he was 
Minister of the Interior from 1989 to 1991 and again from 2005 to 2009. He has 
been a member of the Bundestag since 1972.

Yannis Stournaras 

Mr Stournaras has been the Governor of the Bank of Greece since 2014. He was the 
Greek Finance Minister between 2012 and 2014, overseeing the implementation of 
Greece’s second financial assistance package with the EFSF. He worked as special 
advisor to the Ministry of Finance and the Bank of Greece through much of the 
1980s and 1990s and helped negotiate Greece’s ascension to the euro as a member of 
the Monetary Committee of the European Union. He was previously an academic at 
Oxford and the University of Athens. 

Rolf Strauch 

Mr Strauch is Chief Economist and Management Board Member of both the EFSF and 
ESM, in charge of Economics, Policy Strategy, and Banking. Before joining the EFSF in 
2010, he worked at the European Central Bank and at the Deutsche Bundesbank. 

Fernando Teixeira dos Santos

Mr Teixeira dos Santos is an economics professor at the University of Porto and a 
Director of Banco Bic Português. He was Portugal’s Minister of Finance from 2005 
to 2011, when the EFSF was created. He requested Portugal’s loan from the EFSF, but 
left office soon after. He was Chairman of the Portuguese Securities and Exchange 
Commission from 2000 to 2005 and, from 1995 to 1999, he was Secretary of State for 
the Treasury and Finance. 

Jean-Claude Trichet

Mr Trichet is Chairman of the Brussels-based Bruegel economic think tank and 
of the Trilateral Commission for Europe. Previously, Mr Trichet was the second 
President of the European Central Bank, serving from 2003 until 2011, having 
held the post of Governor of the Bank of France for the previous 10 years. He was 
President of the Global Economy Meeting at the Bank for International Settlements, 
and the first President of the European Systemic Risk Board. 

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  3 7 7

Euclid Tsakalotos

Mr Tsakalotos has been the Greek Minister of Finance since 2015. During his 
tenure, Greece implemented its third financial support programme, with the ESM, 
which concluded successfully in August 2018. He is a member of the Central 
Committee of the Syriza party and has been a Member of Parliament since 2012. He 
is also a professor of economics at the University of Athens. 

David Vegara

Mr Vegara is a lecturer at ESADE Business School and a member of the Board of 
Banco Sabadell. He served as ESM senior advisor and Deputy Managing Director for 
Banking from September 2012 through February 2015. Previously, he worked at the 
IMF as Deputy Director of the Western Hemisphere Department. Before joining the 
IMF, from 2004 to 2009, he was State Secretary for Economic Affairs at the Spanish 
Ministry of Economy and Finance, serving also as chairman of the European 
Union’s Financial Services Committee from 2005 to 2009. 

Maarten Verwey

Mr Verwey has served as Director-General of the European Commission’s Structural 
Reform Support Service since 2015. In 2010, while working at the Dutch Ministry 
of Finance, he was appointed Chairman of the Task Force on Coordinated Action, 
which was responsible for the coordinated European response to the financial crisis, 
serving through 2015. During this time, he played a key role in the EFSF’s creation 
and structure. He began his career at the Dutch Ministry of Finance in 1994. 

Thomas Weinberg

Mr Weinberg is the Division Head of Trading and Issuing Business at the German 
Finance Agency. In 2010, he was appointed project manager in charge of establishing 
the infrastructure for the funding operations of the EFSF, in terms of both staffing 
and strategy. He and his team set up the EFSF’s initial issuance programme and ran 
the EFSF’s first and many subsequent issues. 

Thomas Wieser 

Mr Wieser was Chairman of the European Union’s Economic and Financial 
Committee from 2009 to 2011 and from 2012 to 2018, and President of the Eurogroup 
Working Group from 2011 to 2018. At their helm, he played a key role in putting 
together and achieving consensus among the euro area member state representatives 
on the financial assistance programmes run by the EFSF and the ESM. 

 
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Timeline

13 March

European Monetary System enters into force. This includes 
the European Exchange Rate Mechanism, designed to reduce 
currency fluctuations in preparation for Economic and 
Monetary Union (EMU).

9 November

Berlin Wall falls.

1 July

The first stage of EMU starts with capital movement 
restrictions lifted and cooperation between central banks 
enhanced.

7 February

Maastricht Treaty is signed, amending the European treaties to 
achieve EMU and establishing the EU. 

1 January

Second stage of EMU starts with establishment of the 
European Monetary Institute.

1 June

ECB is established.

1 January

Third and final stage of EMU starts. Monetary union begins 
with the introduction of cashless euro transactions in first 
11 countries – Belgium, Germany, Ireland, Spain, France, Italy, 
Luxembourg, the Netherlands, Austria, Portugal, and Finland – 
and the entry into force of the stability and growth pact.

1 January

Greece adopts the euro, bringing membership to 12. 

1 January

1 May

Euro becomes legal currency, with notes and coins reaching 
people’s pockets for the first time.

Eight mainly central and eastern European countries join the 
EU, bringing membership to 25.

1 January

•  Slovenia adopts the euro, bringing membership to 13.

•  Bulgaria and Romania join the EU, bringing membership to 27.

17 July

US investment bank Bear Stearns informs investors that two 
hedge funds that invested in subprime-backed securities have 
very little value remaining, and on 31 July files for bankruptcy 
and liquidates them. 

All links were checked and worked correctly on 5 April 2019.

  A N N ExE S  

  3 7 9

9 August 

BNP Paribas, France’s largest bank, halts redemptions on three 
investment funds because of subprime concerns.

14 September 

UK Treasury authorises the Bank of England to provide 
liquidity support for Northern Rock, the country’s fifth-largest 
mortgage lender.

1 January 

Malta and Cyprus adopt the euro, bringing membership to 15.

17 February

UK nationalises Northern Rock.

24 March 

US Federal Reserve agrees to guarantee $30 billion of Bear 
Stearns assets as part of a government-sponsored sale to 
JPMorgan Chase.

7 September

US government takes over mortgage giants Freddie Mac and 
Fannie Mae.

15 September 

•  Lehman Brothers files for biggest bankruptcy in US history.

•  Bank of America agrees to buy Merrill Lynch for $50 billion, 

rescuing the investment bank.

16 September 

US Federal Reserve authorises loan of $85 billion to the 
American International Group (AIG), the world’s largest insurer.

18 September

Lloyds TSB announces it is taking over the UK’s biggest 
mortgage lender, HBOS, in a £12 billion deal.

25 September

Ireland’s Central Statistics Office announces the country is 
officially in recession.

28 September

European banking giant Fortis is partly nationalised.

29 September

US Congress rejects Wall Street financial rescue package, 
including the $700 billion Troubled Asset Relief Program 
(TARP). 

30 September

•  Irish government issues guarantee for banks’ liabilities.

•  Dexia Bank receives €6.4 billion in financial assistance from 

governments of Belgium, France, and Luxembourg.

3 October 

US Congress passes a revised version of the financial 
package that includes TARP, which President George W Bush 
signs into law.

4 October 

Leaders of Germany, France, Italy, and the UK call for 
international summit to address the crisis.

 
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8 October 

•  UK government announces £500 billion bank bailout scheme.

10 October

13 October 

31 October

15 November 

3 December

19 December

21 December

•  Six central banks (Bank of Canada, Bank of England, ECB, 

US Federal Reserve, Sveriges Riksbank, Swiss National Bank) 
lower rates in coordinated move.

Group of Seven finance ministers and central bank governors 
call for ‘urgent and exceptional action’ to ‘stabilize financial 
markets and restore the flow of credit, to support global 
economic growth’.

UK government announces £37 billion rescue plan for Royal 
Bank of Scotland, HBOS, and Lloyds TSB.

Financial assistance of €20 billion agreed for Hungary. Of the 
total, the EU contributes €6.5 billion; the IMF €12.5 billion; and 
the World Bank €1 billion.

Group of 20 (G20) summit in Washington DC. Leaders meet to 
coordinate their response to the financial crisis. They agree to 
‘take whatever further actions are necessary to stabilize the 
financial system’, including increased oversight of banks and 
the reform of global financial institutions.

US Securities and Exchange Commission strengthens 
oversight of credit-rating agencies, which it says ‘contributed to 
the recent turmoil in the credit markets’ through their ratings of 
subprime-backed securities.  

US President Bush offers up to $17.4 billion in emergency 
loans for car makers General Motors and Chrysler.

Irish Finance Minister Brian Lenihan announces plan to 
recapitalise the country’s three main banks: Anglo Irish Bank, 
Allied Irish Bank, and Bank of Ireland.

1 January 

Slovakia adopts the euro, bringing membership to 16. 

14 January

15 January

19 January

20 January

Standard & Poor’s downgrades Greece: A- from A, the first 
in a series of downgrades leading to the eventual loss of 
investment grade.

Irish government announces nationalisation of Anglo Irish 
Bank after determining recapitalisation is insufficient.

Standard & Poor’s downgrades Spain: AA+ from AAA, the first 
in a series by the major ratings agencies, although the country 
never loses investment grade.

Ecofin approves €3.1 billion financial assistance to Latvia, 
part of a total €7.5 billion package. Of that total, the IMF 
commits €1.7 billion; the World Bank, the European Bank for 
Reconstruction and Development (EBRD), and seven individual 
European countries also pledge assistance. 

  A N N ExE S  

  3 8 1

21 January

23 January 

11 February

30 March

2 April 

4 May

Standard & Poor’s downgrades Portugal: A+ from AA-, the 
first in a series of downgrades leading to the eventual loss of 
investment grade.

