2021 Annual Report

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printed on chlorine-free recycled paper (PCF)
Luxembourg: Publications Office of the European Union, 2022
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ISBN 978-92-95223-10-3
ISBN 978-92-95223-09-7

ISSN 2314-9493
ISSN 2443-8138

doi:10.2852/933433
doi:10.2852/200351

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DW-AA-21-002-EN-N

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2021
Annual Report

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M E C H A N I S M

Letter of transmittal
to the Board of Governors
16 June 2022
Dear Chairperson,
I have the honour of presenting to the Board of Governors (BoG) the annual report in respect of the financial year 2021,
in accordance with Article 23(2) of the By-Laws of the European Stability Mechanism (By-Laws).
The annual report includes a description of the policies and activities of the European Stability Mechanism (ESM)
during 2021. It also contains the audited financial statements as at 31 December 2021, as drawn up by the Board of
Directors (BoD) on 28 March 2022 pursuant to Article 21 of the By-Laws, which are presented in Chapter 4. Furthermore, the report of the external auditor in respect of the financial statements is presented in Chapter 5 and the report
of the Board of Auditors (BoA) in respect of the financial statements in Chapter 6. The independent external audit was
monitored and reviewed by the BoA as required by Article 24(4) of the By-Laws.

Klaus Regling
Managing Director

Note: The description of ESM policies and activities covers the 2021 financial year, except when stated otherwise. The information related to the composition of
the BoG, BoD, and BoA reflects their composition as of 27 April 2022. The economic development report (Chapter 1) includes certain information available up to
29 April 2022, but all historical financial data are limited to the period to 31 December 2021.

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Contents
2

Letter of transmittal to the Board of Governors

4

ESM at a glance

5

2021 year in review

7

Message from the Managing Director

11	ESM pursues interinstitutional collaboration for
the common good
13	Pandemic stimulates positive changes in ESM
working methods

01

Economic developments

04

Financial report

15

Macroeconomic and financial environment

58

Balance sheet

20	Climate risks and the role of crisis prevention and
resolution mechanisms

59

Off-balance sheet

60

Profit and loss account

61

Statement of changes in equity

62

Statement of cash flows

63

Notes to the financial statements

05

External
auditor’s report on

the 2021 financial statements

06

 eport of the Board of Auditors on
R
the 2021 financial statements

22

Thoughts from institutional peers

24

Former programmes

02

ESM activities

31	Asset and Liability Management and Financial
Structuring
32

Lending

33

Funding and Investor Relations

36

ESM’s funding strategy evolves with the times

38

Investment and Treasury

40

Risk Management

42

ESG at the ESM

44

Transparency and accountability

03

Institutional framework
and organisation

47

Governance

49

Board of Governors

51

Board of Directors

53

Board of Auditors

54

Internal control framework

55

ESM organisational structure

113 Acronyms and abbreviations

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ESM at a glance
The ESM is a crisis resolution mechanism established by the euro area countries. Since its
inauguration in October 2012, the Luxembourg-based ESM has provided financial assistance to ESM Members experiencing or threatened by severe financing problems to safeguard the financial stability of the euro area as a whole and of its member states. The ESM
raises funds by issuing debt instruments in the capital markets, which are purchased by
institutional investors.
On 30 November 2020, the Eurogroup agreed to proceed with the reform of the ESM. The
reform includes the refining of ESM precautionary instruments, enhancing the ESM’s role in
programme management associated with financial assistance, and providing a common
backstop for the Single Resolution Fund (SRF). It will come into force following the ratification of the amended ESM Treaty by all 19 ESM Members.
The ESM grants financial assistance to ESM Members in exchange for a commitment to
strengthen economic and financial fundamentals, in line with the financial assistance instrument chosen. The ESM has a number of financial assistance instruments:

z

loans to cover ESM Members’ financing needs;

z

loans and direct equity injections to recapitalise financial institutions;

z

primary and secondary debt market purchases of Members’ national bonds;

z

credit lines to be used as precautionary financial assistance.

Following the amended ESM Treaty ratification, the common backstop for the SRF will
replace the direct bank recapitalisation instrument. The ESM will be able to disburse up to
€68 billion under this credit line if the SRF is depleted and certain other criteria are fulfilled.
The ESM has used two financial assistance instruments to date: ESM loans and loans to
recapitalise financial institutions. In total together, the ESM and its predecessor the European
Financial Stability Facility (EFSF) have disbursed €295 billion to five programme countries:
Ireland, Greece, Spain, Cyprus, and Portugal.
For more information about the ESM, visit www.esm.europa.eu.

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2021 year in review
The EFSF kicks off 2021 with a record €70 billion order
book on a dual bond transaction.

11.01

27.01

EFSF BoD approves fourth successive reduction of
step-up interest margin accrued by Greece from 17 June
to 31 December 2020, as part of medium-term debt
relief measures agreed for the country in 2018, saving
Greece €122.5 million.

ESM co-organises third annual Capital Markets Seminar
with the European Investment Bank (EIB) and the
European Commission, attracting nearly 1,000 investors
from 30 countries.

04.02

04.03

30.06

24.07

ESM co-organises the 5th Regional Financing
Arrangements Research Seminar, centred on debt and
growth in the post-pandemic world, in partnership with
the Italian G20 Presidency.

ESM BoG holds its ninth Annual Meeting, approves
the 2020 Annual Report, and discusses the main
developments and key activities at the ESM over the past
year, including its response to the Covid-19 pandemic
and the ESM Treaty reform and new mandate. The BoG
also benefits from a virtual address by IMF Managing
Director Kristalina Georgieva.

In close coordination with the ESM, Luxembourg’s
Ministry of Mobility and Public Works launches a Europewide competition for the design of a new headquarters
for the ESM in Luxembourg.

24.09

30.09

The 6th High-level Regional Financing Arrangements
Dialogue, co-organised by the ESM, takes place.

ESM and EFSF BoD agree to waive Greece’s mandatory
repayment obligation of ESM/EFSF loans tied to its early
repayment to the International Monetary Fund (IMF).

14.06

17.06

EFSF BoD approves reduction to zero of the stepup margin accrued by Greece from 1 January to
17 June 2021 as part of the medium-term debt relief
measures agreed in 2018, saving Greece €103.3 million.

ESM Members, represented by their Ambassadors
to the EU, sign the Agreement Amending the Treaty
Establishing the ESM. Due to a change of government,
Estonia signs on 8 February.

ESM BoG appoints Akis Kikas and Jochen Wenz to the
ESM BoA for three-year non-renewable terms, starting
on 8 October.

12.10

31.12

ESM increases its hold-to-maturity tranche to
€9.9 billion and its holdings in Environmental, Social,
and Governance (ESG)-themed bonds to €8 billion by
year end.

“Ten years after its
creation, the ESM
is poised to play
a stronger role in
crisis prevention
and remains ready
to assist in current
and future crises
as part of an
overarching euro
area commitment
to stand united.”
KLAUS REGLING
Managing Director
European Stability Mechanism

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Message from the
Managing Director
The ESM and its temporary predecessor the EFSF were set up to aid euro area countries
in avoiding and overcoming financial crises and maintaining financial stability. Since the
inception of the crisis mechanisms, the euro area has undergone a series of crises, each of
a different nature but all providing lessons for the future. Through it all, the ESM has carried
out its mission by providing billions in financial assistance to five member states during the
euro debt crisis and by creating its Pandemic Crisis Support tool, an offer to help finance
Covid-19 pandemic-related healthcare costs.
Now, we face a new crisis with a devastating war at our doorstep. Beyond the tragic loss of
lives, the war in Ukraine also reintroduces a high degree of uncertainty – not only about how
our economies will be affected, but also about how this war could lead to a new world order
with potentially long-lasting political and economic consequences. Against this backdrop,
the EU and euro area will need to ramp up cooperation and increase their resilience.
The ESM is poised to play a stronger role in crisis prevention and future economic adjustment programmes and provide a backstop for the SRF, once the new ESM Treaty is ratified.
It remains ready to assist in current and future crises as part of an overarching euro area
commitment to stand united.

The euro overcomes its most severe test to date
In 2010, the euro debt crisis brought several euro area member states to the brink of
bankruptcy. In some countries, healthy banks struggled with large amounts of debt from
their increasingly insolvent sovereigns. In others, badly managed banks bailed out with
public money worsened public finances. This ‘doom loop’ threatened the integrity of our
monetary union.
Several factors proved essential in overcoming this crisis.
First, the programme countries took the necessary measures to fix their economies, implementing important reforms, regaining competitiveness, and considerably improving their
public finances. Through these efforts, they recovered market participants’ trust and thereby
market access.
Second, the newly created EFSF and ESM provided lending to those euro area member
states that had lost or nearly lost market access. Although the adjustment programmes and
attached conditionality did create hardship, they were key in helping address the root causes
of economic problems accrued over time and in preserving the integrity of the euro area.
Third, the European Central Bank (ECB), through exceptional monetary policy measures,
helped restore the transmission mechanism of the single monetary policy, alleviate the
pressure several member countries were facing to refinance themselves, and regain market
confidence.
Today, the adjustment programmes for the five countries that received financial assistance totalling nearly €300 billion from the EFSF and the ESM are seen as success stories.
Thanks to their high credit ratings, the rescue funds have been able to tap the markets at
very favourable conditions and onlend the proceeds to programme countries – at no cost

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to taxpayers. These favourable lending terms continue to generate substantive budgetary
savings for former programme countries and make their debt more sustainable.

Reforms born of crises
Though painful, crises also offer opportunities for change. As we have seen over the past
decade, crises can be very different in nature and thus require different solutions – something to bear in mind for any future crises, which may be as unexpected as the ones we
have faced to date. During the last decade, crises have triggered significant institutional
innovations and led to the creation of banking union and progress in deepening Economic
and Monetary Union (EMU).
The euro crisis has shown the clear political commitment to safeguard the integrity of the
euro area. It has led to the creation of firewalls, non-conventional monetary policy measures, stronger banking supervision, and the emergence of macroprudential surveillance and
policies. Despite undeniable hardship, countries have been able to implement important
reforms to reduce macroeconomic imbalances and improve public finances.
Then, in 2020, the Covid-19 crisis again tested the EU and euro area’s resilience. The pandemic has caused immense human and economic distress and brought about a deep
recession, but it has also been a testimony to the EU’s priority to protect human lives while
simultaneously reducing the economic fallout through several measures. It has demonstrated the importance and effectiveness of rapid and well-coordinated cooperation at both
national and European levels.
The Covid-19 crisis has reminded us that a symmetric economic shock can have a substantial asymmetric impact on countries and require special efforts for those countries most
affected by the crisis to protect the single market and the functioning of the monetary union.
The Next Generation EU (NGEU) package could rely on the experience of the EFSF and the
ESM by issuing highly rated bonds and using the proceeds to support beneficiary countries.
The activation of the Stability and Growth Pact’s escape clause created breathing space and
allowed for bold fiscal action at the national level.
The cause of this crisis has been very different compared to the euro crisis. Hence, adopting
a new approach to solving the shock was appropriate.

The war in Ukraine – a grave new crisis
The war in Ukraine has shocked the world. In addition to the tragic human toll, it has caused
massive displacements and destruction. Inevitably, economic growth in the euro area,
which was on a strong recovery trajectory after the most severe period of the pandemic, has
been revised downward. The conflict has caused high uncertainty about future economic
developments by exacerbating the disruption of supply chains and contributing to higher
inflation, already seen in the sharp increase in energy and food prices. The economic impact
of the conflict could be long-lasting.
A deterioration in the terms of trade, when import prices increase more than export prices,
generates losses in wealth and real income. For energy-importing countries, the increase in
energy prices brings about a transfer of income and wealth abroad. For the euro area, this
loss amounted to about 2.5% of GDP up to the first quarter of 2022, the biggest terms of
trade loss on record.
This war has triggered awareness about the need to reduce dependency on energy imports
and to diversify energy sources, underscoring the need to push ahead with the green energy

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transition. This war could also be the trigger for more far-reaching changes, like the shaping
of a new economic world order that could reduce globalisation and change trading flows.
Against this backdrop, cooperation within Europe should increase further.

Additional steps needed to strengthen the euro area architecture
In that context, I hope that additional steps to strengthen the EMU architecture will become
possible during the next decade, despite the current lack of consensus among member
states. At the end of my mandate at the EFSF and the ESM, and after four decades of working on monetary integration in Europe, I believe that progress in the following areas would
make EMU more resilient.
First, the completion of banking union. This will require the implementation of several initiatives, including some form of a European deposit insurance scheme. If depositors across
the euro area are unevenly protected in the face of a major crisis, the euro does not carry the
same value across our monetary union – something misaligned with the spirit underpinning
a single currency. Depositors should be protected equally, no matter where they are located.
Second, more progress on establishing a capital markets union. A deep and integrated capital markets union will be essential to generate substantial private investments – comple­
menting public investments – to transform our economies and boost their growth potential.
Currently, 19 domestic capital markets coexist in EMU. Ambitious steps towards integration
are needed to achieve a single market for capital. This will require major changes, such as
harmonising parts of national insolvency laws. While difficult, this endeavour will contribute
to better allocation of capital across the EU, strengthening potential growth and increasing
risk-sharing via markets, which would reduce fragmentation and promote convergence
within the euro area.
Completing banking union and capital markets union would also bolster the international
role of the euro. Such a greater role could also be supported by a larger pool of common
euro-denominated safe assets. This, in turn, would make banks less vulnerable to sovereign risk by allowing them to substitute some domestic government debt holdings with
European safe assets. Such diversification would help lessen the spillover of risks between
sovereigns and banking sectors and so help address the ‘doom loop’.
Third, a central fiscal capacity for macroeconomic stabilisation. The response to the pandemic was effective and constituted a remarkable act of solidarity, but the nature of the
pandemic crisis differed from the previous debt crisis and from the current conflict-induced
crisis. In the pandemic crisis, member countries were not suffering from macroeconomic
imbalances but were instead hit by a symmetric shock, and all benefitted from a large, but
temporary, pan-European support package.
Without further reform of EMU, euro area member states remain vulnerable to asymmetric
shocks. As they are part of a monetary union, the only macroeconomic lever to counteract
an asymmetric shock is fiscal policy. Without the possibility of receiving additional financial
resources from the European level, domestic fiscal space could be insufficient to withstand
such a shock and leave a country stranded.
Thus, there is a strong case for introducing a central fiscal capacity to make the euro area
more resilient by providing macroeconomic stabilisation and increasing public risk-sharing.
It could be designed as a revolving fund, without necessitating additional transfers from
member states. The ESM could add such an instrument to its toolbox, drawing on its existing infrastructure and financial resources.
Finally, a reform of the EU fiscal rules that provide an essential coordination framework for
the monetary union.