The ‘Vienna Initiative’ to safeguard the financial stability of 
emerging Europe is launched.

Recapitalisation terms agreed for Allied Irish Bank and Bank of 
Ireland. Each is to receive €3.5 billion.

Standard & Poor’s downgrades Ireland: AA+ from AAA, the first 
in a series of downgrades leading to the July 2011 loss of its 
investment grade.

G20 summit in London. Leaders agree to expand the Financial 
Stability Forum into the Financial Stability Board with a beefed-
up role monitoring the global financial system. 

IMF approves €12.9 billion stand-by arrangement for Romania, 
part of a total €20 billion package. Of that total, the EU commits 
€5 billion; the World Bank €1 billion; the EBRD and the EIB a 
combined €1 billion. 

26 June 

Spanish government establishes FROB to channel public 
financial support to banks. 

25 September 

21 October

13 November

22 November

2 February

11 February

G20 summit in Pittsburgh. Leaders decide that it is the 
appropriate international forum to deal with the current crisis 
and draws up the ‘Framework for strong, sustainable and 
balanced growth’.

Greece announces that the government deficit is much worse 
than previously reported. The 2008 deficit was 7.7%, not 5%, 
and in 2009 the deficit was planned to be 12.5%, not 3.7%. 

Eurostat says that euro area GDP increased by 0.4% in the 
third quarter of 2009, the first increase after five consecutive 
quarters of economic contraction.

Ireland’s National Asset Management Agency Act 2009 
becomes law, creating a ‘bad bank’ that becomes operational 
in December.

Greece adopts measures to cut the fiscal deficit, including 
wage freezes.

EU leaders declare that they ‘will take determined and 
coordinated action, if needed, to safeguard financial stability in 
the euro area as a whole.’

5 March

Greek parliament passes a package of measures that freeze 
pensions, cut civil servant salaries, and raise taxes.

 
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25 March

30 March

31 March

22 April

23 April

2 May

9 May 

10 May

7 June

27 June

EU leaders meet and pledge to offer support to Greece 
alongside IMF, noting country has not yet asked for assistance.

Ireland’s National Asset Management Agency buys a first batch 
of loans at an average discount of 47%.

Anglo Irish reports biggest corporate loss in Irish history, 
€12.7 billion for the 15 months to end-2009 after writing off 
€15.1 billion in bad loans.

Eurostat revises the Greek 2009 deficit up to 13.6% with a final 
upward revision to 15.4% on 15 November.

Greece formally requests financial assistance from the euro 
area member states and the IMF.

Eurogroup approves a three-year, €80 billion, bilateral loan 
programme for Greece (GLF), part of a €110 billion package.  
Of that total, IMF commits €30 billion in a stand-by 
arrangement on 9 May.

Agreement is reached on setting up the EFSF. It will have a 
total lending capacity of €440 billion.

ECB launches its Securities Markets Programme to address 
‘severe tensions in financial markets’.

EFSF is established in Luxembourg. 

G20 summit in Toronto. Amid protests, leaders meet to discuss 
the global economic crisis, concluding ‘serious challenges 
remain’.

4 August

EFSF becomes fully operational.

7 September

12 September

29 September

Ecofin endorses reforms agreed with the European Parliament 
on the EU framework for supervising the financial system, 
including the setting up of a macroprudential oversight body 
under the auspices of the ECB, the European Systemic Risk 
Board, as well as three supervisory authorities for banks, 
securities markets, and insurance companies.

Basel Committee on Banking Supervision adopts the Basel III 
accord, introducing higher global minimum capital standards 
for banks.

European Commission proposes six legislative measures 
to improve the EU’s fiscal and economic governance and 
surveillance (the ‘six-pack’). These include strengthening the 
stability and growth pact and introducing a process to monitor 
and correct macroeconomic imbalances.

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30 September

Irish Finance Minister Lenihan says the cost of supporting 
the banking sector (€46 billion at end 2010) will cause a 
‘substantial spike’ in the country’s deficit.

18 October

German Chancellor Angela Merkel and French President 
Nicolas Sarkozy meet in Deauville, and agree to ensure that 
bondholders, such as banks and hedge funds, share some of 
the costs of risky lending by participating in the rescue of euro 
area member states on the brink of insolvency.

21 October

European Council task force report includes recommendations 
to improve budgetary discipline and establish a permanent 
crisis management mechanism.

29 October

European Council agrees to establish a new permanent crisis 
resolution mechanism, the ESM, in 2013.

3 November

Hungary’s international financial assistance programme expires. 

12 November

G20 summit in Seoul. Leaders discuss strengthening the 
international financial regulatory system and financial safety 
nets, as well as pursuing the reform of international financial 
institutions.

16 November

Standard & Poor’s downgrades Cyprus: A from A+, the first 
in a series of downgrades by the three major rating agencies 
leading to the 2012 loss of investment grade.

21 November

•  Ireland requests financial assistance from the EU, euro area 

7 December

member states, and the IMF.

•  Eurogroup and Ecofin agree to provide Ireland with assistance 

through what will become the EFSF’s first programme.

The Council of the European Union formally agrees Europe’s 
share of an €85 billion joint financial assistance package for 
Ireland, with contributions from the EU, the euro area, and the 
IMF, bilateral contributions from Denmark, Sweden, and the UK, 
as well as Ireland’s own contributions. The IMF approves its 
€22.5 billion extended arrangement for Ireland on 16 December. 

16 December

ECB nearly doubles its capital to give it more leeway to take 
action in the crisis.

17 December

EU leaders adopt the treaty amendment required to set up 
the ESM (Article 136 of the Treaty on the Functioning of the 
European Union) and agree on its general format.

23 December

Ireland effectively nationalises Allied Irish Bank with capital 
injection of €3.7 billion.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

1 January

Estonia adopts the euro, bringing membership to 17.

25 January

26 January

11 March

EFSF places inaugural 5-year €5 billion bond. The issue is 
nearly nine times oversubscribed.

Following the EFSF’s successful bond issue, Irish media 
question the high interest rate the rescue fund charges for 
loans to Ireland compared with its funding cost.

At special summit, euro area leaders boost the EFSF’s 
lending capacity to the full €440 billion by agreeing on extra 
guarantees. They enable it to conduct primary market bond 
purchases and recommend that it reduce interest rates on 
programme country loans.

21 March

Eurogroup agrees to endow the ESM with €500 billion capacity, 
backed by €80 billion in paid-in capital and €620 billion in 
‘callable’ capital.

23 March

Portuguese parliament rejects government’s reform measures.

24 March

29 March

7 April

12 May

16 May

5 June

20 June

24 June

José Sócrates’ government in Portugal resigns but remains in 
a caretaker capacity.

2010 Portuguese deficit reaches 8.6% of GDP, above the 
7.3% target.

Portugal requests financial assistance from the EFSF, the 
EFSM, and the IMF.

Romania’s second financial assistance programme takes 
shape ahead of the June 2011 end of the first programme. The 
second includes precautionary loans of up to €1.4 billion from 
the Council of the European Union, agreed on 12 May, and a 
€3.5 billion IMF stand-by arrangement, approved on 25 March 
2011, also precautionary. 

Eurogroup and Ecofin agree to provide financial aid to Portugal. 
Of the total €78 billion, the EFSF, EFSM, and the IMF each 
commits €26 billion.

Pedro Passos Coelho announces he will form a coalition 
following Portuguese elections that prompt Sócrates’ 
resignation.

Eurogroup states that Greece is unlikely to regain private 
market access by early 2012.

EU leaders agree to take all steps required to ensure the 
ratification of the ESM Treaty by the end of 2012 and for rapid 
entry into force of the amended EFSF.

  A N N ExE S  

  3 8 5

29 June

July

11 July

21 July

16 August

2 October

4 October

13 October

26 October

31 October

Greek parliament passes second fiscal consolidation bill after 
widespread protests and strikes. 

Greek adjustment programme’s fourth review says pace of 
reforms has substantially slowed, and recession is worse than 
projected.

Euro area member states sign the first ESM treaty.

Euro area leaders prepare for a second Greek programme, 
envisaging an EFSF contribution and private sector debt 
restructuring. Leaders also further expand the EFSF’s toolkit.

German Chancellor Angela Merkel and French President 
Nicolas Sarkozy launch call for strengthened euro area 
governance.

Greece says it will miss key deficit targets agreed with its 
international lenders.

Ecofin approves the six-pack measures designed to strengthen 
economic governance in the EU. 

EFSF Members approve an increase in guarantee 
commitments to €780 billion, including an overguarantee of up 
to 165%, to secure its €440 billion lending capacity.

Euro area leaders say the private sector has a ‘vital’ role to 
play in restoring Greek debt sustainability. They also agree two 
options to leverage the EFSF’s resources.

Greek Prime Minister George Papandreou calls for a 
referendum on the rescue plan. It is cancelled three days later, 
and he resigns on 9 November.

1 November

Mario Draghi succeeds Jean-Claude Trichet as ECB president.

4 November 

•  G20 summit in Cannes. Leaders agree that supporting 
growth is a priority and decide to strengthen the IMF, 
increasing its lending capacity. 

•  Financial Stability Board publishes an initial list of 29 ‘too-

big-to-fail’ systemic international banks.

11 November

Lucas Papademos is sworn in as new Greek prime minister. 

20 November

Mariano Rajoy’s centre-right People’s Party wins an absolute 
majority in Spanish elections.

30 November

Global central banks (ECB, Bank of Canada, Bank of England, 
Bank of Japan, US Federal Reserve, and Swiss National 
Bank) announce coordinated plan to boost liquidity in global 
financial system. 

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

8 December

9 December

ECB cuts main interest rate to 1% and offers to lend to euro 
area banks under its longer-term refinancing operations for 
three years.

Euro area leaders agree to implement a ‘fiscal compact’ for 
stronger economic policy coordination and discipline, and 
reinforce rules for the excessive deficit procedure. They also 
decide to accelerate the entry into force of the ESM Treaty 
(with adjustments to make it more effective, such as an 
emergency voting procedure). 

16 December

Cypriot parliament adopts measures to reduce the government 
deficit to 2.5% of GDP in 2012 from 6.3% of GDP in 2011.

23 December 

Cyprus obtains a €2.5 billion loan from Russia. It restructures 
terms in 2013, and makes first repayment on schedule in 
March 2018.

5 January

19 January

31 January

EFSF implements diversified funding strategy, issuing first non-
back-to-back bond, a 3-year maturity, raising €3 billion. 

EU financial assistance programme to Latvia expires. 
This follows the conclusion of the IMF programme in 
December 2011. 

Spanish jobless rate jumps to 22.9% in December 2011, or 
5.27 million people – then the highest in the EU. The rate will 
peak at an average 26.2% in 2013, surpassed only by Greece’s 
27.5% during the crisis.

2 February

Euro area member states sign the second, amended, ESM Treaty.

17 February

21 February

28 February

EFSF launches the European Sovereign Bond Protection 
Facility and prepares to introduce the European Sovereign Bond 
Investment Facility, creating the two leverage vehicles agreed 
by euro area leaders in October 2011. Both are eventually 
dissolved, unused.

Eurogroup reaches preliminary deal on second assistance 
package for Greece. 

As part of the Greek sovereign debt restructuring (bond 
exchange with private sector involvement (PSI)), ECB 
temporarily suspends the eligibility of marketable debt 
instruments issued or fully guaranteed by Greece for use as 
collateral in Eurosystem monetary policy operations. Eligibility 
is restored two weeks later. 

1 March

European Commission says that major progress has been made 
in strengthening and downsizing Ireland’s banking system, and 
that the recapitalisation of banks is largely complete.

  A N N ExE S  

  3 8 7

9 March

14 March

22 March

30 March

17 April

20 April

25 April

6 May

9 May

15 May

Greek sovereign debt restructuring (bond exchange with private 
sector involvement) of around €199 billion begins, concluding 
on 25 April.

Euro area member states approve second Greek programme, 
with the EFSF. The overall €130 billion programme includes 
undisbursed funds from the IMF and EU from the first financial 
assistance programme. The next day, the IMF agrees a 
€28 billion extended fund facility for Greece, after Greece 
cancels its stand-by arrangement of 9 May 2011.

‘The worst of the euro crisis is over,’ ECB President Mario 
Draghi tells German newspaper Bild.

•  Eurogroup decides to increase ESM/EFSF combined lending 
capacity to €700 billion from €500 billion, and to accelerate 
the payment schedule of ESM paid-in capital. The ESM is to 
be the main instrument to finance new programmes from 
July 2012. Euro area countries also commit €150 billion in 
additional bilateral contributions to the IMF.

•  Spain’s government proposes a drastic reduction in budget 
spending of 16.9%, or €27 billion, after a 2011 fiscal deficit 
first estimated at 8.5% of GDP, but later revised to 9.6%.

IMF Managing Director Christine Lagarde says that  
Economic and Monetary Union requires ‘a single bank 
resolution authority with a common backstop, and a single 
deposit insurance fund.’

At IMF and World Bank spring meeting, G20 countries agree 
that IMF resources to tackle the global financial crisis should 
be increased by $430 billon.

IMF identifies a group of 10 Spanish banks that are vulnerable, 
including the country’s largest mortgage lender, Bankia.

Greek parliamentary elections are held, but no majority winner 
emerges. Coalition talks fail, so new elections are set for June.  

Spain’s central bank confirms Bankia is to be partly 
nationalised.

Ecofin adopts general approach to transposing into EU law new 
Basel III capital requirements for banks and investment firms 
agreed at G20.

21 May

•  Cyprus adopts legislation allowing it to underwrite Laiki 

Bank’s €1.8 billion capital increase, in effect committing to 
purchase any shares not bought by private investors.

•  Spain commissions consultants Oliver Wyman to conduct an 
independent and comprehensive review of Spanish banks.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

24 May

30 May

5 June

17 June

19 June 

European Council reinforces commitment to safeguard 
financial stability.

European Commission’s in-depth review of 12 member states 
identifies ‘very serious imbalances’ in Cyprus and Spain that 
need to be addressed urgently.

Spain’s Treasury Minister Cristóbal Montoro says that Spain is 
having problems accessing credit markets. 

Antonis Samaras wins election as Greek Prime Minister and 
takes office three days later.

G20 summit in Los Cabos, Mexico. Leaders urge Europe to 
shore up its financial foundations.    

25 June

•  Spain asks the Eurogroup for financial assistance. 

•  Cyprus asks the Eurogroup for financial assistance. 

26 June

29 June

30 June

20 July

European Council president publishes a report sketching out 
euro area reforms, such as banking union, including the direct 
recapitalisation of banks by the ESM, on which euro area 
leaders follow up at summit three days later.

At summit, euro area leaders call for the establishment of a 
Single Supervisory Mechanism (SSM) for euro area banks and 
plan to give the ESM a tool to recapitalise banks directly. 

Having failed to attract sufficient private investment, Cyprus 
rescues Laiki Bank, making the €1.8 billion share purchase for 
an 84% holding in the bank.

Eurogroup approves Spanish programme for the recapitalisation 
of financial institutions, covering financing needs of up to 
€100 billion. The IMF contributes in an advisory fashion only.

26 July

•  Mario Draghi says that ‘the  ECB is ready to do whatever it 

takes to preserve the euro’.

6 September

•  Ireland returns to international capital markets with a 5-year 

bond sale, raising €500 million.

ECB presents technical features of its outright monetary 
transactions programme to purchase secondary market 
sovereign bonds issued by euro area member states receiving 
financial assistance from the ESM/EFSF.

12 September

German Federal Constitutional Court confirms that the ESM 
Treaty is constitutional. 

15 September

Widespread protests across Portugal criticise the government’s 
proposed increases in social security contributions, eventually 
forcing a U-turn.

  A N N ExE S  

  3 8 9

27 September

ESM Treaty enters into force for 16 euro area member states 
after ratification by signatory countries, representing 90% of 
subscribed capital. For Estonia, it enters into force a week later, 
on 4 October. 

28 September

Eurogroup president announces that Oliver Wyman’s stress 
tests show that Spanish banks’ capital shortfall is less than 
€60 billion.

Late September

The ratio of non-performing loans in Cypriot banks’ Greek 
operations worsens to 42% of total loans, amounting to 
€19 billion (111% of GDP).

8 October

ESM is declared operational at first Board of Governors meeting in 
Luxembourg. Members begin making paid-in capital instalments.

16 November

Spain’s FROB issues blueprint for Sareb as a ‘bad bank’.

27 November

•  Eurogroup overhauls Greece’s second programme and 

endorses potential future debt relief measures.

•  EFSF sells 364-day €7 billion bond, opting for the unusual 
maturity because a credit-rating downgrade temporarily 
ruled out the issuance of bonds with maturities of one year 
and higher.

28 November

European Commission approves state aid and restructuring 
plans for several of Spain’s key banks.

13 December

EU and ECB agree on banking supervision and SSM.  

14 December

ESM moves to new premises in Kirchberg, Luxembourg, like the 
prior EFSF premises. 

1 January

ESM takes on EFSF employees.

8 January

21 January

23 January

ESM launches bill programme, shifting such sales away from 
EFSF.

Jeroen Dijsselbloem is appointed Eurogroup president, 
succeeding Jean-Claude Juncker. 

Portugal returns to international capital markets with a 
syndicated tap, raising €2.5 billion.

24 February

Nicos Anastasiades is elected president of Cyprus. 
Negotiations over aid programme resume.

March

4 March

Independent PIMCO report into banking due diligence in Cyprus 
finds €10 billion shortfall.

Eurogroup agrees to work towards ‘earliest possible 
completion of the loan agreement’ for Cyprus.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

16 March

18 March

19 March

21 March

25 March

Eurogroup reaches initial accord with Cyprus on aid package.

Fears of a bank run cause the Central Bank of Cyprus to 
declare a bank holiday, extended until 28 March.

Cypriot parliament rejects the aid agreement.

ECB warns it can’t guarantee emergency funding for Cyprus 
beyond 25 March, unless a financial assistance deal is agreed 
with the EU/IMF.

Eurogroup approves a revised package for Cyprus. Under the 
new terms, the burden is shifted to depositors with holdings 
over €100,000.

28 March

Cyprus imposes capital controls, which are lifted two years later. 

9 April

12 April

30 May

1 July

14 August

8 October 

22 October

EFSF sells €8 billion in 5-year bonds, the largest-ever issue by a 
sovereign, supranational, and agency (SSA) borrower.

Eurogroup says agreement reached on the conditions of the 
ESM/IMF financial assistance for Cyprus, in line with 25 March 
package. Of the total €10 billion package, the ESM commits 
€9 billion and the IMF, €1 billion.

Two additional regulations, the two-pack, to strengthen 
budgetary discipline and economic surveillance in the euro 
area take effect, in addition to the six-pack. 