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The European Commission has launched a public consultation on the EU economic
governance framework, which includes a review of the EU fiscal framework.
When reviewing these rules, we should keep two key aspects in mind: their ultimate
objective and our current economic environment. The ultimate objective is clearly debt
sustainability, from which no other objective should detract. The current economic
environment is very different from the one that existed three decades ago, when the
Maastricht Treaty was crafted.
As interest rates are expected to remain below historic levels, the debt-carrying capacity of member countries has increased without putting debt sustainability at risk.
The fiscal rules would become more credible if they reflected this new economic context. The continued application of current rules seems unrealistic and would necessitate permanent exceptions, undermining the credibility of the framework. However,
the deficit rule prohibiting yearly deficits of more than 3% of GDP should be kept. Even
if not perfect, it has proved its worth by helping keep deficits in check over time. Nevertheless, the fiscal framework should be based on simple and measurable criteria to
help increase transparency.

ESM equipped for future uncertainty
Ten years after its creation, the ESM is entering a new phase. Early last year, ESM member countries signed an agreement amending the ESM Treaty, which provides the legal
basis for the ESM to perform new tasks. This reform had initially been endorsed by
the Heads of State in December 2018 and by the Eurogroup in November 2020. Upon
ratification of the reformed treaty, the ESM will play a stronger role in preparing and
monitoring potential future programmes and enhance its precautionary credit lines by
making their eligibility process more transparent and predictable. Most importantly, the
ESM is operationally ready to provide the backstop for the SRF, effectively doubling the
SRF’s resources should they become depleted. Hence, the credit line provided by the
ESM will only be used as a last resort during a severe crisis. The loan would be paid
back within three to five years through contributions by banks, thereby guaranteeing its
fiscal neutrality. The nominal cap of ESM loans to the SRF has been set at €68 billion.
Once the backstop to the SRF becomes effective, the ESM will remove the direct recapitalisation instrument for banks from its toolbox.
Through much effort, trials, errors, and commitment, the euro area and its currency
have remained strong and look toward a promising future, especially if it focuses on
fortifying its resilience. The ESM has been equipped for the future and, as in the past,
stands ready to contribute to safeguarding financial stability in the euro area.

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ESM pursues interinstitutional
collaboration for the
common good
Since its beginnings, the ESM has recognised the value of collaborating with stakeholders
beyond regular interactions with Members and investors. The ESM’s predecessor, the EFSF,
was established with the help of vital services provided by the EIB. Loyal to this collaborative spirit, the ESM has since continued to expand its network, leveraging on the experience
and comparative advantage of key counterparts to improve operations and support other
institutions with its expertise.
Today, the ESM cooperates with a wide range of institutions and forums at global, regional,
and national levels. These include European institutions and bodies; international organisations such as the IMF; Regional Financing Arrangements and multilateral development
banks; policy coordination platforms such as the G20 International Financial Architecture
Working Group; and knowledge centres like think tanks and academia.
Cooperation with counterparts is paramount for delivering on the ESM’s mandate, especially when extending financial assistance to Members. Other elements of ESM’s business
also benefit from collaborative actions.
Interinstitutional cooperation supports the development of the ESM’s analytical capabilities
and policies. Some relationships, for instance, expand access to data and information or
complement the ESM’s work. The ESM also consults with peers on best practices, reinforcing its lean structure and allowing staff to share knowledge and benefit from others’ expertise, and it exchanges insights with government officials, financial market participants, and
academia. Through these interactions, the ESM keeps abreast of economic analyses and
developments. By participating in high-level meetings and conferences and by publishing
content, the ESM contributes to policy debate.
Such cooperation differs in intensity and form given the varying factors behind engagement
with each stakeholder, ranging from regular, informal bilateral dialogues to joint research
projects and seminars. Some engagements are formalised through a signed agreement
while others remain informal, arising organically as the policy environment and ESM institutional needs evolve. The ESM is adapting its collaboration framework in line with the new
responsibilities foreseen in its enhanced mandate.
At the European level, the ESM nurtures a close relationship with the European Commission – which has intensified over time, largely due to the common work carried out to provide
financial assistance. In April 2018, the European Commission and the ESM signed a Memorandum of Understanding that codified their existing working methods. Under the amended
ESM Treaty, the ESM will have an enhanced role in the design, negotiation, and monitoring
of financial assistance programmes in cooperation with the European Commission, deepening interactions between the two to be laid out in a Memorandum of Cooperation to be
signed upon ratification of the amended ESM Treaty. The ESM has also established close
ties with the ECB, as under the ESM Treaty the ECB is entrusted to perform specific tasks in
liaison with the European Commission in the context of providing stability support. This has
led to regular interaction at all levels, including discussions on topics of common interest
such as euro area financial stability and the deepening of EMU. The ESM has also stepped
up its collaboration with the Single Resolution Board (SRB) following the 2018 Eurogroup
agreement on the creation of a backstop facility at the ESM for the SRF. The ESM and the

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SRB worked jointly during 2021 on the methodology for assessing the SRB’s repayment
capacity. Such close cooperation is expected to continue to ensure full preparedness for
any backstop activation.
At the international level, the IMF is one of the ESM’s main multilateral partners. The
two institutions have collaborated closely on programme design and reviews during the
euro area debt crisis and continue to communicate regularly at managerial and technical
levels to facilitate exchanges of ideas and provide inspiration on a range of policy matters.
These interactions supplement other engagements with the IMF, such as the IMF Article IV
consultation on euro area policies and intense interaction within the IMF annual and spring
meetings that offer opportunities to discuss economic and financial developments in the
euro area and the global economy more generally. In conjunction with peer regional rescue
funds (Regional Financing Arrangements) across the globe, the ESM has also created a dialogue framework with the IMF to discuss crisis prevention and resolution issues and look for
ways to improve cooperation with the IMF through annual policy meetings.
All these valuable partnerships help the ESM enhance its institutional capacity and contribute to safeguarding euro area financial stability. When the ESM takes on the new tasks
of its broadened mandate, many existing interinstitutional ties will be fortified, and new
cooperation opportunities sought. The Covid-19 pandemic has taught a valuable lesson on
the importance of multilateralism, particularly at the regional level where close cooperation among European partners ensured an unprecedented, swift, and well-coordinated economic response to the pandemic shock. As we look cautiously toward the end of the health
crisis, tackling priorities like the economic impact of climate change, ensuring inclusive and
sustainable growth, and maintaining global stability in an uncertain geopolitical environment will require not only working hard but also working together.

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Pandemic stimulates positive changes in ESM
working methods
The ESM quickly adapted to new ways of working when Covid-19 erupted in early 2020, with
most staff working from home and a small team in the office on an as-needed basis. The ESM’s
reliable technology infrastructure and systems, together with new digital channels of communication, made for a smooth transition. The ESM reinforced its cyber security systems and accelerated an existing project to implement a cloud-based collaboration platform, fostering secure
connectivity and strengthening cooperation among staff and external stakeholders.
Throughout 2021, the pandemic continued to challenge the ESM’s internal and external operations, but it also provided the ESM with opportunities to shift, adapt, and focus operations while
ensuring fulfilment of its mandate.
The ESM’s nine-member incident management team, comprised of senior staff and responsible
for navigating the ESM through crises that threaten business continuity, continued its pivotal
role of monitoring the evolving situation, advising management, providing staff with frequent
updates, and shepherding the ESM through the pandemic.
Recognising the importance of social interaction and regular face-to-face contact, especially for
colleagues experiencing isolation and increased anxiety, the ESM made it possible to work safely
in the office and also improved the at-home experience. Steps taken included providing equipment such as headsets, ergonomic chairs, and computer screens to make working from home
more comfortable; encouraging management to regularly check in with their teams; arranging
virtual exercise sessions; and providing courses on maintaining emotional and physical well­being. At the same time, the ESM equipped offices with air purifiers, plexiglass separators
between desks, and contactless bathroom facilities to considerably reduce the risk of infections
at work and lessen the environmental impact.
ESM colleagues have proven resilient and flexible in the face of continuously shifting approaches
to accommodate the ever-changing situation, adjusting office presence as viral variants subsided or emerged over the course of the year. The teamwork and dedication shown by those
responsible for implementing new safety measures and rules for staff returning to the office
were exceptional. According to feedback given, those returning to the office felt increasingly
secure, with any initial apprehension dissipating, not least because all staff respected the rules
for working together safely.
What began as a few weeks of working from home in an emergency has evolved into a catalyst
for changing how we work, live, and interact. The imposed remote working has demonstrated
that flexibility need not come at the expense of productivity, but rather can lead to increased pro­
ductivity and efficiency. The ESM initiated a corporate project in September 2020 that analysed
its pandemic experience to date and identified potential future ways of working, building upon
the principles of agility, resilience, collaboration, and inclusion to define a provisional framework
for hybrid working. The project will continue to monitor and assess the framework’s business
impact during a phased return to the office, with a testing period to identify the optimal opera­
tional model. The project outcome will ensure the ESM can not only withstand disruption,
but also thrive in an ever-changing environment while maintaining a collaborative and closeknit culture.
The pandemic may have also permanently changed the ESM’s interactions with its external
stakeholders. The ESM’s most frequent contact is with ESM Members, through the BoG and
BoD as well as Eurogroup, Eurogroup Working Group, and Task Force on Coordinated Action

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meetings; peers in Regional Financing Arrangements and international financial institutions; and
investors. Although the aims and content of these interactions differ, the new forms of collaboration and communication adopted during the pandemic are similar. Online meetings have largely
replaced in-person interactions, and existing virtual formats have been adopted and adapted to
strengthen professional relationships that once solely relied on travel and face-to-face contact.
The ESM’s 2021 virtual Shareholders’ Day was enriched with new virtual activities to supplement
more traditional panel discussions. For example, the introduction of a virtual meetup tool gave
participants the opportunity to interact one-on-one; ESM colleagues digitally presented posters
showing the main conclusions and findings from their research publications, triggering dynamic
discussions carried out in small breakout chat groups; and the ESM’s Funding and Investor
Relations team simulated an issuance transaction.
Alongside the EIB and the European Commission, the ESM organised its first hybrid event in
June, a capital markets seminar, with speakers both in an on-site studio and attending virtually.
The seminar attracted more than 1,000 participants, most of whom attended online.
The pandemic has offered new and valuable ways to collaborate, challenging the status quo.
Overall, virtual interaction works well, notably when there is an established relationship between
those meeting. Digital discussions are especially advantageous for the organisation of, and participation in, meetings spread across the globe. Reduced staff travel has also contributed to the
ESM’s ESG commitment to reduce its carbon footprint. Yet, virtual meetings and events cannot
entirely replace the in-person experience, which helps build real bonds and understanding. The
ESM will continue learning from this unprecedented change to optimise its hybrid ways of working together.

01 Economic developments
Macroeconomic and financial environment

10
8
6
4
2
0
-2
-4
-6
-8
-10

2017

2018

2019

2020

2021

2022 f

World exports of goods and services volume
World gross domestic product volume
Note: f = forecast.
Source: IMF World Economic Outlook, April 2022

Figure 2
Real gross domestic product growth for selected
countries
(year-on-year growth in %, quarterly data)

Source: Eurostat

FR

Dec 21

ES

Sep 21

Jun 21

Dec 20
DE

Mar 21

Euro area

Sep 20

25
20
15
10
5
0
-5
-10
-15
-20
-25
Jun 20

Global economic activity continued to rebound strongly in
2021 following a sharp drop at the onset of the pandemic
in spring 2020 (Figure 1). G20 countries’ gross domestic
product (GDP) grew by 6.1% to exceed its pre-pandemic
level. The rollout of vaccinations and continued policy
support partially decoupled economic activity from pandemic developments, and benefitted mobility and demand.
While global trade increased by 10.1% in 2021 (Figure 1),
protracted supply-side disruptions made it difficult to meet
rising demand. Nevertheless, uncertainty dwindled as
fiscal and monetary policy remained supportive.

(volume, year-on-year growth in %)

Mar 20

Global economic activity recovered forcefully in 2021 from
the unprecedented pandemic shock of the previous year.
Progress in fighting the pandemic and continued concerted
policy action at European and national levels contained the
impact on labour market outcomes, mitigating risks of
scarring and helping anchor the recovery despite further
waves of Covid-19 infections. After muted growth in the
first quarter, the euro area economy grew strongly in the
second and third quarters before a new virus variant
started to weigh on growth towards the end of the year.
Appropriately supportive and mutually reinforcing economic policies have ensured effective macroeconomic stabilisation. In light of strong rises in global energy prices,
together with a marked resurgence in Covid-19 cases,
euro area member states extended the provision of safety
nets for households and corporates – such as job retention
schemes and public guarantees – the ECB’s monetary policy remained accommodative, and the ESM’s Pandemic
Crisis Support credit line remained available, further helping reduce uncertainty. Looking ahead, the NGEU package,
and in particular the Recovery and Resilience Facility within
it, provides an opportunity to boost Europe’s growth
potential. Over the coming years, the effective implemen­
tation of reforms and investments under the Recovery and
Resilience Facility will have a deep, positive impact on the
functioning of the euro area economies.

Figure 1
Global economic activity and exports of goods
and services

Dec 19

Strong recovery with several challenges

IT

M E C H A N I S M

Figure 5
Euro area services and manufacturing confidence

ES
PT
SK
DE
AT
IT
EL
Euro area
FR
BE
LV
MT
CY
FI
NL
LT
LU
SI
EE
IE

Services

Notes: EFSF/ESM post-programme countries in yellow. Multinational
corporations’ activities may distort GDP figures in Ireland.
Source: Eurostat

Figure 4
Euro area contributions to real gross domestic
product growth
(year-on-year growth in %, contributions in percentage points)

Net exports
Investment
Private consumption
Source: Eurostat

Q4 21

Q3 21

Q2 21

Q1 21

Q4 20

Q3 20

Q2 20

Q1 20

Q4 19

Q3 19

Q2 19

Q1 19

Q4 18

20
16
12
8
4
0
-4
-8
-12
-16
-20

Inventories and valuables
Government consumption
Real gross domestic product
growth

Source: Eurostat

Manufacturing

Jan 22

Mar 22

Nov 21

Jul 21

Sep 21

16
14
12
10
8
6
4
2
0
-2
-4
-6

May 21

(Q4 2021 relative to Q4 2019 level, in %)

Jan 21

30
20
10
0
-10
-20
-30
-40
-50

Mar 21

(% balance)

Sep 20

Figure 3
Real gross domestic product in 2021

The speed of the recovery varied across euro area countries and sectors in 2021 (Figures 3 and 4). The differences in growth performance are partially linked to the
varying impact of the initial pandemic shock and the
differing economic structures in place, such as dependence on manufacturing. Industries highly integrated
into global value chains, for example the automotive
sector, were hit particularly hard by the shortage of
semiconductors, which contributed to supply-demand
mismatches. Demand for services recovered (Figure 5),
especially in the second and third quarters, but the tourism sector, crucial for several euro area member states,
continued to perform significantly below its pre-crisis
level.

Nov 20

Euro area GDP recovered in 2021, growing by 5.4%
annually. A new surge of Covid-19 infections and
containment measures muted the recovery in the
first quarter (Figure 2). Growth strengthened in the second and third quarters as vaccination rates increased,
economies reopened, uncertainty slightly moderated,
and households’ savings began to normalise, thereby
boosting consumption. While demand expanded, industrial supply shortages ranging from specific inputs to
broader sets of goods and raw materials impaired manufacturing and construction. In the fourth quarter, a new
and highly transmissible virus variant pushed infections
to unprecedented highs and hampered growth across
the euro area (Figure 2). However, the variant induced
less severe illness and fewer fatalities, prompting many
governments to avoid strict lockdowns, limiting the
impact on the economy.

Jul 20

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Euro area average inflation increased to 2.6% in 2021
from 0.3% in 2020 (Figures 6 and 7). Following months of
slightly negative readings, monthly year-on-year headline
inflation turned positive in January 2021 and trended
upwards over the year, reaching 5% in December. Rising
energy prices and strong base effects compounded with
various initial temporary and administrative factors to
trigger price pressures. Since mid-2021, euro area core
inflation also gained traction and stood above 2.5% by
year end. Inflationary pressures from wage negotiations
remained contained overall, but rising producer prices
created cost pressures for businesses. Market-based
long-term inflation expectations increased in the second
half of 2021, reaching close to 2% in the fourth quarter.

The extended activation of the Stability and Growth
Pact’s general escape clause provided euro area governments with the possibility for large amounts of fiscal
support to respond to the pandemic and its negative
economic impact. In 2021, unprecedented fiscal support gradually shifted towards the hardest hit economic
sectors and vulnerable groups. Governments continued to provide financing to ensure healthcare systems
functioned smoothly and to support employment and
businesses. The pandemic fiscal response laid the foundations for a solid recovery but also led to an increase in
euro area general government debt, peaking in 2020 at
97.2% of GDP. In 2021, the government debt-to-GDP ratio
decreased to 95.6% due to strong economic growth and
a slight decrease in the nominal debt in absolute terms
(Figure 8).

Figure 6
Euro area contributions to harmonised index of
consumer price inflation rate

Figure 8
Euro area government debt
(in % of GDP)

(year-on-year inflation in %, contribution in percentage points)
100
95
90
85

Source: Eurostat

Figure 7
Harmonised index of consumer price inflation rates
in 2021

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

Services
Energy
Non-energy industrial
Food including alcohol
goods
and tobacco
Headline harmonised
index of consumer prices

75
2010

Dec 21

Mar 22

Jun 21

Sep 21

Dec 20

Mar 21

Jun 20

Sep 20

Dec 19

Mar 20

Jun 19

Sep 19

Dec 18

Mar 19

80
Sep 18

8
7
6
5
4
3
2
1
0
-1

Source: Eurostat

Figure 9
Non-performing loans, non-performing loan ratio and
return on equity in the euro area
(left-hand scale in € billion, right-hand scale in %)
16

(in %)

800

12

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

600

8

400

4

200

0

0

-4

EL
MT
PT
IT
SI
FI
FR
CY
IE
Euro area
AT
SK
NL
ES
DE
BE
LV
LU
EE
LT

Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Dec 20
Dec 21

1,000

Note: EFSF/ESM post-programme countries in yellow.
Source: Eurostat

Non-performing loans
Ratio (right-hand scale)
Return on equity (right-hand scale)
Note: Single Supervisory Mechanism supervised banks.
Sources: SNL, FitchConnect, ESM calculations

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The successful rollout of the NGEU package and the
Recovery and Resilience Facility within it has supported
investments that facilitate green and digital transitions.
By the end of the year, the facility had allowed the first
disbursements to national governments, enhancing the
euro area recovery. Increased investment promoting
the twin transition underscores the benefits of the common crisis response.
The euro area financial sector remained resilient, thanks
to concerted support measures as well as to generally
good levels of capital and liquidity buffers held by banks
at the start of the crisis. Initial fears of a significant
increase in non-performing loans (NPLs) have not
materialised; banks have effectively continued their risk
reduction efforts, resulting in a 0.5 percentage point
Figure 10
Euro area banks’ net new lending, cumulated flows

Dec 21

Sep 21

Jun 21

Mar 21

Dec 20

Sep 20

Feb 20

500
400
300
200
100
0
-100
-200

Jun 20

(in € billion, February 2020 = 0)

Newly originated corporate loans subject to
government guarantee
Net new corporate lending without government
guarantee
Net new household lending
Net new household lending for house purchase
Sources: European Banking Authority Risk Dashboard, ECB, ESM
calculations

drop in the average NPL ratio during 2021. Banks’
profitability started to recover after the slump of 2020,
mostly on the back of reduced provisioning needs and
favourable funding conditions. Return on equity reached
6.6% by end-2021, three and a half times higher than at
end-2020 (Figure 9). Nevertheless, some traces of the
pandemic crisis remain. Despite having sufficient
lending capacity, banks’ new lending to corporates,
excluding that backed by public support, only began to
recover in the last quarter of 2021, reflecting an
improving economic outlook (Figure 10). During the last
decade, capital markets somewhat compensated for
missed lending activity by providing more funding to
large corporates, including in the lower credit quality
segment (Figure 11), a development that accelerated
further during the pandemic crisis. Signs of increasing
risks have emerged in real estate lending in some
regions, with mortgage loans increasing by 5% year-onyear in 2021. In the longer term, low returns and cost
inefficiencies continue to challenge the sector’s competitiveness, while climate change and risks of a sudden repricing of assets could prompt instability in the
financial sector. Policy initiatives such as banking union
and capital markets union are designed to help the
financial system move towards a more sustainable
business model.
On global financial markets, reflation dominated
throughout 2021. Market-based long-term inflation
expectations rose in 2021 to 2.6% from 2% in the US
and to 2% from 1.3% in the euro area. Yields on 10-year
US Treasury bonds increased to 1.5% from 0.9%, and
the GDP-weighted average euro area government bond
yield turned positive, reaching 0.3%, up from -0.2%.
While major central banks started scaling back asset
purchases, financial markets are pricing in policy rate
hikes in 2022.

Figure 11
Share of outstanding financing amounts extended to euro area firms by type of financial sector and asset
(in % of total)
2013 Q4

100

75

Debt

2021 Q4

100

Equity
MFI

Debt
75

MFI

50

50
Loans
25

0

Equity

25

NBFI

Sector

Asset
Monetary financial institutions (MFI)

0

Loans
NBFI

Sector
Non-bank financial intermediaries (NBFI)

Source: ESM calculations based on ECB and Eurostat quarterly financial and non-financial sector accounts

Asset

2 0 2 1

Investors’ risk appetite was resilient throughout 2021,
equity markets continued to rally, and corporate and
emerging market credit spreads remained broadly
stable. Euro area sovereign bond yields were also largely
unchanged, suggesting that market perceptions of
country-specific risks remained contained (Figure 12).

Early 2022 developments
The euro area economy entered 2022 in a slightly
weaker position than expected in the autumn of the previous year. In December 2021, a rise in Covid-19 cases
triggered new mobility restrictions, supply chain disruptions, and further increases in energy prices, thereby
generating faster and more broad-based inflation than
anticipated. Elevated inflation is expected to persist for
longer than projected last year.
Figure 12
Yields on 10-year government bonds issued by the
US and selected euro area member states
(in %)
4
3
2
1
0

DE
Source: ECB

ES

FR

IT

US

Dec 21

Dec 20

Dec 19

Dec 18

Dec 17

Dec 16

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The outbreak of the war in Ukraine in February 2022
caused enormous geopolitical uncertainty and led to
significant revisions of previous growth projections. The
European Commission published its preliminary fiscal
guidance for 2023 in March 2022 but announced that
it would update it if necessary – at the latest in May.
The ultimate macroeconomic ramifications will depend
on how the conflict unfolds and subsequent policy
reactions.

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Climate risks and the role of crisis prevention and
resolution mechanisms
Climate change threatens our society and economies. Both climate change and responses to it
pose various risks to financial stability. ESM Members have already responded at national, European, and international levels, including by signing the Paris Agreement – a binding international
treaty on climate change. There are different channels through which climate-related risks might
impact the financial system and financial stability.
Impact of climate-related risks on our economies
Climate-related risks to financial stability are those that arise directly from climate change or
from efforts to mitigate and adapt to climate change. These can be either physical risks, such
as extreme weather events or rising sea levels, or transition risks, such as large shifts in asset
values, higher costs of doing business, or the socioeconomic challenges of the transition to
a more sustainable economic model.
The possible impact of and exposure to physical risks varies across economies and sectors,
and their respective banking and insurance sectors’ loan books, portfolio holdings, or underwriting activities. Transition risks that arise from policies aimed at transitioning from a high- to
a low-carbon economy and building a climate-resilient future could give rise to financial risks in
multiple ways, which affect our economies, financial systems, and public finances that, in turn,
raise financial stability issues. Transition risks affect financial institutions through credit risks,
market risks, liquidity risks, operational risks, and reputational risks.

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The transition towards a climate-neutral economy may depress investments in carbon-intensive
sectors and their underlying assets, potentially leading to stranded assets burdening balance
sheets in the public and private sectors. Countries with more emission-intensive industries are
more exposed to transition risks and stranded assets.
At the macroeconomic level, climate change may impact the public sector balance sheet
through growth potential and investment returns, which may affect a country’s debt sustainability. Fiscal policy measures have an important role to play in fighting climate change. They will
have to be widely used, also by increasing public investment, to incentivise the private sector to
mitigate and adapt to the effects of climate change.
A collective effort for the common good
No country can fight climate change and limit global warming alone. Mitigation efforts serve to
benefit all countries, making it a global public good. Addressing climate-related financial stability
risks requires an unparalleled level of cross-country policy cooperation and coordination, whose
success hinges on collective action.
The financial stability risks and the need for collective effort have direct implications for the role
of crisis mechanisms, which are generally designed to detect vulnerabilities to prevent crises or
to resolve crises that do occur. Such mechanisms can support the effectiveness of climate mitigation efforts. They are sovereign insurance mechanisms against the impact of climate change
when a lender of last resort is needed.
Ensuring financial stability amid climate change
To help, crisis mechanisms should further integrate climate change considerations into their
macrofinancial analyses and progress with the mapping of economic and financial exposures
to climate risks. In addition to intensifying internal training on macrofinancial climate analysis,
crisis mechanisms can support national efforts to expand or establish climate best practices by
providing training and technical assistance. More specifically, they can exchange information,
participate in international forums, and cooperate with partner and peer institutions across the
globe on climate risks.
By improving data, analyses, and risk monitoring, crisis mechanisms can test the fitness of their
available instruments and address ESG needs and climate change-related risks – adjusting their
toolkits to close remaining gaps.
Monitoring and surveillance activities that include climate change considerations will help crisis
mechanisms to prevent crises from materialising and inform policymakers on the externalities
of climate change. With early warnings, markets are better informed in their pricing and a
sudden sizeable repricing of climate-related risks or a reversal of financing flows becomes
less likely.
The role of crisis mechanisms is to identify, pool, and insure against acute risks to governments
that they cannot resolve themselves. Building sovereign resilience to climate change is key to
mitigating inherent risks that touch every aspect of the global economy and to ensuring a better
future for our societies.
The ESM has integrated ESG considerations into its market operations and internal processes
and is deepening its analyses of the implications of climate change for financial stability. On the
following pages, you will find comments from peer institutions on how the ESM can play a role
in the shared endeavour of creating a more resilient and sustainable future.

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Thoughts from institutional peers
How relevant is the ESM’s commitment to help allocate funds for
social needs in the euro area?
“By having designed a social bond framework, aligned with the ICMA Principles, to
finance the Pandemic Crisis Support tool, the ESM has demonstrated vital public-sector
leadership in helping to build this extremely important but still considerably underutilised
area of ESG-related bonds globally.”
Bryan Pascoe
Chief Executive, International Capital Market Association (ICMA)

How can regional institutions support members in mitigating the
socioeconomic impacts of climate change?
“Development policy choices disproportionately influence the ability of countries to adapt
to climate change. Regional institutions can help mitigate the negative implications
of climate change by supporting countries to systematically assess climate risks and
vulnerabilities, develop local capacities, integrate appropriate resilience measures into
development policies, and allocate resources to increase resilience to climate change.”
Abdulrahman A. Al Hamidy
Director General Chairman of the Board, Arab Monetary Fund (AMF)

How can the ESM contribute to the work of the NGFS?
“We welcome the ESM’s work on the implications of climate change on financial stability,
and we look forward to working together to strengthen the resilience of the financial
system to climate risks. ESM’s regional reach and strong commitment will support the
NGFS’ efforts to accelerate the greening of the financial system.”
Ravi Menon
Chair of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS)

What role do European and international institutions play in the fight
against climate change?
“Climate change poses major risks to the global financial system. To preserve economic
stability and seize the new opportunities offered by the green transformation of our
economies, the financial community must work closely together. The EIB is delighted to
cooperate with ESM and partners from around the world to unlock sustainable finance
at scale.”
Werner Hoyer
President, European Investment Bank (EIB)

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Why is it essential for international financial institutions to consider
climate-related risks in economic surveillance?
“Climate change is a critical policy challenge that already imposes large economic
and social costs on many economies. In the period ahead, it is bound to affect
macroeconomic and financial stability through numerous transmission mechanisms,
including fiscal positions, asset prices, trade flows, and real interest and exchange
rates—so engagement on this issue is vital.”
Gita Gopinath
First Deputy Managing Director, International Monetary Fund (IMF)

How can regional institutions support economies in responding to
climate-related risks?
“Climate change is a global challenge that requires us to join forces to be part of the
global solution. Regional institutions have the responsibility to identify opportunities
for our members to facilitate their mitigation of and adaptation to climate change, and
transition towards greener economies. By engaging in regular dialogue and sharing of
expertise, we can strengthen regional resilience to disasters and secure inclusive ‘climate
prosperity’ for all.”
Toshinori Doi
Director, ASEAN+3 Macroeconomic Research Office (AMRO)

How can the European Commission and the ESM cooperate on
factoring climate-related risks into economic analysis?
“Climate change has significant economic and fiscal implications linked not only to
physical risks, like natural disasters, but also to those stemming from mitigation and
adaptation policies aimed at supporting the transition to climate-neutral economies. The
European Commission stands ready to collaborate with the ESM in supporting member
states in the event that these risks were to affect financial stability.”
Paolo Gentiloni
Commissioner for Economy, European Commission

Why is it important to pay due attention to climate change from
a financial stability perspective?
“The physical and transitional risks of the climate and environmental crises are not
hypothetical, but a reality. Analysis confirms that the consequences constitute a material
risk to financial stability. European institutions – including the ESM and the ECB – take
action in recognition that this is necessary to deliver on their mandate.”
Frank Elderson
Member of the Executive Board, European Central Bank (ECB)