•  ESM becomes sole mechanism for new financial assistance 
programmes to euro area member states, while the EFSF 
continues to handle its outstanding loans. 

•  Internal government disagreements in Portugal prompt the 

resignation of Finance Minister Vítor Gaspar.

•  Croatia joins EU, bringing membership to 28.

Eurostat says that euro area GDP grew by 0.3% in the second 
quarter, the first quarterly growth since the third quarter of 
2011. Eurostat dates the recession from the third quarter of 
2011 through the first quarter of 2013. 

ESM begins long-term bond issuance, selling a 5-year €7 billion 
bond. The order book tops €20 billion.

Council of the European Union approves Romania’s third 
precautionary programme following expiry of the second. The 
EU and IMF each put aside €2 billion for the programme, which 
runs until September 2015. 

8 November

European Commission, ECB, and IMF say ‘steadfast’ 
implementation of reforms by Irish government, with above 
euro area average growth.

  A N N ExE S  

  3 9 1

8 December

Ireland successfully exits EFSF financial assistance 
programme.

11 December

European Parliament and EU Member States agree on the bank 
recovery and resolution directive (BRRD), the first step towards 
setting up an EU system to deal with struggling banks. 

15 December

Ireland’s IMF extended fund facility expires.

31 December

Spain successfully exits ESM banking sector financial 
assistance programme.

1 January

Latvia adopts the euro, bringing membership to 18.

18 March

•  German Constitutional Court confirms preliminary 2012 

ruling that upheld the constitutionality of the ESM Treaty and 
its transposition into German law. 

•  Basel Committee on Banking Supervision recognises ESM 
and EFSF securities as Level 1 high quality liquid assets. 

European Parliament and EU Member States reach political 
agreement on the Single Resolution Mechanism, allowing 
the orderly resolution of failing banks without costly taxpayer 
bailouts.

Greece returns to international capital markets with a 5-year 
bond sale, raising €3 billion. 

ESM’s 17 founding Members complete payment of the final 
tranche of paid-in capital.

Portugal obtains positive twelfth review and aims to conclude 
with a final June disbursement. Court blocks a key reform, 
ending the programme without the last disbursement.

European Commission takes note of Portugal’s decision not to 
seek a precautionary aid programme.

European Commission, ECB, and IMF statement says Cyprus 
has taken steps towards implementing ambitious structural 
reform agenda.

Portugal successfully exits EFSF financial assistance 
programme. 

Cyprus returns to international capital markets with a 5-year 
bond sale, raising €750 million.

Portugal’s IMF extended fund facility expires.

Spain, after gaining ESM approval, makes a €1.3 billion 
voluntary prepayment on its ESM loan, the first in a series. 

20 March

10 April

30 April

2 May

5 May

17 May

18 May

18 June

30 June

8 July

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

19 August

26 October

Regulation establishing a Single Resolution Mechanism for 
banks enters into force. 

ECB publishes its year-long asset-quality review of the 
130 largest euro area banks. Banks with a capital shortfall 
have two weeks to announce remedies and nine months to 
enact them.

4 November

SSM becomes operational. ECB assumes role of central 
banking supervisor of 130 largest euro area banks.

26 November

European Commission announces €315 billion investment 
plan, referred to as the ‘Juncker plan’.

8 December

•  ESM Board of Governors adopts direct bank recapitalisation 

instrument, making it ready for use. 

•  Greek Prime Minister Antonis Samaras seeks early 

parliamentary appointment of next president.

29 December

Greek government collapses after failing to elect a new 
president.

31 December

Deadline for EU Member States to transpose into national 
law the single rulebook of the BRRD, which sets new rules for 
resolving troubled banks.

1 January

Lithuania adopts the euro, bringing membership to 19.

22 January

25 January

4 February

20 February

ECB introduces quantitative easing programme, buying 
European government bonds to boost the economy and 
inflation.

Syriza party wins parliamentary election in Greece, and Alexis 
Tsipras becomes prime minister the next day.

ECB suspends eligibility of minimum credit-rating 
requirements for Greek bonds used as collateral in 
Eurosystem monetary operations.

Eurogroup agrees request to extend Greece’s second programme 
by up to four months. EFSF Board of Directors follows up one 
week later, extending the programme to 30 June.

20 March

Ireland completes early repayment of part of its IMF assistance. 

6 April

8 April

24 April

Cyprus lifts all capital controls.

Greek Prime Minister Alexis Tsipras goes to Moscow for talks 
with Russian President Vladimir Putin.

Eurogroup President Jeroen Dijsselbloem says that there are 
‘still wide differences’ between the creditors and Greece.

  A N N ExE S  

  3 9 3

12 May

3 June

4 June

11 June

16 June

To meet a €750 million debt repayment instalment to the IMF, 
Greece taps its IMF holding account.

French and German economy ministers say ESM should be 
brought under community law and transformed into a proper 
European Monetary Fund.

Greece informs IMF that it will delay a scheduled €300 million 
loan repayment.

IMF says there are ‘major differences’ with Greece, ‘no progress 
in narrowing these differences recently’. 

European Court of Justice rules that ECB’s outright monetary 
transactions programme complies with EU law.

22 June

•  Five Presidents’ report on completing EMU is published.

•  Emergency euro summit tentatively welcomes Greek reform 

proposals but fails to reach agreement.

26 June

27 June

29 June

30 June

5 July

6 July

8 July

10 July

12 July

16 July 

Greece abandons talks with creditors. 

•  Greek Prime Minister Alexis Tsipras calls referendum on 
financial assistance terms after the expiry of current loan 
agreement.

•  Eurogroup refuses to extend EFSF programme for Greece.

Greece imposes capital controls and closes banks.

•  EFSF financial assistance programme for Greece expires.

•  Greece fails to make IMF loan repayment.

•  Eurogroup reconfirms its refusal to extend EFSF programme 

for Greece.

In a referendum, Greek voters reject creditors’ rescue 
conditions.

Yanis Varoufakis resigns as Greek finance minister and is 
replaced by Euclid Tsakalotos.

Greece applies to the ESM for additional financial assistance.

European Commission and ECB recommend financial support 
to Greece because of the risk to the euro area.

Euro area leaders agree to start talks on third Greek 
programme, as long as Greece enacts immediate reforms.

Eurogroup decides to grant in principle a three-year ESM 
stability support programme to Greece, subject to conditions.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

17 July

20 July

4 August

14 August

18 August

9 September

EU approves €7 billion EFSM bridge loan to Greece. Loan is 
facilitated by ESM private placement.

Greek banks reopen after a three-week shutdown.

EFSM lending terms are revised to shield its non-euro area 
member countries from financial loss in the event of non-
repayment of loans to Greece, as agreed in decision to grant 
the bridge loan.

Eurogroup agrees Greece’s third financial assistance 
programme. 

Fitch upgrades Greek debt to CCC from CC, the first in a series 
of upgrades. 

In his state of the union speech to the European Parliament, 
European Commission President Jean-Claude Juncker says the 
agreement with Greece should be ‘a new start, for Greece and 
for the euro area as a whole’. 

12 September

Eurogroup statement notes positive fiscal developments in 
Cyprus, financial improvements in banks and progress on 
growth-enhancing reforms.

20 September

Greek election confirms Syriza as the largest party; Alexis 
Tsipras remains prime minister.

13 October 

ESM lengthens its maturity profile by selling its first 30-year 
bond, raising €3 billion.

24 November

•  European Commission makes legislative proposal to set up 
a European deposit insurance scheme in the euro area.

•  ESM sells 40-year €1 billion bond, the first ultra-long 

benchmark issued by an SSA borrower.

1 January

Single Resolution Mechanism becomes fully operational.

15 January 

Greece’s IMF extended fund facility expires.

7 March

Cyprus’s IMF extended fund facility is cancelled.

31 March

Cyprus successfully exits ESM financial assistance programme.

9 May

23 June

5 December

Eurogroup welcomes Greek reforms, and moves towards debt 
relief measures for Greece in the short, medium, and long term.

In a referendum, the UK votes to leave the EU (51.9%  
versus 48.1%).

Eurogroup endorses short-term debt relief measures for 
Greece including smoothing repayment profile and reducing 
interest rate risk. 

  A N N ExE S  

  3 9 5

8 December

ECB extends its quantitative easing programme.

23 January

31 May

ESM and EFSF approve short-term debt relief measures for 
Greece, which they implement throughout the year.

European Commission publishes a paper on deepening EMU, 
including proposals to add to the ESM’s mandates.

15 June

•  Eurogroup welcomes Greek fulfilment of agreed prior 

actions, paving the way for the successful completion of the 
second review of ESM programme.

•  First evaluation report of EFSF/ESM financial assistance 

programmes is published by Independent Evaluator Gertrude 
Tumpel-Gugerell.

IMF Executive Board approves in principle €1.6 billion stand-by 
arrangement for Greece.

Greece returns to international capital markets for the first time 
since 2014 with a 5-year bond sale, raising €3 billion.

20 July

25 July

24 October

ESM makes its debut in the dollar market, raising $3 billion 
through the launch of a new 5-year bond.

13 November

European Commission in its report on ESM programme states 
that Greek government has widely outperformed fiscal targets, 
and launched important structural reforms in areas such as 
tax administration, business environment, energy, privatisation, 
and public administration.

6 December

European Commission sets out a roadmap for  
deepening EMU.

15 December

Leaders at euro summit decide to continue work on deepening 
EMU in 2018 on areas where convergence is visible: banking 
union and developing the ESM. 