What impact can the ESM have as a signatory of the UN Principles
for Responsible Investment?
“As a PRI signatory, the ESM has prioritised ESG integration across the organisation’s
investment activities, designing a responsible investment framework to measure and
monitor investments. By committing to ESG integration and promoting sustainable
investment practices, the ESM sets an important example for others to foster greater
financial stability.”
David Atkin
Chief Executive Officer, United Nations Principles for Responsible Investment (UN PRI)

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Former programmes
Ireland
The Irish economy grew strongly in 2021 as it recovered from the pandemic, aided by strong exports and
a rebound in domestic demand. Fiscal policy remained
supportive, and growth helped reduce the deficit-to-GDP
ratio. Low borrowing costs and fiscal overperformance
allowed Ireland to maintain a fairly favourable fiscal
position and sizeable year-end cash buffers. Irish banks’
financial positions remained sound, with profitability
improving.
Real GDP growth accelerated to 13.5% in 2021 due to
the recovery of private consumption from pandemicinduced lockdowns and strong export growth. A measure
for domestic economic activity corrected for the influence of multinational firms increased by 6.5%, supporting the recovery of labour markets. The Covid-adjusted
unemployment rate1 declined to 7.4% by end-2021, down
from its April 2020 peak of 31.5%, but remains above
the longer-term average rate of around 5%. Extensive
support measures helped prevent bankruptcies. The re­
covery saw the harmonised index of consumer prices
inflation rate accelerate to 5.7% in December 2021, due
to rising energy prices and global supply chain disruptions. Exports performed robustly thanks to the activities
of resident multinational companies. New Brexit-related
trade frictions were mitigated by pre-Brexit stockpiling,
policy support, and the shift of trade routes to direct
shipping to and from the European continent.
The budget deficit was lower than expected, at 1.9% of
GDP, due to stronger tax revenue and underspending.
The domestic economy’s rapid recovery aided the
upturn in income tax receipts and a strong rebound in
VAT. Strong export activity swelled corporate tax revenues beyond expectations, despite the potential instability of a significant portion stemming from multinational
companies. Public expenditure turned out lower than
expected due to an overall decline in pandemic-related
claims as well as lockdown-induced closures of construction. Strong GDP growth reduced gross debt to 56%
of GDP from 58.4% in 2020, despite a further increase
in the absolute level of debt in 2021. However, the debt

1

The Covid-19 adjusted unemployment rate classifies all claimants of
the Pandemic Unemployment Payment, a job retention scheme, as
unemployed.

level remains high under alternative scaling metrics that
isolate GDP distortions caused by the highly mobile
activities of multinational companies.
Low borrowing costs allowed Ireland’s National Treasury Management Agency to reduce the average cost
of government debt, with the cost of long-term bond
issuances falling slightly to 0.17%. With issuances of
€18.5 billion in 2021 (down from €24 billion in 2020),
and a lower-than-expected budget deficit, Ireland ended
the year with a sizeable cash buffer. Credit ratings of AA
or A with stable or positive outlooks and accommodative monetary policy enabled favourable market access
conditions. The return of the 10-year Irish bond yields to
positive territory by end-2021 was in line with euro area
interest rate developments.
The impact of the pandemic on the financial position
of the retail banking sector started to dissipate in 2021,
reflecting the improved economic outlook. Irish retail
banks’ capital and liquidity positions remained strong
and well above regulatory minimums. Asset quality
improved during 2021, though risks may arise in some
portfolios as policy support fades. Bank profitability
returned to pre-pandemic levels, although vulnerabilities
remain due to the strong reliance on net interest income
and a high cost base. The sector continued to benefit
from an ample deposit base.
Under its Early Warning System, the ESM monitors risks
to its loan service payments. The Irish economy proved
resilient, but uncertainty persists. Main risks relate to
a weaker external environment and rising inflation, further aggravated by the Ukraine crisis, albeit that Ireland’s
direct trade and investment exposure to the belligerent
parties remains small. Other risks comprise a limited
delivery capacity for public investments and potential issues affecting trade with Ireland if the Trade and
Cooperation Agreement between the UK and the EU,
including the Ireland/Northern Ireland Protocol, is not
fully implemented. Changes to the international corporate tax regime warrant fiscal prudence.

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Greece
The Greek economy recovered vigorously from the pandemic, driven by strong domestic demand and tourism.
The budget deficit accommodated a large package of fiscal support to households and firms. Market conditions
remained favourable, supported by the ECB’s accommodative monetary policy stance and the NGEU recovery plan.
Meanwhile, banks strengthened their balance sheets.
Greece’s economic activity grew by 8.3% in 2021, essentially recovering the output losses recorded in the previous year due to the impact of Covid-19. Households and
firms used accumulated savings to boost consumption
and investment, and tourism surged. The government’s
large fiscal support package propped up incomes and
employment throughout the year.
The primary balance improved significantly to -5.5% of
GDP in 2021, from -8% the year before. The government
provided extensive support to households, employees,
and firms, with one of the largest discretionary fiscal
packages in the euro area. Thanks to rapid growth, the
debt-to-GDP ratio fell to 193.3% of GDP from 206.3%.
Greece’s sovereign financing conditions remained
favourable throughout the year. It over-executed its
2021 funding plan, raising €14 billion in market funding,
and maintained a cash buffer that more than covered
gross financing needs over the coming 12 months.
Amid strong investor demand, sovereign spreads fell to
their lowest levels since the sovereign debt crisis, before
widening moderately later in the year. In December, the
ECB announced it would discontinue net purchases
under the pandemic emergency purchase programme
from March 2022, and only reinvest redemptions. This
also concerns Greek sovereign bonds. However, the
ECB also announced reinvestments could include purchasing Greek bonds beyond rollovers of redemptions
to avoid interrupting purchases in that jurisdiction that
could impair the transmission of monetary policy to
the Greek economy while it recovers from the fallout of
the pandemic.
Bank solvency indicators remained adequate amid
a sharp decline in banks’ NPLs. Two systemically important institutions raised new capital from private investors. NPL sales and securitisations are supported by the

government-backed Hercules asset protection scheme
and strong investor demand. As a result, banks more
than halved their aggregate NPL ratio to 12.8% by the
end of 2021. Yet the overhang of private debt remains,
underscoring the need for an efficient enforcement
framework. Bank lending activity was cautious, failing
to mirror the vigorous rebound in the rest of the economy. Private-sector credit to non-financial corp­orates
expanded by 3.7% while credit to households declined
by 2.4% year-on-year in December 2021.
Greece further progressed in implementing its reform
commitments and, as a result, received the fifth and
sixth tranches of semi-annual, policy-contingent debt
relief measures totalling €1.5 billion. Favourable ESM
and EFSF lending terms also provided budget savings
estimated at about €8 billion in 2021.2
Greece reached several important milestones in its
comprehensive reform agenda: the implementation of
a new insolvency framework; further progress in privatisation, notably of land at Athens’ former airport; and the
adoption of an ambitious strategic plan to strengthen
governance in state-owned enterprises and improve
financial discipline. However, some reform efforts
encountered delays and setbacks, such as the plan to
reduce non-pension arrears to zero in 2021.
Under its Early Warning System, the ESM monitors
risks to Greece’s repayment capacity. In the short term,
Greece enjoys a comfortable liquidity position, stable
market access, low financing needs that reflect a long
average maturity, and significant financial support from
NGEU. But over the long term, Greece remains vulnerable due to macroeconomic imbalances, particularly its
very high public debt, as well as to a persistent investment gap, low productivity, and high NPLs. To remedy
these weaknesses, Greece has embarked on an ambitious journey to modernise its economy. The reform priorities include addressing long-standing weaknesses in
infrastructure; education and skills; and public administration, including the justice system. The war in Ukraine
casts shadows over the economic outlook for Greece.
The magnitude of the impact remains to be seen, but
Greece may be affected given its dependence on tourism and on imports of Russian oil and gas.

2

The ESM estimates the budget savings by comparing Greece’s
borrowing rates on ESM/EFSF loans with its market interest rates at
the time of the disbursement of the ESM/EFSF loans. Specifically,
these estimates reflect the spread between Greece’s seven-year
market rates at the time of disbursements and the actual ESM/EFSF
interest cost in 2021.

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Spain
After the sharp recession of 2020, Spain returned
to economic growth in 2021. A successful Covid-19
vaccination strategy helped mitigate the health and economic impact of the pandemic. Prompt policy support
to firms and households dampened the pandemic shock
but affected public finances. Nevertheless, the Spanish
Treasury benefitted from favourable market access
conditions, supported by monetary policy and investors’
confidence. Spanish banks’ profitability and capital ratios
have improved since the pandemic, thanks to policy
support measures as well as to balance sheet enhancements over the last decade.

standing debt reaching historic lows of -0.04% and
1.64% respectively. Spain’s 10-year yield dropped to
around 0.4% on average in 2021 from its March 2020
peak of 1.2%. Average maturity lengthened to eight
years, which will dampen the impact of any future
increase in market interest rates. The main credit rating
agencies maintained Spain’s ratings. S&P assigned
Spain a negative outlook in late 2020 but returned it to
stable in March 2022, based on the soundness of its
long-term economic prospects. Economic growth combined with credible medium-term fiscal plans will be key
to maintaining investor confidence.

The Spanish economy rebounded in 2021 after an
unprecedented contraction of 10.8% in 2020. Real
GDP grew by around 5%, mainly powered by domestic
demand. High vaccination rates and declining hospitalisation rates drove national authorities to ease restrictions further, supporting economic activity. External
demand also reinforced growth, although the tourism
sector has yet to fully recover. The labour market recovery was notable, driven mainly by effective policy measures, reaching pre-pandemic levels. The unemployment
rate declined to 13% in December 2021 from 16.3% for
the same period in 2020, and the employment rate rose
by more than 2.5% in 2021. Annual inflation reached 3%
due to rising energy prices and supply chain disruptions.

Importantly, the Spanish banking sector weathered the
pandemic well. Profitability rebounded in the first three
quarters of 2021, and capitalisation improved. NPL
ratios fell further during 2021, though the pace slowed
as public support measures started to expire. Credit
growth was markedly varied across sectors, with a surge
in new credit to households while credit to non-financial
corporations dwindled. Sareb, the asset management
company for proceeds from bank restructuring, was
fully incorporated into Spain’s government accounts
following a Eurostat decision, explaining the public
debt increase of up to three percentage points in 2020.
Furthermore, the Spanish government has acquired
a majority share in Sareb from the private sector.

The budget deficit narrowed to 6.9% of GDP in 2021
from 10.3% in 2020, following the economic recovery
and gradual withdrawal of discretionary measures to
combat the effects of the pandemic, though it remains
high. The debt ratio also diminished to slightly above
118% of GDP in 2021 from about 120% in 2020. NGEU
funds provide a good opportunity to boost investments
and structural reforms that aid potential growth and
improve Spain’s fiscal position. The government has
made progress on reforms associated with the Recovery and Resilience Facility and has been the first country
to receive a disbursement associated with the satisfactory fulfilment of the milestones of the first instalment,
which together with the pre-financing, adds up to around
2% of GDP in grants in 2021.

Under its Early Warning System, the ESM monitors
risks to its loan service payments. The Spanish Treasury retains the capacity to service its debt, including
loan service payments to the ESM over 2022. Spain’s
economic activity is projected to continue strengthening in 2022, despite downside risks to the outlook. The
reforms and investment funded by NGEU are expected
to raise growth potential and further enhance Spain’s
fiscal sustainability and capacity to respond to future
shocks, subject to the successful implementation of
the recovery plan. The pension system and tax reforms
envisaged in the recovery plan are also key to addressing medium-term fiscal challenges. Despite Spain’s limit­
ed direct trade exposure to Russia, the economic and
financial impact of the conflict in Ukraine may still affect
the country through higher energy prices and a slowdown in key trading partners.

Spain retained very favourable financing conditions in
2021, with the average cost of newly issued and out-

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Cyprus
The Cypriot economy staged a strong recovery in 2021
from the impact of Covid-19, slightly surpassing the euro
area average. This rebound helped reduce the budget deficit, even while pandemic-related fiscal support continued
to be offered to households and businesses. Cyprus
enjoyed overall favourable financing conditions backed by
an accommodative monetary policy stance and began to
reduce its precautionary liquidity buffer towards prepandemic levels. Banks’ NPLs shrank and profitability
recovered, but asset quality concerns remain until the full
impact of the pandemic is known. Completing structural
reforms in several areas would boost the country’s growth
potential.
Cyprus’ GDP swelled in 2021 as the pandemic receded
and vaccination numbers rose. Real economic activity
rebounded by about 5.5% in 2021, following a 5% drop
in 2020, largely driven by domestic demand and supported by fiscal measures. Cyprus’ 2021 annual growth
slightly exceeded the euro area average, partly due to
fewer containment measures and less severe supplyside shortages. External demand, especially tourism,
remained significantly below pre-pandemic levels.
However, the labour market strengthened, showing an
unemployment rate of 6.6% in December 2021 – comparable to the pre-pandemic level.
The fiscal deficit also remained below the euro area
average, with higher revenues stemming from the economic recovery offsetting larger pandemic support
measures. The primary balance turned slightly positive
and stood at 0.1% of GDP in 2021 compared to a deficit
of 3.7% in 2020, while support measures reached about
3.1% of GDP in 2021 from 3.6% in 2020. Contingent liabilities from government guarantees for the private and
public sectors were contained. The public debt ratio fell
to 103.6% of GDP in 2021 from 2020’s 115%, largely
thanks to a gradual reduction of the large precautionary cash buffer, as well as to the recovery. Cyprus’ credit
ratings from DBRS, S&P, and Moody’s improved in 2021,
triggered by the favourable growth outlook supported
by European funds and strong fiscal performance. All
main rating agencies, except for Moody’s, continued to
assign investment grade to Cyprus. However, high private and public debt levels constrained the country’s
creditworthiness.

Cyprus enjoyed an overall positive market perception in
2021. New sovereign debt issuances recorded favourable outcomes. Yields remained relatively low with
spreads widening towards year end, akin to the evolution seen in the rest of the euro area. The ECB’s monetary policy measures continued to support advantageous financing conditions and, in September, Cyprus
received a first disbursement of €157 million under the
NGEU programme.
The banking sector was resilient and NPLs declined
by almost three percentage points in 2021 to reach an
overall reduction of 85% from their 2015 peak, thanks
to government legislative initiatives and reforms and
banks’ continued efforts to progress with risk reduction.
On the back of the improving macroeconomic outlook
and favourable funding conditions, banks’ profitability
began to recover. Nevertheless, uncertainties remain
due to pandemic-related risks. The proportion of loans
with increased credit risk remains elevated and the private sector’s high indebtedness constrains banks’ ability to provide new loans. Policy initiatives, such as the
government guarantee scheme and the implementation
of reforms incorporated in the recovery and resilience
plan, could help address these issues.
Under its Early Warning System, the ESM monitors
risks to repayment capacity. The economic outlook for
Cyprus improved throughout 2021, with the pandemic
remaining the main downside risk. While recent waves
of infection have done less economic damage, Covid19 still has the potential to impair activity, particularly in
tourism. Over the medium term, elevated household and
corporate debt make the economy vulnerable, and risks
in the financial sector could hobble banks’ ability to provide sufficient lending. Completing reforms of local governments, the justice system, and public administration
would enhance Cyprus’ growth potential, but absorption
and implementation risks remain. The economic consequences of the war in Ukraine are not yet fully visible. Sanctions imposed on Russia could have sizeable
repercussions for the Cypriot economy, especially in the
tourism sector. In the financial sector, immediate risks
have been mitigated and resolved as direct exposures
to Russia were largely concentrated in one entity, while
Cypriot banks on average have a low exposure to the
Russian economy.

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Portugal
In 2021, private consumption and investment supported
Portugal’s partial recovery from the economic downturn
induced by the Covid-19 pandemic. A rebound in fiscal revenue led to a reduction in the primary deficit. Government
bond yields increased on the back of rising euro area inflation expectations, but market access conditions remained
favourable mainly thanks to accommodative monetary
policy. Portuguese banks’ profitability has recovered and
NPLs have declined further.
Real GDP grew by 4.9% in 2021 after declining by
8.4% in 2020, mainly driven by the upturn in domestic
demand. Given the asymmetric impact of the Covid-19
pandemic, real GDP did not, however, fully recover from
the shock, remaining 1.4% below its pre-pandemic level
at year end. The labour market improved, with overall
employment more than undoing pandemic-related job
losses and the unemployment rate stabilising at a low
level. As an important step to solidifying the recovery,
the European Council approved Portugal’s recovery and
resilience plan in mid-July 2021, with a total envelope of
€16.6 billion (8.2% of GDP) for 2021–2026.
The 2021 primary deficit narrowed to 0.4% of GDP from
2.9% of GDP in 2020, due to increased revenues fuelled
by the economic recovery. While fiscal support required
to address the negative impacts of the Covid-19 pandemic continued to weigh on the budget, the government maintained its commitment to strengthen fiscal
consolidation, as public debt shrank slightly to 127.4%
of GDP from 135.2% the previous year.
Portugal’s market access remained stable. The Portuguese Treasury and Debt Management Agency’s gross
bond (Portuguese Government Bond) issuance reached
€19.4 billion, which translated into a net issuance of
€6.8 billion. The ECB’s accommodative monetary policy
also helped ensure supportive financial conditions.

Portugal enjoys an investment grade rating from major
credit rating agencies. Fitch and S&P reverted to stable outlooks from positive in 2020. Moody’s, however,
upgraded Portugal to Baa2 in September 2021, citing
the normalisation of employment levels and a robust
economic rebound. DBRS maintained the country’s
rating at BBB (high) with a stable outlook, the highest
level among the four major rating agencies.
The extensive use of government support measures and
supervisory forbearance helped stimulate a more resilient banking system, while capital and liquidity ratios
improved, increasing capacity to support a real economy recovery. Banking sector profitability also improved
considerably in 2021. Progress towards decreasing the
stock of NPLs has continued, and most loans already
out of moratoria schemes before the end of the third
quarter were performing normally. Public guarantee
schemes played a lesser role in supporting loan growth
in 2021 compared to 2020.
Under its Early Warning System, the ESM monitors risks
to its loan service payments. Economic activity is projected to strengthen in 2022, despite downside risks to
the outlook, and the reforms and investment funded by
NGEU could further enhance Portugal’s capacity to
respond to future shocks. Portugal’s high public debt
burden remains an important source of vulnerability.
However, uncertainty has significantly increased
recently. Despite limited direct trade and financial links
with Russia and Ukraine, and a moderate direct gas
import share from Russia, Portugal’s high external
energy dependency and consequent rise in domestic
energy prices leave the country vulnerable to the geo­
political environment.

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02 ESM activities
Asset and Liability Management
and Financial Structuring
z

Asset and Liability Management (ALM) and
Financial Structuring conducts analyses and
tests to ensure readiness of the Pandemic
Crisis Support credit line.

z

The team prepares all operational processes
for any possible future deployment of the
SRF backstop, including a thorough dryrun exercise.

z

The team seeks efficiency gains through the
automation of key operational processes.

The ALM and Financial Structuring division measures,
monitors, and manages liquidity, currency, and interest
rate mismatches between assets and liabilities that
may arise from the execution of the ESM and EFSF
mandates. Financial structuring, interest rate modelling,
simulation, and scenario analysis covering all balance
sheet risks are other major parts of the team’s work.
The division contributed to maintaining the Pandemic
Crisis Support credit line’s readiness for use by con-

ducting detailed analyses and testing of the facility.
The team also contributed to preparations for the
implementation of the ESM backstop for the SRF by
preparing the operational processes required for a possible future deployment, testing their implementation
with a thorough dry-run exercise, and by highlighting
all balance sheet risks associated with the provision of
liquidity in the banking crisis resolution framework.
Beyond this work, the division focused on overseeing
the entire ESM/EFSF balance sheet, including the analysis and management of the liquidity, currency, and
interest rate risks. The team continued to work on debt
portfolio analysis to forecast variability of debt interest
costs. Additionally, the team continuously sought ways
to enhance efficiency in data management through
further automation of operational processes such as
simulations, analyses, and reporting. The team worked
with the Funding and Investor Relations division to
create synergies in managing liquidity.

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Lending
z

ESM collaborates with the SRB to develop
frameworks to ensure timely repayments
and fiscal neutrality under the common backstop facility foreseen in the amended treaty.

z

Greece concludes its second early repayment
of IMF loans after gaining a waiver from the
ESM and the EFSF.

As part of continued preparations for the backstop for
the SRF, the Lending division contributed to joint efforts
to adapt the ESM’s Early Warning System, the tool for
ensuring timely repayments, to monitor loans provided
under the common backstop foreseen in the amended
treaty. The team also worked with colleagues from the
SRB to develop a framework for assessing and structuring loans, to ensure fiscal neutrality over the life of any
loan drawn under the backstop facility.

In February 2021, Greece requested the ESM and the
EFSF approve an early repayment of part of its outstanding loans to the IMF, amounting to approximately
€3.3 billion, without proportionally repaying the ESM
and the EFSF. This was Greece’s second early repayment to the IMF. Consequently, the ESM and the EFSF,
considering the benefits of the prepayment to Greece’s
debt management operations, approved a waiver of the
proportional repayment provisions due when parallel
official-sector financing is repaid ahead of schedule. On
15 June 2021, Greece also repaid €27.2 million early to
the ESM in connection with the dividend of the Hellenic
Corporation of Assets and Participations.
The Lending team continued its management of the
existing loan portfolio, with a total outstanding amount
of €264.5 billion at the end of 2021.

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Funding and Investor Relations
z

EFSF kicks off 2021 with record €70 billion
order book on dual bond transaction.

z

ESM/EFSF issue €24.5 billion in bonds, with
regular new lines and taps on existing bonds.

z

ESM celebrates 10 years of bond issuance at
Luxembourg Stock Exchange.

z

ESM issues €46.6 billion in bills, despite low
yields.

The EFSF enjoyed a new record €70-billion order book
on a dual-tranche transaction in January, evidence of
continued strong demand for issuances during 2021
despite lower coupons and negative yields.
In September, the ESM marked another record, this
time on a US dollar transaction that priced for the first
time with a negative spread versus Libor and with
a single-digit spread to US Treasury bonds. Despite
such tight pricing, the demand had a record allocation
of 39% in the Americas versus 29% across all the USD
bonds previously issued. It also attracted 64% central
bank investors versus an average of 55%.

ESM issues €46.6 billion in bills
z

ESM moves to new derivatives programme.
The ESM bill programme continued to attract investors
in 2021, providing a useful tool for additional liquidity
and flexibility.

z

z

ESM US-dollar transaction priced with singledigit spread garners record allocation in the
Americas.
ESM launches Funding and Investor Relations
LinkedIn page.

Medium-sized bonds across the curve maintain
market presence
The ESM reached its 2021 combined funding target
of €24.5 billion, with a split of €8 billion for ESM and
€16.5 billion for EFSF (Figure 13).
For 2021, the ESM focused its funding strategy on
issuing medium-sized benchmark transactions, of
€2 to €3 billion across a range of maturities, as well as
tapping outstanding lines. This approach allows the
ESM to be regularly present in the market and keep
investor interest, maintaining access to cheap funding
should it need to rapidly raise funds to provide emergency financial assistance – critical for a last resort
mechanism like the ESM.
In March 2021, the EFSF and its successor the ESM
celebrated 10 years of bond issuance and listings at the
Luxembourg Stock Exchange with a bell ceremony. The
virtual event gathered investors, bankers, lawyers, and
media and offered an opportunity to reflect upon the
EFSF’s first bond issuance in 2011, and to look towards
the ESM’s future.

The ESM issued a total of €46.6 billion in bills over 2021,
split between an €18 billion 3-month bill, a €16.5 billion
6-month bill, and a €12.1 billion 12-month bill. The
highest average yield was -0.60% for the 12-month bill
issued on 9 March, and lowest average yield was -0.85%
for the last 3-month bill issued for the year.

ESM switches derivative exposure rate
The ESM replaced the interest rate benchmark used
in derivative contracts, the Euro Overnight Index Average (EONIA) rate used until 2 January 2022, with the
euro short-term rate (€STR). When EONIA was declared
non-compliant for benchmark reference, all derivatives
contracts needed a replacement solution. The switch
changes the exposure of collateralised derivatives to
the new rate, which reflects the wholesale euro un­
secured overnight borrowing costs of euro area banks.
The derivatives and market intelligence team contributed to the project through pricing and execution of
these benchmark switches. This comprised a multi­
billion sized derivative portfolio with various counterpar­
ties, which were all executed successfully within the
timeline for the benchmark rate switch.

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Investor relations adapt and blossom over 2021

trips to visit investors in person in Paris, Frankfurt, Milan,
Amsterdam, and New York.

Given the pandemic, investor relations took place in
either virtual or hybrid format. The Funding and Investor
Relations team also enhanced their online presence by
launching a dedicated LinkedIn page in September, as
part of efforts to maintain communication and cultivate
relationships with investors in an increasingly digitalcontact focused world.

The ESM investor base grew by 34 new investors this
year, now totalling over 1,700 investors globally. The
breakdown remains well diversified geographically and
by investor type (Figures 14 and 15).
Over the year, the team observed that Europe remained
well perceived by the investor community, which was
reflected in the positive reception of ESM’s bond offerings. The strength of the euro as an international currency was a recurrent topic in investor forums.

The ESM organised a total of 16 hybrid roadshows and
conferences, 16 high-level meetings, and more than 30
one-on-one calls with investors.
The virtual attendance of nearly 1,000 investors from
some 30 countries marked the success of the ESM’s
second annual capital markets seminar, co-organised
with the European Commission and the EIB in June.

Funding outlook 2022
The combined funding target for the EFSF and the ESM
for 2022 is €27.5 billion, comprising €19.5 billion for the
EFSF and €8 billion for the ESM.

As the pandemic and associated risks abated in the
autumn, the Investor Relations team organised several
Figure 13
EFSF/ESM Bond issuance
(in € billion)
58

60
50

49

44.8

40

34.5

30
20

23.5
16

15

10

10

12.5

28

24.5
14

18

11.5

20

19.5

9.8

11

16.5
8

2019

2020

2021

19.5

20

8

8

2022

2023e

0
2011

2012

2013

2014

2015

2016

2017
EFSF

2018
ESM

Note: e = estimate.
Source: ESM

Figure 14
Investor participation in ESM syndicated
bonds in 2021, by geography

Figure 15
Investor participation in ESM syndicated bonds
in 2021, by investor type

(in %)

(in %)
9

3

29

11

2
1

22
38
33

35

17
Asia
Rest of Europe
Middle East

Central banks/governments/
sovereign wealth funds
Asset managers
Others

Euro area
UK & Switzerland
Americas

Source: ESM
Source: ESM

Banks
Pensions/
insurance/
corporates

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Table 1
ESM ratings
DBRS
Morningstar

S&P

Fitch

Moody’s

Longterm
rating

Short- Rating Longterm
out- term
rating look rating

ShortLongRating
term
term
outlook
rating
rating

ShortLongRating
term
term
outlook
rating
rating

ShortLongRating
term
term
outlook
rating
rating

Short- Rating
term
outrating look

AAA

A-1+

F1+

P-1

R-1
Stable
(high)

S-1+

Stable AAA

Stable Aa1

Note: Scope and DBRS Morningstar ratings are unsolicited.
Sources: The rating agencies named, compiled by the ESM

Stable AAA

Scope

AAA

Stable

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ESM’s funding strategy evolves with the times
The ESM is continuously adapting and exploring new working methods to best serve
its shareholders, investors, and the debt capital market as a whole. To this end, the
ESM funding strategy evolves with changing debt capital markets and in line with the
ESM’s upcoming broadened mandate.
The year 2021 marked the 10th anniversary of the first EFSF bonds, with the ESM following in 2013. Established to raise funds for euro area countries that lost access to
debt financing, the EFSF and ESM began to raise funds amidst an environment where
trust in Europe was low and debt had to be issued in large quantities and with great
speed. What began with a simple back-to-back funding strategy, where the bonds
matched the loans disbursed, later developed into a diversified funding strategy where
financing was pooled and then disbursed.
From late 2012, an issuance calendar, newsletter, and regular investor calls and roadshows provided investors with transparency and certainty. These actions also helped
rebuild trust in Europe by offering the certainty of a reliable and predictable partner.
A bill programme was added to provide extra liquidity and offer investors different
instruments to invest in. In 2016 the ESM added privately placed N-bonds (Namens­
schuldverschreibungen), and in 2017 introduced a US dollar bond programme to
further diversify the investor base. In 2020, the bill programme was extended with the
addition of a new 12-month bill.
Circumstances have changed markedly since the inception of the rescue funds. Since
the conclusion of the last ESM assistance programme in 2018, funding has been undertaken solely to finance the rollover of existing debt. The EFSF and ESM will continue to
issue around €20–€25 billion annually in rollover debt for the foreseeable future.
With confidence in Europe and the euro greatly restored since the height of the sovereign debt crisis, and beneficiary Member States enjoying favourable market access,
the ESM announced in December 2021 that it would cease advance publication of
potential windows of bond issuance to pursue a nimbler, more opportunistic strategy.
The upcoming change in the ESM mandate, broadening the institution’s mission, also
demands such agility in the funding approach. Once the new treaty enters into force,
the ESM will provide the backstop for the SRF, should additional emergency funding
be required for bank resolution. Bank resolutions can happen over a weekend, putting a premium on agile fundraising. However, unlike a country assistance programme,
a bank does not necessarily need a cash transfer but, rather, to strengthen its balance
sheet through recapitalisation. The ESM is prepared for this as well, with a disbursement-in-kind strategy that allows it to issue bonds that can be lent directly to the beneficiary, without selling them to end-investors.