22 June 

29 June

Eurogroup agrees to move ahead on medium-term debt relief 
measures for Greece, including maturity extensions and further 
deferral of EFSF interest. It also agrees to review whether or 
not additional measures are needed in 2032, the scheduled end 
of the EFSF repayment grace period.

Euro area leaders pledge to use ESM as Single Resolution Fund 
backstop, and ask finance ministers to prepare package of 
ESM reforms by December.

20 August

Greece successfully exits the ESM programme.

 
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S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

16 October

3 December

Spain makes a €3 billion voluntary early repayment, its ninth, 
reducing Spain’s outstanding debt to the ESM to €23.7 billion 
from the original €41.3 billion. 

Eurogroup meets in inclusive format, including all EU Member 
States except the UK, to prepare package of ESM and monetary 
union initiatives ahead of leaders’ summit. 

4 December

EFSF approves waiver of Portugal’s mandatory repayment of 
EFSF loans.

14 December

Euro area leaders agree on plan to strengthen ESM, create a 
bank resolution backstop and improve euro area governance, 
with proposal for ESM Treaty changes due by mid-2019.

  A N N ExE S  

  3 9 7

EFSF and ESM disbursements

EFSF financial assistance to Ireland

Disbursement 
date

Amount 
disbursed

Cumulative 
amount 
disbursed

Initial final 
maturity

Final maturity

01/02/2011

€1.9 billion

€1.9 billion

18/07/2016

01/08/2032

01/02/2011

€1.7 billion

€3.6 billion

18/07/2016

01/02/2033

10/11/2011

€0.9 billion

€4.5 billion

04/02/2022

01/08/2030

10/11/2011

€2.1 billion

€6.6 billion

04/02/2022

25/07/2031

15/12/2011

€1.0 billion

€7.6 billion

23/08/2019

01/08/2030

12/01/2012

€1.2 billion

€8.8 billion

04/02/2015

01/08/2029

19/01/2012

€0.5 billion

€9.3 billion

19/07/2041

01/07/2034

03/04/2012

€2.7 billion

€12.0 billion

03/04/2037

01/08/2031

02/05/2013

€0.8 billion

€12.8 billion

02/05/2029

01/08/2029

18/06/2013

€1.6 billion

€14.4 billion

27/09/2013

€1 billion

€15.4 billion

04/12/2013

€2.3 billion

€17.7 billion

n.a

n.a

n.a

15/11/2042

27/09/2034

04/12/2033

Notes: Weighted average maturity: 20.8 years. See our website for more information on financial assistance to Ireland.

Source: ESM

 
3 9 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

EFSF financial assistance to Portugal

Disbursement 
date

Amount 
disbursed

Cumulative 
amount 
disbursed

Initial final 
maturity

Final maturity

22/06/2011

29/06/2011

20/12/2011

€3.7 billion

€2.2 billion

€3.7 billion

05/07/2021

01/07/2036

€5.9 billion

05/12/2016

03/12/2025

€1 billion

€6.9 billion

23/08/2025

No change

12/01/2012

€1.7 billion

€8.6 billion

04/02/2015

30/01/2035

19/01/2012

€1 billion

€9.6 billion

19/07/2026

18/07/2027

30/05/2012

€3.5 billion

€13.1 billion

30/05/2032

30/05/2032

30/05/2012

€1.7 billion

€14.8 billion

30/05/2032

30/05/2035

17/07/2012

€1.5 billion

€16.3 billion

17/07/2038

17/07/2038

17/07/2012

€1.1 billion

€17.4 billion

17/07/2038

17/07/2040

03/12/2012

€0.8 billion

€18.2 billion

03/12/2028

03/12/2028

07/02/2013

€0.8 billion

€19 billion

07/02/2022

07/02/2026

27/06/2013

€1.05 billion

€20.05 billion

27/06/2013

€1.05 billion

€21.1 billion

22/11/2013

€3.7 billion

€24.8 billion

28/04/2014

€1.2 billion

€26 billion

n.a.

n.a.

n.a.

n.a.

27/06/2033

27/06/2034

22/11/2033

28/04/2038

Notes: Weighted average maturity: 20.8 years. See our website for more information on financial assistance to Portugal.

Source: ESM

ESM financial assistance to Spain

Disbursement 
date

Amount 
disbursed

Cumulative 
amount 
disbursed

Type of
disbursement

Final maturity

11/12/2012

€39.468 billion

€39.468 billion

05/02/2013

€1.865 billion

€41.333 billion

Cashless

Cashless

11/12/2027 *

11/12/2025 **

Notes: Weighted average maturity of loans: 12.49 years. 
*Constant amortisation between 2022 and 2027 of €4.143 billion per year (amount adjusted following loan prepayments). 
**Constant amortisation between 2024 and 2025 of €933 million per year. See our website for more information on ESM 
financial assistance to Spain, including floating rate notes and loan repayments.  

Floating rate notes for Spain can also be found on page 228.

Source: ESM

  A N N ExE S  

  3 9 9

ESM financial assistance to Cyprus

Disbursement 
date

Amount 
disbursed

13/05/2013

26/06/2013 

€1 billion

€1 billion

€1 billion

27/09/2013

€750 million

€750 million

19/12/2013

€100 million

Cumulative 
amount 
disbursed

€2 billion

€3 billion

€4.5 billion

€4.6 billion

04/04/2014

€150 million

€4.75 billion

09/07/2014

€600 million

€5.35 billion

15/12/2014

€350 million

15/07/2015

€100 million

08/10/2015

€200 million

€5.7 billion

€5.8 billion

€300 million

€6.3 billion

Type of 
disbursement

Final maturity

Cash

Cash

Cash

Cashless

Cashless

Cash

Cash

Cash

Cash

Cash

Cash

Cash

13/05/2026

13/05/2027

26/06/2028

27/09/2029

27/09/2030

19/12/2029

04/04/2030

09/07/2031

15/12/2025

15/07/2031

08/10/2029

08/10/2031

Notes: Weighted average maturity of loans: 14.9 years. See our website for more information on ESM financial 
assistance to Cyprus, including floating rate notes.

Source: ESM

EFSF financial assistance to Greece

Overview of financial assistance

EFSF financial assistance for Greece comprised of:

Amount disbursed

Private sector involvement 
participation

Master Financial Assistance 
Facility Agreement

TOTAL

Private sector involvement facility

€29.7 billion

Accrued interest facility

Bank recapitalisation

Budget financing

Debt buy-back

€4.9 billion

€37.3 billion

€47.8 billion

€11.3 billion

€130.9 billion

Notes: On 27/02/2015, the Hellenic Financial Stability Fund (HFSF) redelivered €10.9 billion in bonds issued by the EFSF 
for the recapitalisation of Greek banks. This comprised a full repayment of the €7.2 billion disbursed on 31/05/2013 
and a partial repayment of €3.7 billion of the loan tranche disbursed on 19/12/2012). Prior to this, the full cumulative 
disbursed amount as of 14/08/2014 was €141.8 billion. See our website for more information on EFSF financial 
assistance to Greece.

Source: ESM

 
4 0 0    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Disbursed EFSF loan tranches to Greece and subsequent maturity 
extensions*

Disbursement 
date 

Amount 
disbursed

Cumulative 
amount 
disbursed

Initial 
maturity

Maturity 
after first 
reprofiling 
(short-term 
measures)

Maturity 
after second 
reprofiling 
(medium-term 
measures)

(No change)

(No change)

09/03/2012

19/03/2012

10/04/2012

€34.6 
billion

€5.9 
billion

€3.3 
billion

€34.6 billion Amortisation 
from 2023 to 
2042

€40.5 billion

2047

Amortisation 
from 2045 to 
2050

€43.8 billion

2041

2048

19/04/2012

€25 billion €68.8 billion

Amortisation 
from 2052 to 
2056

2018, 2019, 
2020, 2021 
and 2022 
(interim 
maturities)

10/05/2012

€4.2 
billion

€73 billion

2042

2049

28/06/2012

€1 billion

€74 billion

2040

2045

17/12/2012

€7 billion

€81 billion

Amortisation 
from 2044 to 
2046

Amortisation 
from 2046 to 
2047

17/12/2012

€11.3 
billion

€92.2 billion Amortisation 
from 2023 to 
2042

(No change)

19/12/2012

€16 billion

€108.2 
billion

2022, 
2023, 2024 
(interim 
maturities)

Amortisation 
from 2051 to 
2056

31/01/2013

€2 billion

€110.2 
billion

2043

Amortisation 
from 2051 to 
2053

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 
to 2070 and 
from 2051 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2043 to 
2049

Amortisation 
from 2049 
to 2070 and 
from 2051 to 
2070

Amortisation 
from 2049 to 
2070

Disbursement 
date 

Amount 
disbursed

Cumulative 
amount 
disbursed

Initial 
maturity

Maturity 
after first 
reprofiling 
(short-term 
measures)

Amortisation 
from 2049 to 
2050

Amortisation 
from 2043 to 
2044

€113 billion

2043-2044

€115.8 
billion

2032

€120 billion

2043

2050

€127.2 
billion

€130.5 
billion

(Loan repaid 
on 
27/02/2015)

2045

€133 billion

2048

Amortisation 
from 2051 to 
2052

Amortisation 
from 2047 to 
2048

€133.5 
billion

€139.8 
billion

€140.8 
billion

€141.8 
billion

2050

(No change)

2054

Amortisation 
from 2043 to 
2045

2053

2054

2053

Amortisation 
from 2055 to 
2056

28/02/2013

29/04/2013

17/05/2013

31/05/2013

25/06/2013

31/07/2013

18/12/2013

28/04/2014

€2.8 
billion

€2.8 
billion

€4.2 
billion

€7.2 
billion

€3.3 
billion

€2.5 
billion

€500 
million

€6.3 
billion

09/07/2014

€1 billion

14/08/2014

€1 billion

  A N N ExE S  

  4 0 1

Maturity 
after second 
reprofiling 
(medium-term 
measures)

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

Amortisation 
from 2049 to 
2070

27/02/2015

€-10.9 
billion**

130.9 
billion***

Notes:  
*As a result of short-term and medium-term debt relief measures for Greece – approved by the EFSF Board of Directors 
in January 2017 and November 2018 – the EFSF loan tranches were reprofiled twice. This involved an extension of the 
loan maturities.
**On 27 February 2015, the Hellenic Financial Stability Fund redelivered €10.9 billion in bonds issued by the EFSF for the 
recapitalisation of Greek banks. This comprised: a full repayment of the €7.2 billion disbursed on 31 May 2013; and a 
partial repayment of €3.7 billion of the loan tranche disbursed on 19 December 2012. 
***Outstanding loan amount.