2 0 2 1

European debt capital markets also evolve, and issuers’ funding programmes fluctuate
according to their financing requirements. These have been particularly pronounced
during the Covid-19 pandemic, where issuers, such as France’s social debt amortisation fund and the EU’s newly formed Support to mitigate Unemployment Risks in an
Emergency programme and NGEU, have increased funding while those like the ESM
have scaled back. Tighter spreads across euro area government bonds have encouraged national issuance while NGEU grants offer an attractive alternative for governments to loans from EU supranationals.
The ESM funding team, however, remains close to the markets and its investors, nurturing trust and stability in the euro area financial system. Moreover, with more than
€400 billion in available lending capacity, the ESM remains ready for any future crisis
affecting the financial stability of its Members.

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Investment and Treasury
z

ESM mitigates paid-in capital losses caused
by negative yields.

tral banks, €39.1 billion at the end of the year, rather than
investing it in short-term securities priced well below
ESM’s cash remuneration of -0.50%.

z

ESM continues diversifying its portfolios by
increasing its hold-to-maturity tranche.

z

ESM successfully transitions its derivatives
activity to the new euro benchmark rate.

z

ESM ramps up ESG integration in its investment practices.

The ESM maintained a diversified exposure in eligible
asset classes to benefit from the additional return provided by credit spreads. The share of paid-in capital held
in public agency, sub-sovereign, supranational, and covered bonds remained at 43% (Figure 16). The volume of
non-euro denominated assets, hedged into euros, rose
by €2 billion to reach an €11 billion equivalent, mainly
due to increased allocation to US dollar denominated
assets, which offered additional returns compared to
European assets. The paid-in capital’s credit quality
remains at a very high level, with 93% of capital held
with Eurosystem central banks or invested in assets
rated AA- or higher (Figure 17), similar to 2020.

ESM mitigates paid-in capital losses caused by
negative yields
The ESM’s paid-in capital stood at €80.5 billion at the
end of 2021 and will total €80.8 billion in 2027, when all
instalments from existing ESM Members will have been
received. The capital is invested in three tranches with
different investment horizons, liquidity objectives, and
financial valuation. The short-term and medium-/longterm tranches, whose assets are marked to market, are
invested with an average maturity below 2.5 years; the
hold-to-maturity tranche, valued on an amortised cost
basis, is invested in securities with maturity at purchase
usually beyond 10 years; the €3 billion in reserves, accumulated since inception, are invested in the short-term
tranche.
In 2021, the ESM’s marked-to-market portfolios
recorded a return of -0.97%. Negative market yields
led to negative returns on cash deposits and on a large
share of ESM assets. In addition, asset valuation fell as
European yields rose across maturities, with 10-year
yields on the ESM’s eligible assets finishing the year on
average 50 basis points higher.
As the world economy began to recover from the 2020
pandemic crisis, inflation soared beyond central banks’
targets. To mitigate the impact of market developments
on its marked-to-market portfolios, the ESM progressively reduced its sensitivity to interest rate risk in anticipation of a gradual withdrawal of ECB accommodative
monetary policy. The ESM also kept a significant part of
its capital in cash held at several European national cen-

As a result of these actions, the annual performance of
these portfolios was two basis points above the longterm benchmarks, taking the outperformance since
inception to 19 basis points per year. The benchmarks,
which the ESM Board Risk Committee reviews annually,
consist of indices of AAA/AA rated euro area government and supranational bonds spread across maturities ranging from zero to 10 years.
The paid-in capital recorded an accounting loss of €59.5
million for the year, including a loss of €66.2 million for
the short-term and medium-/long-term tranches. In
2021, the ESM switched its accounting methodology
for measuring profit and loss from securities sales
from the first-in first-out method to the average cost
method, which is more common in financial reporting,
produces consistent results, and is less impacted by
price changes. The change of methodology increased
accounting losses by €0.5 million. The losses on the
portfolios were offset by the €216.2 million received
by the ESM as compensation for negative interest
paid on the ESM’s Eurosystem cash deposits in 2020.
To ensure that the negative interest environment does
not erode ESM’s capital, France, Germany, Italy, and the
Netherlands have agreed, as a temporary solution and
under certain conditions, to return negative interest payments on ESM capital deposited in their national central banks. The accumulated profit on the ESM’s capital
since inception is €1.785 billion, including €901.4 million
extraordinary income from negative interest compensation received from 2018 until the end of 2021.

2 0 2 1

ESM reinforces its long-term financial strength
by increasing the size of its hold-to-maturity
tranche
In 2021, the ESM continued building up its hold-tomaturity tranche investments to sustain its long-term
financial strength. This portfolio is invested in diversified, highly rated eligible issuers. As of the year end, the
portfolio reached €9.9 billion, invested in maturities of
seven to 20 years, and generated an annual accounting
profit of €7.9 million. The ESM intends to continue gradually expanding this portfolio to benefit from a regular
stream of interest.

ESM successfully transitions its derivatives
activity to the new euro benchmark rate
To maintain good access to market liquidity and competitive pricing when conducting derivative operations,
the ESM adjusted its International Swaps and Deriv­
atives Association credit support annex agreements
with its counterparties. The ESM replaced the interest
rate reference to EONIA, the main cash rate in the euro
area until early January 2022, with the euro short-term
rate (€STR), reflecting wholesale euro unsecured overnight borrowing costs of euro area banks. This change
came about after market regulators reviewed the
methodology for calculating reference market rates to
ensure that they robustly and transparently represent
financing conditions.
As the new reference rate is set below the previous
one, the ESM performed a full revaluation exercise of
its swap portfolio with each of its counterparties. The

A N N U A L

R E P O RT

ESM ramps up its ESG integration
The ESM is committed to integrating ESG factors into
its investment approach. Since signing the United
Nations (UN) backed Principles for Responsible Investment (PRI) in 2020, the ESM has continued reporting on
its responsible investment activities and preparing to
apply ESG principles to all its paid-in capital in 2022 –
in particular, by working to define an ESG score based
on issuer ESG performance for its paid-in capital investments.
In parallel, the ESM increased its holdings in use-ofproceeds bonds, which reached €8 billion at the end of
2021, a rise from €5.9 billion in 2020 (including a €1.1
billion upward revision of the 2020 reported amount).
Of these, €7.7 billion are compliant with the International Capital Market Association principles and guidelines: about 20% are categorised as green bonds and
the remaining part is split equally between social and
sustainability bonds. The remaining €0.3 billion are
‘pandemic’ bonds issued by eligible supranational and
agency issuers, whose proceeds financed part of the
emergency response to the Covid-19 crisis but do not
follow the International Capital Market Association principles and guidelines.

Figure 17
Ratings distribution of investments

(in %)

(in %)
1.8

11.3

1.2

6.0

8.8
11.9

4.3
47.6

18.1
30.3
12.6
Sovereign
Sub-sovereign/
governmentrelated agency
Source: ESM

39

switch generated small changes in ESM’s derivatives
valuations, which were compensated by one-off net
payments to counterparties for a total of -€0.9 million,
reflecting the future lower cash collateral remuneration.
These payments are recorded as part of the interest
receivable/payable in the ESM profit and loss account.

Figure 16
Asset class distribution of investments

46.1

|

Eurosystem central banks and
Bank for International Settlements
AAA
AA+
AA
AAA+
A

Supranational
Covered bonds
Eurosystem
Source: ESM

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S TA B I L I T Y

M E C H A N I S M

Risk Management
z

Risk Management helps shape the risk framework for future SRF backstop.

z

ESM maintains vigilance to ongoing and evolving risks.

z

ESM expands cyber risk measures.

z

ESM values interinstitutional risk-related knowledge sharing and building.

z

ESM improves risk monitoring activities.

z

Risk Management factors ESG into analyses.

Shaping the risk framework for the SRF
backstop
The Risk Management division, in cooperation with
other divisions, contributed to developing the ESM’s
operational readiness for its broadened mandate. The
division reviewed ESM risk policies to prepare the risk
management and governance procedures for work
related to providing the common backstop for the SRF.
The common backstop will replace the direct recapitalisation instrument, meaning the ESM will no longer have
the potential for equity exposures to banks. The Board
Risk Committee will consider the related changes to the
risk policies ahead of discussion and approval by the
BoD and publication on the ESM website.
Risk Management participated in ESM–SRB dry runs to
test the new procedures and governance arrangements.
Lessons from the dry runs were incorporated in updates
to internal procedures.

ESM maintains vigilance to ongoing and
evolving risks
The ESM remained vigilant to ongoing and evolving
risks throughout the year. Risk Management closely

monitored and reported to the internal risk committee on risk developments, including those arising from
the pandemic, and continuously identified issuers and
counterparties whose credit profiles were more prone
to deterioration. The internal risk committee approved
several updates to risk policies and exercised oversight
on risks related to the ESM’s initiatives and projects.
In 2021, credit rating agencies took negative rating
actions on some of the issuers and derivative counterparties to which the ESM was exposed, particularly in
the second and third quarters. However, upgrades and
more favourable outlooks outweighed negative ratings
in the fourth quarter of the year, resulting in fewer negative ratings for 2021 compared to 2020.
The ESM continues to maintain a portfolio of highquality investment assets, in accordance with ESM’s
investment guidelines and risk policies.

ESM expands cyber risk measures
As cybersecurity is one of the ESM’s top potential risks,
Risk Management continued to collaborate closely with
the information technology (IT) division to review both
new and existing services and products for best practice and industry standard protections against cyberattacks. The Risk Management division’s dedicated
information security function provided a second line
of defence overview on cybersecurity and information
security risk and incident prevention, identification, and
responses. This included an exercise, in conjunction
with the ESM’s incident management team, simulating
a ransomware attack to inform and enhance ESM’s
cyber incident response plan.
The ESM also established a new internal IT governance
committee in November 2021 to provide oversight on
ESM’s IT strategy and key decisions related to its implementation, including on information security.

ESM values knowledge sharing and building
In 2021, the ESM continued to exchange best practices
with other international financial institutions and peer
institutions, including with the Bank for International
Settlements, the Council of Europe Development Bank,
the EIB, and the Nordic Investment Bank. Risk Management organised and participated in virtual meetings
and workshops to share expertise on various risk topics

2 0 2 1

such as ESG – with a focus on climate risk, Covid-19
and its consequences, scenario analyses, methodologies for setting credit limits, and operational risk.

ESM improves automation and risk monitoring
The ESM finalised further risk monitoring automation
and enhancements:




Risk Management further integrated analytics in
its market and liquidity risk reporting. The automation of data inflows and outflows enabled system-generated reports on value-at-risk (historical,
parametric, Monte Carlo), back testing, market
liquidity metrics, and stress testing. This, in turn,
allowed for more dynamic and impactful presentation of risk reports at committee level.
Risk Management developed credit risk dashboards to better monitor and swiftly react to credit
rating changes. The team also introduced new
risk management software to increase its credit
risk analysis capacity. The division will explore and

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promote the use of other automation tools, such
as artificial intelligence and natural language generation software, for use in credit risk reports and
analyses.


Risk Management procured a tool to better manage operational risks by automating and simplifying the process of collecting, storing, analysing,
tracking, and reporting information relevant to
ESM’s operational risk framework.

Risk Management factors ESG into analyses
Risk Management closely follows ESG-related market
practices and regulatory developments, including the
identification and management of climate risks and the
assessment of the impact of ESG factors on issuers’
credit strength. Risk Management takes such factors
into account on a qualitative basis when assessing risk
exposures. Monitoring public information on counterparties’ regulatory compliance is an important governance element for the ESM when setting risk limits.

ESG at the ESM
z

ESM identifies ESG and climate change as one
of its strategic priorities for 2022.

z

ESM incorporates ESG criteria in the review
of internal policies on an ongoing basis, and
establishes a whistleblowing hotline in February 2021.

z

ESM progresses in implementing the
UN-backed PRI and continues to report on its
sustainable investing efforts.

z

ESM publishes its third carbon footprint report
in July 2021.

z

ESM joins the Network of Central Banks and
Supervisors for Greening the Financial System
(NGFS) in early 2022.

Environmental
The ESM remains dedicated to protecting the environment and follows a prudent approach on environmental
matters. In February 2021, the ESM updated its Code
of Conduct, expanding its ESG commitment to contin­
uously monitor, communicate, and further limit its
environmental impact.
The ESM published its third carbon footprint report in
July 2021 as part of ongoing efforts to monitor, measure, and report the institution’s environmental impact.
The exercise also serves to guide the design of measures to enhance its environmentally conscious practices
and reduce the use of natural resources and energy. The
2020 carbon footprint reflected the shift in the ESM’s
day-to-day operations and environmental impact due to
the Covid-19 pandemic. The ESM adjusted the report’s
methodology to include teleworking emissions while
still remaining comparable to previous reports, allowing
for the identification of positive emission trends.
Throughout 2021, the ESM increasingly replaced non-recyclable plastic materials with sustainable alternatives
in line with its pledge under the Zero Single-Use Plastic
Manifesto.
As a result of these efforts, the ESM received its eighth

consecutive certificate for the sound treatment of
energy sources and the recycling of waste from the
Luxembourg government.

Social
The ESM’s Pandemic Crisis Support credit line, established as part of the concerted European response to
the financial effects of the Covid-19 pandemic, is avail­
able to all euro area countries to finance direct and
indirect healthcare, cure, and prevention-related costs
stemming from the Covid-19 crisis. The instrument,
created in 2020, remains available to ESM Members
until the end of 2022. Should a country draw upon the
credit line, the ESM intends to issue social bonds,
enabling the ESG investor community to allocate funds
to support the social needs of euro area member states.
For this, the ESM has in place a social bond framework
compliant with the International Capital Market
Association’s social bond principles.

Governance
The ESM has a robust governance framework that
ensures strong accountability and transparency
towards its shareholders and other stakeholders. In
2021, the ESM established a whistleblowing policy and
hotline providing a confidential and anonymous reporting system for ESM staff and the public to reinforce
the ESM’s commitment to accountability and compliance best practices. During 2021, the ESM continued
to embed the UN-backed PRI criteria into its investment
processes (for more information, see Investment and
Treasury). Furthermore, the ESM continues to closely
follow regulatory updates and incorporates climate risk
and ESG considerations in the assessment of counterparties’ credit strength.
In 2021, the ESM added information on its ESG devel­
opments and governance to its webpages dedicated
to informing stakeholders and the public. In addition,
the ESM regularly and actively engaged with credit
rating and ESG rating agencies as well as with investors,
peer institutions, and policymakers to inform, shape,
and enhance ESG-related thought leadership and objectives. The ESM continued participating as an observer
in the European Commission’s Platform on Sustainable
Finance and as a member in the International Capital

2 0 2 1

Market Association’s Social Bond Working Group, contributing to various public consultations through these
two forums. Furthermore, the ESM joined the NGFS in
February 2022 and is planning to increasingly incorporate climate change considerations in its analyses and
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banks, supervisory authorities, and other public institutions to strengthen the financial system’s ability to
finance the transition to a carbon-neutral economy
through the redirection of capital to sustainable
investments.

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M E C H A N I S M

Transparency and accountability
z

ESM publishes a transparency webpage to
offer information on its policies and guidelines,
complementing its existing programme database that details ESM’s financial assistance
operations.

eral occasions on the response to the pandemic crisis
and the European recovery path in the context of EMU.
In addition, ESM senior staff engaged in continuous dialogue with national and international media, resulting
in frequent interviews and television appearances, with
Bloomberg, CNBC, and leading European newspapers.

z

ESM publishes 13 new blog posts featuring
topical, mandate-related issues.

Throughout the year, the ESM published 13 blog posts
from various managers and staff on a variety of ESMrelated topics, including the pandemic response and the
road to recovery following the pandemic crisis.

The ESM has a number of measures in place to ensure
its stakeholders and the public have a good understanding of its mandate and work. Most recently, it has
used its ESM reform webpage to provide the public
with timely updates on the early 2021 signature of the
amended ESM Treaty and agreed package of related
documents. The ESM regularly publishes a wide range
of policies, legal documents, and governing bodies’
decisions regarding its operations and the implementation of its mandate on its transparency webpage.

The ESM, as an institution with a public mandate, has
accountability embedded in its governance structure
and activities. The ESM’s BoG, its highest decisionmaking body, consists of the euro area finance ministers,
who represent the ESM Members’ elected governments.
National parliamentary procedures, required by some
ESM Members before the BoG or BoD can approve decisions, make the ESM indirectly accountable to national
parliaments.

In 2021, the ESM Managing Director and senior staff
participated in various conferences, seminars, academic gatherings, and regular exchanges with national
parliaments either virtually or in person. Among these,
the Managing Director spoke about EU fiscal reform at
the ECB’s fifth biennial conference on fiscal policy and
EMU governance. Senior managers also spoke on sev-

The ESM’s accountability framework is also underpinned by the BoA’s extensive audit oversight. Both the
BoA’s annual report to the BoG and accompanying comments by ESM management are provided to the national
parliaments and supreme audit institutions of the ESM
Members, the European Parliament, the European Court
of Auditors, and to the public via the ESM website.

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03

Institutional framework
and organisation

Governance

Board of Auditors

Board of Governors

Managing Director

Board of
Directors
Board Risk
Committee
Budget Review
and Compensation
Committee

Management Board

Investment Management
Committee

Economic and Financial Monitoring
Committee

Internal Risk Committee

Corporate Projects Committee

Finance Committee

IT Governance Comittee

Retirement Plan Committee

Sourcing Committee

The BoG meets at least once a year and whenever the affairs of the ESM so require (resulting in one physical meeting and two votes without meeting in 2021). The
BoD also meets whenever the affairs of the ESM so require (seven instances in 2021), while the Board Risk Committee and the Budget Review and Compensation
Committee normally meet quarterly, and additionally when required.

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M E C H A N I S M

ESM shareholders
The ESM shareholders are the 19 euro area member
states, which are also referred to as ESM Members.
ESM Members have contributed to the ESM’s authorised capital based on their respective shares of the
EU’s total population and GDP. The authorised capital
amounts to €704.8 billion and is divided into paid-in and
callable capital. The paid-in capital currently stands at
€80.55 billion.

Shareholder engagement

presentation sessions and interactive simulations, created an engaging and dynamic event that stimulated
exchanges of views among participants and strengthened relationships between the ESM and its Members.
Speakers included ESM staff, as well as academics and
representatives from partner institutions.
To discuss relevant matters throughout the year, the
ESM also participated in various forums where its
shareholders are represented, such as the Eurogroup,
the Eurogroup Working Group, and the Task Force on
Coordinated Action.

The eighth Shareholders’ Day took place in a virtual
format on 10 and 11 November 2021. The event gathered representatives from the finance ministries of all
19 ESM Members who work on ESM-related matters,
as well as representatives from the European Commission and ECB. Sessions covering policy, research, and
operational areas of ESM activity gave participants the
opportunity to discuss topics such as the deepening
of EMU and the SRF backstop, and to reflect on the
ESM’s work. A variety of formats, such as virtual poster
ESM contribution key
(in %)
Germany
France
Italy
Spain
Netherlands
Belgium
Greece
Austria
Portugal
Finland
Ireland
Slovakia
Slovenia
Lithuania
Latvia
Luxembourg
Cyprus
Estonia
Malta

3.4454
2.7910
2.7581
2.4863
1.7811
1.5777
0.9849
0.4670
0.4063
0.2746
0.2482
0.1945
0.1847
0.0898

5.6650

11.7953

17.7506

20.2003

26.8992

(in €’000)
Subscribed capital – Total 704,798,700
Paid-in capital – Total 80,548,400

Notes: As of 27 April 2022. In line with Article 42 of the ESM Treaty, ESM Members with GDP per capita of less than 75% of the EU average in the year immediately
preceding their ESM accession benefit from a temporary correction mechanism. During this period, the initial capital subscription of the ESM Member benefitting
from the correction is lower, thus leading temporarily to a lower paid-in capital contribution. Once this period ends, the ESM Member must deposit the remaining
amount. Most recently, Slovakia’s temporary correction period expired on 1 January 2021, and Slovakia deposited the remaining paid-in capital contribution.
Estonia, Latvia, and Lithuania are currently benefitting from temporary corrections, the last of which concludes at the end of 2026.

Visit our website for more information on our governance.

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Board of Governors
On 17 June 2021, the BoG held its ninth annual meeting
in Luxembourg.
In his presentation to the BoG, the Managing Director highlighted the key achievements of the ESM during the previous year, including the ESM’s response to
the Covid-19 pandemic, ESM operations, and the ESM
Treaty reform. In addition, the Chairperson of the BoA
addressed the Governors regarding the BoA’s annual
report to the BoG, as well as the BoA’s report in respect
of the ESM 2020 financial statements. Furthermore, the
external auditor presented its report in respect of the
audit of the ESM 2020 financial statements.

At this meeting, the BoG approved the ESM 2020 Annual
Report as drawn up by the ESM Managing Director and
benefitted from a virtual address by the IMF Managing
Director, Kristalina Georgieva. In her address, Ms Georgieva discussed the outlook for the global recovery from
the Covid-19 pandemic, the role of the Regional Financing Arrangements within the global financial safety net,
and the new allocation of special drawing rights.
Visit our website for more information on the BoG.

Members of the Board of Governors

Paschal Donohoe
Ireland
Eurogroup President since 9 July 2020,
Chairperson of the Board of Governors
since 17 July 2020,
Minister of Finance,
Governor since 15 June 2017

Vincent Van Peteghem
Belgium

Christian Lindner
Germany

Keit Pentus-Rosimannus
Estonia

Deputy Prime Minister and Minister of Finance,
Governor since 1 October 2020

Federal Minister of Finance,
Governor since 8 December 2021
– Replacing Olaf Scholz,
Governor since 14 March 2018

Minister of Finance,
Governor since 26 January 2021
– Replacing Martin Helme,
Governor since 29 April 2019

Christos Staikouras

Nadia Calviño

Bruno Le Maire

Greece

Spain

France

Minister of Finance,
Governor since 11 July 2019

Vice-President, Minister of Economic
Affairs and Digital Transformation,
Governor since 7 June 2018

Minister of Economy and Finance,
Governor since 25 May 2017

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E U R O P E A N

S TA B I L I T Y

Daniele Franco

M E C H A N I S M

Constantinos Petrides

Jānis Reirs

Italy

Cyprus

Latvia

Minister of Economy and Finance,
Governor since 13 February 2021
– Replacing Roberto Gualtieri,
Governor since 5 September 2019

Minister of Finance,
Governor since 3 December 2019

Minister of Finance,
Governor since 19 February 2019

Gintarė Skaistė

Yuriko Backes

Clyde Caruana

Lithuania

Luxembourg

Malta

Minister of Finance,
Governor since 11 December 2020

Minister of Finance,
Governor since 5 January 2022
– Replacing Pierre Gramegna,
Governor since 4 December 2013

Minister of Finance and Employment,
Governor since 23 November 2020

Sigrid Kaag

Magnus Brunner

Fernando Medina

Netherlands

Austria

Portugal

Deputy Prime Minister and Minister of
Finance,
Governor since 10 January 2022
– Replacing Wopke Hoekstra,
Governor since 26 October 2017

Federal Minister of Finance,
Governor since 20 December 2021
– Replacing Gernot Blümel,
Governor since 4 February 2020

Minister of Finance,
Governor since 30 March 2022
– Replacing João Leão,
Governor since 15 June 2020

Andrej Šircelj

Igor Matovič

Annika Saarikko

Slovenia

Slovakia

Finland

Minister of Finance,
Governor since 13 March 2020

Deputy Prime Minister,
Minister of Finance,
Governor since 1 April 2021
– Replacing Eduard Heger,
Governor since 21 March 2020

Minister of Finance,
Governor since 27 May 2021
– Replacing Matti Vanhanen,
Governor since 17 June 2020

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Board of Directors

Members of the Board of Directors

Klaus Regling
Chair of the Meetings
of the Board of Directors

Steven Costers
Belgium

Carsten Pillath
Germany

ESM Managing Director

Counsellor General,
Ministry of Finance,
appointed on 1 May 2015

State Secretary, Federal Ministry of Finance,
appointed on 13 January 2022
– Replacing Jörg Kukies,
appointed on 9 April 2018
– Member of the Board Risk Committee
since 22 February 2022,
appointed until 8 October 2023

Märten Ross

Gary Tobin

Estonia

Ireland

Michael Arghyrou

Deputy Secretary General for Financial
Policy and External Relations,
Ministry of Finance,
appointed on 21 October 2013
– Member of the Board Risk Committee
since 9 October 2020,
appointed until 8 October 2023

Assistant Secretary General,
International and EU Division,
Department of Finance,
appointed on 8 July 2019

Chairman of the Council of Economic Advisors,
appointed on 22 July 2019

Carlos Cuerpo

Emmanuel Moulin

Alessandro Rivera

Spain
Secretary General of Treasury and
International Financing,
Ministry of Economic Affairs and Digital
Transformation,
– Replacing Carlos San Basilio,
appointed on 19 June 2018
– Member of the Board Risk Committee
since 23 September 2021,
appointed until 8 October 2023

France
Director General of the Treasury,
Ministry of Economy, Finance, and Recovery,
appointed on 9 November 2020
– Member of the Budget Review and
Compensation Committee since
23 November 2020,
appointed until 8 October 2023

Greece

Italy
Director General of the Treasury,
Ministry of Economy and Finance,
appointed on 27 July 2018
– Member of the Board Risk Committee
since 20 September 2018,
reappointed until 8 October 2024

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S TA B I L I T Y

M E C H A N I S M

Mindaugas Liutvinskas

George Panteli

Līga Kļaviņa

Cyprus

Latvia

Permanent Secretary,
Ministry of Finance,
appointed on 29 April 2013

Deputy State Secretary,
Ministry of Finance,
appointed on 30 January 2015

Vice-Minister, Ministry of Finance,
appointed on 8 January 2021
– Replacing Miglė Tuskienė,
appointed on 4 March 2015

Nima Ahmadzadeh

Alfred Camilleri

Christiaan Rebergen

Luxembourg

Malta

Netherlands

Director of Economic and Fiscal Affairs,
Ministry of Finance,
appointed on 26 July 2019
– Member of the Budget Review and
Compensation Committee since
5 September 2019,
reappointed until 8 October 2024

Permanent Secretary,
Ministry for Finance and Employment,
appointed on 8 October 2012
– Member of the Budget Review and
Compensation Committee since
9 October 2012,
reappointed until 8 October 2022
– Chairperson of the Budget Review
and Compensation Committee since
24 April 2014,
reappointed until 8 October 2022

Treasurer-General,
Ministry of Finance,
appointed on 6 June 2018
– Member of the Budget Review and
Compensation Committee since
5 September 2019, reappointed until
8 October 2022

Harald Waiglein

João Nuno Mendes

Katja Lautar

Austria

Portugal

Slovenia

Director General for Economic Policy,
Financial Markets and Customs Duties,
Federal Ministry of Finance,
appointed on 8 October 2012
– Member of the Board Risk Committee
since 9 October 2012,
reappointed until 8 October 2022
– Chairperson of the Board Risk
Committee since 8 June 2018

Secretary of State for the Treasury,
Ministry of Finance,
appointed on 15 June 2020

State Secretary, Ministry of Finance,
appointed on 19 February 2019

Peter Paluš

Lithuania

Leena Mörttinen

Slovakia

Finland

Head of Financial Unit at Permanent
Representation of Slovakia to the
European Union,
appointed on 22 February 2017
– Member of the Budget Review and
Compensation Committee since
9 October 2020,
appointed until 8 October 2023

Permanent Under-Secretary,
Ministry of Finance,
appointed on 5 November 2020

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Board of Auditors
The BoA is an independent oversight body of the ESM
that inspects the ESM accounts, conducts audits on the
regularity, compliance, performance, and risk management of the ESM, and monitors the ESM internal and
external audit processes and their results.
The BoA is composed of five members appointed by the
BoG in line with Article 24 of the By-Laws. In
October 2021, the BoG appointed two new BoA members, Jochen Wenz and Akis Kikas, for non-renewable
terms of three years, to replace Irena Petruškevičienė
and Noel Camilleri, whose mandates had come to an
end. Furthermore, the BoG appointed Lucia Kašiarová in
April 2022 to replace Tommaso Fabi, whose term had
also ended.
In 2021, the BoA held eight meetings, with six of these
meetings taking place virtually. During these meetings, ESM management and senior staff updated the

BoA on ESM activities, the decisions of the ESM governing bodies, and other relevant issues and developments. Throughout the year, the BoA regularly met with
the ESM’s internal audit function and monitored and
reviewed the work of the external auditors. In addition,
the BoA Chairperson met once with the Board Risk
Committee Chairperson and once with the BoD. The
BoA Chairperson also met with the BoG Chairperson
at the Annual Meeting of the BoG, to discuss the audit
work and reports issued by the BoA, namely its report
on the ESM financial statements and its annual report
to the BoG.
The BoA also concluded, with the support of subjectmatter experts from the European Court of Auditors, its
audit on ESM Human Resource recruitment processes.
In fulfilling its role, the BoA reviewed the ESM 2021
financial statements and the working papers of the
external auditor.