Source: ESM

 
 
 
 
 
4 0 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

ESM financial assistance to Greece

Disbursement 
date

Amount 
disbursed

Cumulative 
amount 
disbursed

Type of 
disbursement

Maturity

20/08/2015 

€13 billion 

€13 billion

24/11/2015 

€2 billion 

€15 billion

Cash

Cash

01/12/2015 

€2.7 billion 

€17.7 billion

08/12/2015 

€2.7 billion 

€20.4 billion

Cashless

Cashless

23/12/2015 

€1 billion 

€21.4 billion

21/06/2016 

€7.5 billion 

€28.9 billion

26/10/2016 

€2.8 billion 

€31.7 billion

10/07/2017 

€7.7 billion 

€39.4 billion

30/10/2017 

€0.8 billion 

€40.2 billion

28/03/2018 

€5.7 billion 

€45.9 billion

15/06/2018 

€1 billion 

€46.9 billion

06/08/2018 

€15 billion 

€61.9 billion

Cash

Cash

Cash

Cash

Cash

Cash

Cash

Cash

Amortisation from 
2034 to 2057 

Amortisation from 
2034 to 2057 

Amortisation from 
2055 to 2059  

Amortisation from 
2034 to 2057

Amortisation from 
2034 to 2058 

Amortisation from 
2034 to 2058

Amortisation from 
2034 to 2059 

Amortisation from 
2034 to 2059 

Amortisation from 
2051 to 2054; 
2060

Amortisation from 
2034 to 2060 

Amortisation from 
2043 to 2060 

Notes: Weighted average maturity of loans: 32.35 years (after repayments of €2 billion). See our website for more 
information on ESM financial assistance to Greece, including floating rate notes and loan repayment.

Source: ESM

  A N N ExE S  

  4 0 3

Floating rate notes issued by the ESM – Greece*

ISIN**

Issuance 
date

EU000A1U9852

27/08/2015

EU000A1U9860

27/08/2015

EU000A1U9878

27/08/2015

Amount 
issued

€3 billion

€3 billion

€4 billion

Type of 
disbursement

Maturity

FRN***

FRN***

FRN***

27/02/2017

27/08/2017

27/02/2018

Notes: 
*The ESM issued floating rate notes to fund bank recapitalisation/resolution. Notes amounting to €5.4 billion were 
disbursed to Greece; the remaining €4.6 billion was not used and the notes were subsequently cancelled. The amount 
was disbursed pro rata in the ESM floating rate notes listed above. 
**International Securities Identification Number. 
***Floating rate note.

Source: ESM

Loan repayment – Greece

Date of 
repayment

20/02/2017

Amount repaid

Details

€2 billion

Contractual obligation following sale of assets  
of recapitalised National Bank of Greece

Source: ESM

Loan repayments – Spain

Date of 
repayment

Amount repaid

Cumulative 
amount repaid

Details

08/07/2014

€1.304 billion

€1.304 billion

Early repayment (voluntary)

23/07/2014

€0.308 billion

€1.612 billion

Scheduled repayment  
of unused funds

17/03/2015

14/07/2015

11/11/2016

14/06/2017

16/11/2017

23/02/2018

23/05/2018

16/10/2018

€1.5 billion

€3.112 billion

Early repayment (voluntary)

€2.5 billion

€5.612 billion

Early repayment (voluntary)

€1 billion

€1 billion

€2 billion

€6.612 billion

Early repayment (voluntary)

€7.612 billion

Early repayment (voluntary)

€9.612 billion

Early repayment (voluntary)

€2 billion

€11.612 billion

Early repayment (voluntary)

€3 billion

€14.612 billion

Early repayment (voluntary)

€3 billion

€17.612 billion

Early repayment (voluntary)

Source: ESM

Floating rate notes for Spain can be found on page 228.

 
4 0 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

EFSF and ESM rating history

EFSF

Moody’s

Date

Rating/outlook

Rating action

7 May 2018

Aa1 / Positive

Change of outlook to positive

6 Jun 2014

Aa1 / Stable

Change of outlook to stable

30 Nov 2012

Aa1 / Negative

Downgrade

25 Jul 2012

Aaa / Negative

Change of outlook to negative

20 Sep 2010

Aaa / Stable

New rating

Fitch

Date

Rating/outlook

Rating action

16 Dec 2014

AA

Downgrade and end of rating on watch

15 Oct 2014

AA+ / On watch negative

Rating on watch for downgrade

15 Jul 2013

20 Sep 2010

AA+

AAA

Downgrade

New rating

Standard & Poor’s

Date

Rating/outlook

Rating action

25 Oct 2016

AA / Stable

Change of outlook to stable

10 Oct 2014

AA / Negative

Change of outlook to negative

8 Nov 2013

AA / Stable

Downgrade and change of outlook to stable

27 Feb 2012

AA+ / Negative

Change of outlook to negative

16 Jan 2012

AA+ / Developing

Downgrade and outlook developing

6 Dec 2011

AAA / On watch negative

Rating on watch for downgrade

20 Sep 2010

AAA

New rating

DBRS*

Date

Rating/outlook

27 July 2012

AAA / Stable

Rating action

New rating

* Unsolicited rating

  A N N ExE S  

  4 0 5

ESM

Moody’s

Date

Rating/outlook

Rating action

7 May 2018

Aa1 / Positive

Change of outlook to positive

6 Jun 2014

Aa1 / Stable

Change of outlook to stable

30 Nov 2012

Aa1 / Negative

8 Oct 2012

Aaa / Negative

Downgrade

New rating

Fitch

Date

Rating/outlook

Rating action

16 Dec 2014

AAA / Stable

Affirmation and end of rating on watch for 
downgrade

15 Oct 2014

AAA / On watch negative

Rating on watch for downgrade

8 Oct 2012

AAA / Stable

New rating

DBRS*

Date

Rating/outlook

Rating action

4 April 2014

AAA / Stable

New rating

* Unsolicited 

 
4 0 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

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  A N N ExE S  

  4 1 1

Acronyms and abbreviations

ALM

BRRD

DRI

DSA

ECB

Ecofin

EFSF

EFSM

EIB

EMU

ESM

EU

Asset and liability management

Bank recovery and resolution directive

Direct recapitalisation instrument

Debt sustainability analysis

European Central Bank

Economic and Financial Affairs Council, body comprising EU economic 
and finance ministers 

European Financial Stability Facility

European Financial Stabilisation Mechanism

European Investment Bank

Economic and Monetary Union

European Stability Mechanism

European Union

Euribor

Euro interbank offered rate

Eurogroup

Eurosystem

Recognised informal body, comprising of euro area member states’ 
finance ministers

Euro area monetary authority, comprising ECB and euro area national 
central banks. 

FROB

G20

GDP

GLF

IFI

IMF

KfW

Libor

NPL

OJ

Spain’s Fondo de reestructuración ordenada bancaria, or Fund for 
Orderly Bank Restructuring.

International forum of 19 countries plus EU

Gross domestic product

Greek Loan Facility

International financial institution

International Monetary Fund

Germany’s state-backed development bank

London interbank offered rate

Non-performing loan

Official Journal of the European Union

 
4 1 2    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

PSI

RFAs

Sareb

SMP

SSA

SSM

SWIFT

TARP

Private sector involvement

Regional financing arrangements

Sociedad de Gestión de Activos Procedentes de la Reestructuración 
Bancaria – Spain’s ‘bad bank’.

Securities Markets Programme

Sovereign, supranational, and agency

Single Supervisory Mechanism

Society for Worldwide Interbank Financial Telecommunications

Troubled Asset Relief Program

  A N N ExE S  

  4 1 3

Index

A
Ackermann, Josef  171
Aerts, Jasper  325
Albuquerque, Maria Luís  7, 28, 29, 117, 121, 122, 123, 126, 136, 277, 279, 281, 283, 356, 371
Allied Irish Bank  92, 380, 381, 383
Anastasiades, Nicos  263, 265, 270, 389
Anev Janse, Kalin  7, 65, 68, 69, 72, 103, 107, 152, 181, 186, 232, 235, 239, 241, 243, 255, 259, 

260, 371

Angel, Benjamin  7, 48, 49, 50, 60, 137, 156, 371
Anglo Irish Bank  92, 93, 380
Arvaniti, Katerina  247
Asmussen, Jörg  49, 50, 51
Association of German Banks  61
Association of Southeast Asian Nations+3 Macroeconomic Research Office (AMRO)  62, 350

B
Bank for International Settlements  162
Bankia  214, 218, 219, 221, 222, 225, 387
Bank of Ireland  92, 380, 381
Bank recovery and resolution directive (BRRD)  211, 212, 271, 296, 329, 391, 392
Barroso, José Manuel  29, 48, 50, 51
Basel Committee on Banking Supervision  162, 382, 391
Blondeel, Françoise  105, 183, 371
Buti, Marco  7, 45, 64, 75, 135, 282, 347, 371

C
Camilleri, Alfred  7, 19, 75, 134, 142, 332, 352, 363, 372
Cardiff, Kevin  7, 78, 91, 99, 100, 101, 372
Centeno, Mário  7, 331, 340, 357, 360, 372
Central banks (national):

• Bank of England  24, 379, 380, 385
• Bank of France  146, 304
• Bank of Greece  193, 313, 316
• Bundesbank  131, 160, 193, 306
• Central Bank of Cyprus  263, 390
• Central Bank of Ireland  96

Chiang Mai Initiative, CMI Multilateralisation  62
Chouliarakis, George  317
Cooperative Central Bank  273
Court of Justice of the European Union, European Court of Justice  20, 65, 229, 235, 346, 393
Cyprus Popular Bank (Laiki Bank)  262, 266, 274, 387, 388

D
Dassyras, Francis  111, 129, 130
DBRS  252, 404, 405

 
4 1 4    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Deauville agreement  95, 96, 134, 143, 145, 171, 383
De Beule-Roloff, Sofie  108, 182, 183, 185, 186
Debt management office:  288

• Greek debt management office  193
• Irish debt agency  100, 204

de Guindos, Luis  7, 213, 215, 216, 217, 218, 219, 220, 221, 222, 225, 292, 372
Delvaux, Jacques  66
de Maizière, Thomas  49, 50, 51
den Ruijter, Alexander  81, 84, 139, 140
Dijsselbloem, Jeroen  7, 21, 77, 204, 258, 274, 312, 313, 316, 327, 363, 372, 389, 392
Djoneva, Yana  248, 258
Dombrovskis, Valdis  330
Draghi, Mario  7, 19, 57, 60, 143, 194, 204, 237, 238, 366, 372, 385, 387, 388

E
Eatough, David  294, 334, 335, 373
Economic and Financial Affairs Council (Ecofin), EU finance ministers  35, 92, 98, 118, 380, 

382, 383, 384, 385, 387, 408

Economic and Financial Committee  16
Estonian Supreme Court  233
Eurogroup (euro area finance ministers)  9, 11, 18, 47, 59, 60, 82, 121, 128, 234, 268, 348, 389, 

395, 409

• on Cyprus  263, 265, 268, 269, 270, 274, 388, 389, 390, 394
• on EFSF/ESM  47, 65, 73, 136, 146, 152, 153, 180, 234, 235, 237, 239, 240, 285, 293, 

297, 318, 331, 342, 346, 351, 357, 359, 360, 384, 387, 396

• on EFSM  47
• on Greece  32, 37, 40, 166, 168, 190, 191, 202, 203, 308, 311, 312, 314, 316, 317, 318, 

319, 322, 325, 326, 328, 330, 331, 338, 339, 340, 341, 342, 343, 344, 382, 384, 386, 389, 
392, 393, 394, 395, 407, 408, 409, 410

• on Ireland  98, 100, 204, 205, 383
• on Portugal  118, 204, 205, 279, 384
• on Spain  214, 216, 219, 220, 222, 223, 388, 389

Eurogroup Working Group (EWG)  16, 17, 60
European Bank for Reconstruction and Development (EBRD)  27, 137, 244, 293, 380
European Banking Authority  266
European Central Bank (ECB)  18, 46, 55, 56, 60, 67, 70, 94, 101, 107, 111, 119, 121, 131, 140, 
143, 144, 145, 146, 147, 151, 155, 179, 238, 252, 273, 286, 297, 298, 304, 307, 321, 324, 
325, 326, 336, 366, 378, 380, 382, 383, 385, 386, 389, 390, 391, 393

• on emergency liquidity assistance (ELA)  96, 97, 268, 312, 313, 386, 390, 392
• on Greece  321
• on Ireland  94
• on outright monetary transactions  241, 244, 388, 393
• on quantitative easing  303, 366, 392, 395
• on the Securities Markets Programme (SMP)  56, 147, 382, 408
• on the Single Supervisory Mechanism (SSM)  210, 211, 212, 288, 389
• on the stress tests  296, 329, 392
• on the troika  38, 77, 78, 80, 167, 345, 349

  A N N ExE S  

  4 1 5

• on the ‘whatever it takes’ remark  238, 366, 388

European Commission  18, 27, 29, 64, 65, 107, 130, 177, 286, 290, 382, 392

• on banking  210, 293, 297, 298, 394
• on Cyprus  267, 388, 391
• on EFSF/ESM  47, 48, 51, 52, 55, 67, 130, 137, 155, 348, 349, 358, 360, 395
• on EFSM  47, 48, 49, 50, 55, 113, 122, 130, 324, 325, 334, 335
• on Greece  18, 36, 38, 40, 169, 195, 196, 202, 321, 335, 344, 347, 393, 394, 395
• on Ireland  101, 386, 390
• on Portugal  121, 278, 282, 391
• on Spain  215, 222, 224, 388, 389
• on the troika  60, 77, 78, 79, 80, 81, 82, 126, 167, 345, 346

European Court of Auditors  65, 246
European Financial Stabilisation Mechanism (EFSM)  49, 50, 51, 54, 55, 73, 92, 101, 110, 113, 
118, 122, 123, 124, 130, 180, 283, 322, 324, 325, 326, 334, 335, 336, 384, 394, 407, 408
European Investment Bank (EIB)  20, 65, 67, 68, 69, 70, 71, 84, 103, 235, 244, 251, 363, 381
European Parliament  28, 55, 232, 245, 271, 333, 382, 391, 394

F
Fallnicht, Boris  255, 257
Fioretti, Paolo  273, 274
Fitch  33, 83, 86, 90, 120, 143, 166, 252, 254, 316, 322, 326, 328, 394, 404, 405
Fondo Latinoamericano de Reservas (FLAR)  350
Fouqueray-Carrick, Sarah  106, 107, 159, 160, 163, 253
Frankel, Christophe  7, 69, 107, 109, 110, 111, 112, 115, 127, 128, 129, 152, 158, 160, 186, 227, 

294, 303, 362, 373

Franzen, Denise  104, 105, 108
Frieden, Luc  66
Fund for Orderly Bank Restructuring (FROB)  214, 215, 223, 224, 381, 389
Furusawa, Mitsuhiro  7, 20, 67, 114, 373

G
Gaspar, Vítor  7, 23, 24, 28, 64, 121, 125, 135, 173, 278, 280, 281, 366, 373, 390
Gauweiler, Peter  230, 231
Geithner, Timothy  7, 19, 29, 34, 80, 133, 178, 237, 347, 373
German Federal Constitutional Court  149, 229, 230, 231, 234, 388, 391
German Finance Agency  69, 70, 71, 84, 110, 111, 112, 129, 132, 160, 300
Giammarioli, Nicola  177, 188, 205, 233, 315, 352
Gião, João  130
Greek Loan Facility (GLF)  18, 36, 40, 41, 43, 44, 45, 46, 50, 76, 82, 166, 167, 169, 180, 189, 

203, 332, 366, 382, 406, 407, 408

Grilli, Vittorio  7, 138, 177, 373
Group of 20 (G20):  15, 151, 380, 381, 383, 387

• Cannes  174, 177, 385
• Los Cabos  209, 388
• Toronto  73, 382

Group of Seven:  55, 61, 239, 380

• Iqaluit  34, 35

 
4 1 6    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

H
Habtemariam, Niyat  250
Hannoschöck, Gerhard  130
Hardouvelis, Gika  197, 314
Heinrich, Georges  7, 20, 58, 59, 66, 67, 374
Hellenic Financial Stability Fund (HFSF)  227, 399, 401
Henderson, Deborah  7, 186, 187, 188, 374
Hesketh, Mike  294, 295, 298, 329
Hollande, François  209, 323

I
International Monetary Fund (IMF)  17, 18, 27, 54, 55, 60, 62, 78, 107, 138, 139, 143, 144, 145, 
155, 160, 161, 170, 171, 178, 242, 258, 287, 293, 350, 351, 359, 380, 381, 384, 385, 386, 
387, 390, 393, 395

• on assessing debt sustainability  205, 206
• on Cyprus  263, 267, 268, 270, 275, 351, 390, 391, 394
• on Greece  32, 35, 36, 37, 38, 40, 41, 42, 43, 168, 170, 171, 176, 177, 190, 191, 194, 195, 
198, 202, 312, 317, 319, 324, 326, 327, 329, 330, 332, 339, 351, 382, 387, 393, 394, 395, 
407

• on Ireland  92, 98, 99, 100, 101, 102, 351, 383, 390, 391, 392
• on Portugal  118, 121, 122, 123, 124, 279, 283, 351, 384, 391
• on regional financing arrangements (RFAs)  349, 350, 351
• on Spain  214, 217, 218, 221, 387, 388
• on the troika  77, 78, 79, 80, 81, 82, 167, 345, 346, 347, 349, 350, 351, 353

Irish High Court  235

J
Jansen, Ralf  72, 137, 138, 152, 231, 233, 234, 239, 298, 374
Juncker, Jean-Claude  7, 9, 13, 14, 20, 53, 57, 58, 59, 65, 153, 175, 216, 217, 239, 242, 265, 

275, 314, 321, 361, 374, 389, 392, 394

K
Kartcheva, Maria  304
Kažimír, Peter  7, 356, 374
KfW Development Bank  40
Kim, Glenn  111
Kinczer, Eva  248
Klaus, Jürgen  128, 130, 309

L
Lafontaine, Oskar  63
Lagarde, Christine  7, 18, 21, 36, 49, 50, 51, 53, 59, 80, 143, 144, 172, 178, 205, 208, 221, 270, 

279, 347, 349, 374, 387

Lenihan, Brian  92, 93, 97, 99, 380, 383
Lévy, Sébastien  146, 300, 302, 304, 305, 306, 308, 334, 335, 336
Lipsky, John  7, 43, 55, 78, 79, 161, 174, 202, 206, 350, 375
Lipton, David  7, 80, 151, 353, 375

  A N N ExE S  

  4 1 7

M
Martins, Carlos  299, 301, 303, 336
Merkel, Angela  48, 50, 95, 134, 171, 174, 209, 230, 323, 359, 383, 385
Monti, Mario  153, 209
Montoro, Cristóbal  219, 388
Moody’s  33, 41, 83, 86, 90, 143, 252, 253, 316, 326, 404, 405
Moscovici, Pierre  348

N
National Asset Management Agency  92, 93, 94, 381, 382
National Bank of Greece  322, 329, 403

O
Obama, Barack  172
Organisation for Economic Co-operation and Development  226

P
Pacciani, Cosimo  21, 251, 306, 308
Papaconstantinou, George  7, 33, 36, 43, 46, 50, 73, 165, 168, 375
Papademos, Lucas  166, 174, 189, 385
Papandreou, George  31, 36, 40, 166, 174, 385
Parliament(s) (national)  44, 66, 135, 233, 244, 245, 297
• Cypriot parliament  262, 263, 265, 269, 386, 390
• Estonian parliament  234
• Finnish parliament  150
• German parliament (Bundestag)  95, 150, 156, 230, 231, 234
• Greek parliament  32, 35, 166, 169, 190, 194, 199, 312, 329, 381, 385, 387, 392
• Portuguese parliament  118, 121, 125, 279, 282, 384

Passos Coelho, Pedro  118, 125, 384
Paulson, Henry ‘Hank’  178
Pies, Thomas  257
Piraeus Bank  270, 322, 329
Portuguese Constitutional Court  278, 280, 283
Praet, Peter  179
Pringle, Thomas  235
Pujal, Olivier  309, 310
Putin, Vladimir  312, 316, 392

R
Radičová, Iveta  76, 150
Rajoy, Mariano  207, 209, 214, 215, 385
Regling, Klaus  7, 9, 10, 11, 17, 20, 21, 25, 26, 27, 42, 57, 58, 59, 60, 61, 62, 63, 64, 66, 67, 68, 
69, 71, 74, 83, 84, 85, 87, 90, 94, 100, 103, 104, 105, 106, 107, 111, 112, 113, 115, 134, 137, 
141, 150, 152, 154, 158, 162, 176, 177, 178, 179, 181, 187, 188, 194, 201, 204, 205, 206, 
231, 232, 233, 234, 239, 240, 242, 244, 245, 246, 248, 251, 252, 254, 258, 274, 285, 286, 
291, 293, 296, 301, 311, 320, 325, 326, 331, 332, 334, 337, 338, 344, 345, 346, 347, 348, 
349, 355, 360, 361, 362, 363, 365, 368, 375

 
4 1 8    

S A F E G U A R D I N G  T H E   E U R O   I N  T I M E S   O F   C R I S I S

Rehn, Olli  7, 29, 41, 46, 48, 49, 50, 51, 56, 76, 82, 96, 153, 173, 204, 239, 240, 261, 357, 367, 

375

Ritter, Thomas  130
Rodriguez, Fernando  116, 130, 159
Rodriguez, Rogelio  259
Rojas, Juan  219, 220, 282, 286, 287, 288
Ruhl, Siegfried  111, 112, 113, 114, 115, 127, 130, 157, 163, 164, 193, 227, 228, 253, 254, 362

S
Salgado, Elena  49
Samaras, Antonis  190, 194, 198, 199, 388, 392
Sareb  215, 223, 389
Sarkozy, Nicolas  48, 95, 134, 171, 174, 209, 383, 385
Sarris, Michael  7, 264, 265, 268, 269, 376
Schäuble, Wolfgang  7, 17, 18, 28, 34, 36, 49, 50, 53, 55, 79, 89, 102, 135, 153, 155, 156, 191, 

192, 229, 231, 233, 281, 324, 347, 351, 352, 376

Semerdjiev, Ivan  301, 304, 307, 310
Single Resolution Board (SRB)  291, 296, 358
Single Resolution Fund (SRF)  211, 296, 360, 395
Single Resolution Mechanism (SRM)  211, 358, 391, 392, 394
Single Supervisory Mechanism (SSM)  27, 210, 221, 288, 295, 358, 388, 389, 392
Sócrates, José  118, 121, 384
Stability and growth pact  14, 35, 74, 82, 95, 378, 382
Standard & Poor’s  16, 32, 33, 83, 86, 90, 92, 118, 147, 214, 252, 262, 271, 316, 380, 381, 383, 

404

Stournaras, Yannis  7, 194, 195, 197, 198, 203, 316, 320, 321, 351, 366, 376
Strauch, Rolf  7, 42, 69, 75, 83, 84, 85, 86, 88, 89, 90, 102, 109, 111, 116, 122, 126, 127, 128, 

181, 182, 193, 197, 198, 199, 204, 224, 227, 231, 272, 280, 367, 368, 376

Strauss-Kahn, Dominique  36, 38, 41, 54, 55, 143
Sušec, Matjaž  251, 252, 283
Sutt, Andres  207, 211, 266, 268, 274, 292, 293, 297

T
Task Force on Coordinated Action  36, 51, 121, 156
Teixeira dos Santos, Fernando  7, 117, 120, 121, 122, 123, 156, 280, 376
Transparency International  249
Trichet, Jean-Claude  7, 23, 27, 46, 47, 49, 56, 78, 96, 97, 99, 143, 145, 146, 151, 171, 172, 173, 

176, 376, 385

Tsakalotos, Euclid  7, 312, 313, 317, 320, 342, 352, 377, 393
Tsipras, Alexis  311, 312, 313, 314, 315, 316, 317, 318, 320, 322, 323, 333, 392, 393, 394
Tumpel-Gugerell, Gertrude  351, 395
Tusk, Donald  318, 323, 356

V
Van Rompuy, Herman  45, 151, 318
Varoufakis, Yanis  312, 314, 316, 317, 320, 393

  A N N ExE S  

  4 1 9

Vegara, David  293, 294, 377
Venizelos, Evangelos  153, 168, 191
Verwey, Maarten  7, 33, 36, 41, 44, 46, 51, 52, 74, 136, 348, 377

W
Waigel, Theo  232
Wallace, Dave  257, 258
Watson, Max  26, 27, 58, 85, 94
Weinberg, Thomas  7, 110, 111, 112, 113, 114, 115, 128, 129, 130, 132, 157, 160, 377
Weiss, Silke  111, 129, 130
Wieser, Thomas  7, 8, 16, 17, 18, 24, 31, 49, 54, 57, 58, 59, 79, 81, 82, 101, 149, 189, 265, 279, 

315, 377

World Bank  27, 293, 303, 380, 381, 387

Z
Zelenović Matone, Jelena  259
Zinoecker, Florian  243, 244, 245, 246

 
I

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The  European  Stability  Mechanism  and  its  temporary  predecessor 
the  EFSF  provided  billions  of  euros  in  loans  to  five  hard-hit  euro  area 
countries during the European financial and sovereign debt crisis of the 
early 2000s, helping to safeguard the stability of those countries and the 
euro area as a whole. 

This book tells the inside story of those who played key roles in setting 
up the organisations and combatting the crisis. In exclusive interviews, 
global  financial  leaders  and  ESM  insiders  provide  a  rich  stock  of 
perspectives and anecdotes that bring to life the urgency of the crisis as 
well as the innovative solutions found to resolve it.

Initially,  the  crisis-torn  euro  area  was  ill-equipped  institutionally,  but 
the  rapid  establishment  of  the  firewalls,  the  assistance  programmes, 
deep-seated country reforms, the strengthening of European institutions, 
and  extraordinary  European  Central  Bank  measures  shielded  Europe 
from a euro area break-up.

With the EFSF/ESM set-up, its managers aspired to create a new, more 
entrepreneurial international financial institution, one that is agile enough 
to  respond  quickly  to  new  challenges,  while  still  ensuring  the  strict 
governance befitting an organisation pursuing a public mission. 

The euro area has emerged from near disaster in more robust shape. 
As Europe strives to further strengthen its architecture in preparation for 
any possible future crises, it is important to reflect upon how the euro 
area reinvigorated its fortunes and draw the relevant lessons for future 
crisis management in Europe and beyond. 

Print
ISBN 978-92-95085-34-3
doi:10.2852/47298
DW-06-16-056-EN-C

PDF
ISBN 978-92-95085-33-6
doi:10.2852/788601
DW-06-16-056-EN-N