Members of the Board of Auditors

Baudilio Tomé Muguruza

Ilias Dimitriadis

Tommaso Fabi

Chairperson since 22 January 2020
Member since 17 December 2019
Appointed upon nomination by the
European Court of Auditors

Vice-chairperson since 27 April 2022
Member since 8 October 2019
Appointed upon nomination by the
Supreme Audit Institution of Greece
(Hellenic Court of Audit)

Vice-chairperson from 20 October 2021
to 31 March 2022
Member from 1 April 2019
to 31 March 2022
Appointed upon proposal by the
Chairperson of the Board of Governors

Akis Kikas

Jochen Wenz

Lucia Kašiarová

Member since 8 October 2021
Appointed upon nomination by the
Supreme Audit Institution of Cyprus
(Audit Office of the Republic of Cyprus)

Member since 8 October 2021
Appointed upon proposal by the
Chairperson of the Board of Governors

Member since 25 April 2022
Appointed upon proposal by the
Chairperson of the Board of Governors

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M E C H A N I S M

Internal control framework
The ESM internal control framework is embedded in the
ESM’s daily operations and reflects the nature, complexity, and risks inherent in ESM activities. It is underpinned
by the three lines governance model established by
the BoD and is aligned with the principles of the Basel
Committee’s Framework for Internal Control Systems in
Banking Organisations.3
The Managing Director, under the direction of the BoD,
is responsible for the maintenance of the framework.
Assisted by the Management Board, the Managing

Director sets a strong tone at the top and oversees
internal controls across all areas of the ESM. Each year,
the Managing Director issues a management report
on ESM internal controls to the BoD, via the Board Risk
Committee, and to the BoA, with a copy extended to the
ESM external auditor. The management report on internal controls as of 31 December 2021 does not indicate
material or significant internal control weaknesses.
Visit our website for more information on our internal
control framework.

ENTITY-LEVEL CONTROLS
include management oversight and control culture, risk recognition and assessment, availability of information
relevant to decision-making, and processes for monitoring and correcting deficiencies.

PROCESS-LEVEL CONTROLS
include operational controls embedded in key processes and transactions.

IT CONTROLS
include IT general controls, IT security, and IT application controls embedded in ESM systems.

3

Framework for Internal Control Systems in Banking Organisations,
Basel Committee on Banking Supervision, Basel, September 1998.

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ESM organisational structure
The Management Board assists the Managing Director
in conducting the current business of the ESM, specifically in preparing the decisions of the BoG and the BoD
and in seeing to their implementation. Alongside the
Managing Director, the Management Board comprises

the Deputy Managing Director and Chief Risk Officer;
the Chief Operating Officer; the General Counsel; the
Secretary General; the Chief Financial Officer; and the
Chief Economist.

Klaus Regling
Managing Director

Christophe Frankel

Sofie De Beule-Roloff

David Eatough

Deputy Managing Director
and Chief Risk Officer

Chief Operating Officer

General Counsel

Nicola Giammarioli

Kalin Anev Janse

Rolf Strauch

Secretary General

Chief Financial Officer

Chief Economist

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Managing
Director
Klaus Regling

Head of
Communications/
Chief
Spokesperson
C. Crelo

Head of
Internal Audit
L. Lucas

General Counsel
D. Eatough

Chief Economist
R. Strauch

Deputy
Managing
Director & Chief
Risk Officer
C. Frankel

Chief
Financial Officer
K. Anev Janse

Chief
Operating Officer
S. De Beule-Roloff

Secretary General
N. Giammarioli

Head of
Legal &
Procurement
J. Aerts

Head of
Economic
& Market
Analysis
N. Hansen

Head of Risk
Management
M. Prodi

Head of
Funding &
Investor Relations
S. Weiss

Head of Human
Resources &
Organisation
L. Salducci

Head of Corporate
Governance &
Internal Policies
F. Zinoecker

Compliance

Head of
Financial Sector &
Market Analysis
N. Mascher

Head of
Finance & Control
T. Pies

Head of
Investment
& Treasury
S. Levy

Head of
Business Strategy
& Project
Management
D. Blazquez Vila

Head of
Policy Strategy
& Institutional
Relations
M. Sušec

Head of
Economic Risk
Analysis
G. Callegari

Head of Middle
& Back Office
S. Alonso

ALM &
Financial
Structuring
T. Ergo

Head of IT
& Facilities
Management
D. Wallace

Member of the Management Board

Visit our website for more information on our organisational structure and a description of the activities of the various departments.

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04 Financial report
Balance sheet
As of 31 December 2021, the total ESM balance sheet
was €827.0 billion. Compared to the previous year, it
decreased by €1.6 billion, mainly due to a €0.6 billion
decrease in Debt evidenced by certificates in relation to
the lower rollover of maturing bonds and a decrease of
almost €1 billion in the Fair value reserve linked to investments in debt securities.
The €80.5 billion of paid-in capital is invested in debt
securities or held in cash. The Debt securities including fixed-income securities increased by €0.2 billion
compared to 31 December 2020, from €44.2 billion to
€44.4 billion.
Unrealised gains or losses resulting from the valuation of the security portfolio are reflected in the
Fair value reserve within the ESM’s equity position.
As of 31 December 2021, this reserve was negative
€44.7 million, compared to positive €913.4 million as
of 31 December 2020. The decrease reflects the lower
market value of securities investments compared to
the previous year, largely due to the increase in interest
rates that affected the market yields.

Profit and loss account
The ESM recorded a net income of €311.0 million for the
financial year 2021, compared to €392.9 million in 2020.
It is mainly composed of the amounts received from
Germany, France, Italy, and the Netherlands to compensate the ESM for the negative interest paid on the cash
of the paid-in capital and reserves held at their national
central banks in 2020. These compensations, totalling
€216.2 million, were recorded as Extraordinary income
as of 31 December 2021.
The Profit before extraordinary items, which corresponds to the net income generated by ESM operations, decreased by €62.4 million, to €94.9 million
in 2021 from €157.3 million in 2020. The decrease
was driven by the Net profit on financial operations,
which declined by €59.3 million to €149.0 million in
2021 from €208.3 million in 2020.

Operating costs, including depreciation of tangible and
intangible assets, were €81.3 million in 2021 compared
to €76.1 million in 2020. The increase is mainly due to
higher staff cost. The ESM provides administrative services to the EFSF and received a service fee of €33.1 million in 2021 (€33.1 million in 2020), which is recognised
as Other operating income. The ESM continues to focus
on budgetary discipline and effective cost control.

Outlook for 2022
The ESM continues to diversify its investments and
regularly adjusts the portfolio exposure to mitigate the
impact of negative yields on the return of the paid-in capital, in line with its guidelines and its mandate. However,
as European yields continued their rise across maturities that began at the end of last year, asset valuation
continues to fall. The persistence of this environment is
likely to affect the ESM’s net income in 2022.
In 2021, the ESM Members signed the Agreement
Amending the Treaty Establishing the ESM. In 2022,
when the ratification of the Treaty by all national parliaments will be completed, the ESM will become the backstop to the Single Resolution Board (SRB) for the Single
Resolution Fund (SRF), taking a step closer towards
completing banking union. The revised treaty will also
give the ESM a stronger role in future economic adjustment programmes and crisis prevention.
In February 2022, following Russia’s invasion of Ukraine,
all EU countries and many others worldwide started
imposing heavy financial and commercial sanctions
on Russia. Beyond the impact on Russia, the sanctions
influence financial markets and economies globally.
The ESM’s activities may be affected as well. Given the
uncertainty of the situation, it is currently not possible
to assess possible effects on the ESM’s net income in
2022. The ESM will continue to closely monitor the situation to be ready to implement mitigating actions, as
needed.

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Balance sheet
As at 31 December 2021
(In €’000)
Notes

31.12.2021

31.12.2020

4

60,401,825

58,217,164

5

7,098,396

11,084,040

7,098,396

11,084,040

89,867,531

89,894,688

21,687,738
22,751,012

22,292,608
21,959,682

44,438,750

44,252,290

ASSETS
Cash in hand, balances with central banks and post
office banks
Loans and advances to credit institutions
(a) other loans and advances

Loans and advances to euro area member states

6

Debt securities including fixed-income securities
(a) issued by public bodies
(b) issued by other borrowers

7

Intangible assets

8

23

7

Tangible assets

9

4,369

5,451

Subscribed capital unpaid

15

624,250,300

624,250,300

Prepayments and accrued income

10

Total assets

977,392

898,944

827,038,586

828,602,884

1,006,032

983,059

116,906,551

117,511,345

116,906,551

117,511,345

LIABILITIES
Amounts owed to credit institutions

11

Debts evidenced by certificates
(a) debt securities in issue

12

Other liabilities

13

9,535

11,565

Accruals and deferred income

14

1,020,107

1,353,476

118,942,225

119,859,445

Total liabilities
SHAREHOLDERS’ EQUITY
Subscribed capital

15

704,798,700

704,798,700

Fair value reserve

7

(44,749)

913,359

2.8.1/16

Reserve fund

3,031,380

2,638,464

Profit for the financial year

311,030

392,916

Total shareholders’ equity

708,096,361

708,743,439

Total equity and liabilities

827,038,586

828,602,884

The accompanying notes form an integral part of these financial statements.

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Off-balance sheet
As at 31 December 2021
(In €’000)
Notes

31.12.2021

31.12.2020

71,565,500

67,755,500

20,066,650
(19,957,931)

15,682,419
(15,916,704)

556,500
200,000

-

OFF-BALANCE SHEET

Other items
(a) notional value of interest rate swaps
- interest rate swaps
(b) notional value of cross-currency asset swaps
- receivable
- payable
(c) notional value of futures contracts
- bond futures
- interest rate futures

3.6/25

The accompanying notes form an integral part of these financial statements.

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Profit and loss account
For the financial year ending 31 December 2021
(In €’000)
Notes
Interest receivable and similar income
(a) on loans and advances to credit institutions
(b) on loans and advances to euro area member states
(c) on debt securities including fixed-income securities
(d) on debts issued
(e) other
Interest payable and similar charges
(a) on cash and cash equivalents
(b) on loans to credit institutions
(c) on debts issued
(d) on debt securities including fixed-income securities
(e) other

17
18
25

19

18
25

Commissions payable
Other operating income
Net profit on financial operations
General administrative expenses
(a) staff costs
- wages and salaries
- social security
of which relating to pension
(b) other administrative expenses

Profit for the financial year

26,502
1,001,397
158,221
223,053
557,114

12,222
1,127,151
139,844
162,147
460,526

1,966,287

1,901,890

(291,916)
(61,579)
(670,794)
(25,937)
(922,202)

(309,191)
(52,008)
(804,892)
(18,339)
(725,766)

(1,972,428)

(1,910,196)

(38)

(36)

35,100

35,089

7/21

149,016

208,292

22

(38,977)
(28,900)
(10,077)
(8,598)
(42,346)

(36,848)
(26,721)
(10,127)
(8,924)
(39,214)

(81,323)

(76,062)

(1,765)

(1,712)

94,849

157,265

216,181

235,651

311,030

392,916

8/9

Profit before extraordinary items
Extraordinary income

2020

20

23

Value adjustments in respect of intangible and tangible
assets

2021

24

The accompanying notes form an integral part of these financial statements.

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Statement of changes in equity
For the financial year ending 31 December 2021
(In €’000)
Subscribed
capital

Fair value
reserve

Reserve fund

Profit brought Profit for the
forward financial year

704,798,700

442,403

2,348,801

-

289,663

707,879,567

-

-

-

289,663

(289,663)

-

-

-

289,663

(289,663)

-

-

-

-

-

-

392,916

392,916

-

470,956

-

-

-

470,956

704,798,700

913,359

2,638,464

-

392,916

708,743,439

Subscribed
capital

Fair value
reserve

Reserve fund

Profit brought Profit for the
forward financial year

Total

704,798,700

913,359

2,638,464

-

392,916

708,743,439

Allocation of 2020 profit
Allocation of profit brought
forward to the reserve fund
Profit for the financial year

-

-

-

392,916

(392,916)

-

-

-

392,916

(392,916)

-

-

-

-

-

-

311,030

311,030

Change in fair value reserve

-

(958,108)

-

-

-

(958,108)

704,798,700

(44,749)

3,031,380

-

311,030

708,096,361

At 1 January 2020
Allocation of the profit of
2019
Allocation of profit brought
forward to the reserve fund
Profit for the financial year
Change in fair value reserve
At 31 December 2020

At 1 January 2021

At 31 December 2021

The accompanying notes form an integral part of these financial statements.

Total

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Statement of cash flows
For the financial year ending 31 December 2021
(In €’000)
2021

2020

311,030

392,916

Cash flows from operating activities:
Profit for the financial year
Adjustments for value adjustments in respect of tangible and
intangible assets
Changes in tangible and intangible assets
Changes in other liabilities
Changes in accrued interest and interest received
Changes in prepayments
Changes in accruals and deferred income and interest paid
Interest received
Interest paid

1,765

1,712

(699)
(2,030)
(1,188,126)
(132,618)
423,083
1,242,296
(756,452)

(678)
741
(1,311,973)
(40,767)
843,169
1,316,904
(826,479)

Net cash flow (used in)/provided by operating activities

(101,751)

375,545

Cash flows from investing activities
Changes in debt securities including fixed-income securities
Changes in loans and advances to credit institutions
Loan repayments received during the year
Changes in amounts owed to credit institutions

(1,144,568)
3,985,644
27,157
22,973

(10,210,739)
(4,671,151)
652,109

Net cash flow provided by/(used in) investing activities

2,891,206

(14,229,781)

Cash flows from financing activities
Changes in debt securities in issue

(604,794)

7,098,251

Net cash flow (used in)/provided by financing activities

(604,794)

7,098,251

Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year

2,184,661
58,217,164

(6,755,985)
64,973,149

Cash and cash equivalents at the end of the financial year

60,401,825

58,217,164

The accompanying notes form an integral part of these financial statements.

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Notes to the financial statements
1. General Information
The European Stability Mechanism (“ESM”) was inaugurated on 8 October 2012 and established as an international
financial institution with its registered office at 6a, Circuit de la Foire Internationale, L-1347 Luxembourg, Grand Duchy
of Luxembourg.
The Finance Ministers of the then 17 euro area countries signed a first version of a Treaty establishing the European
Stability Mechanism on 11 July 2011. A modified version, incorporating amendments aimed at improving the ESM’s
effectiveness, was signed in Brussels on 2 February 2012 (“ESM Treaty”). The ESM Treaty entered into force on 27
September 2012 following its ratification by the 17 euro area member states.
Latvia joined the euro area on 1 January 2014. The Latvian parliament approved the ESM Treaty on 30 January 2014,
and Latvia officially became the ESM’s 18th Member on 13 March 2014. The ESM Treaty was amended accordingly.
Lithuania joined the euro area on 1 January 2015. The Lithuanian parliament approved the ESM Treaty on 18 December 2014, and Lithuania officially became the ESM’s 19th Member on 3 February 2015. The ESM Treaty was amended
accordingly.
The present financial statements cover the period from 1 January 2021 to 31 December 2021, while comparative
figures cover the period from 1 January 2020 to 31 December 2020.
Following a proposal from the Managing Director, the Board of Directors adopted the financial statements on 28
March 2022 and authorised their submission to the Board of Governors for approval at its 16 June 2022 meeting.

1.1. GENERAL OVERVIEW OF THE FINANCIAL ASSISTANCE PROGRAMMES
The ESM is authorised to use the following lending instruments for the benefit of its Members, subject to appropriate
conditionality:


grant financial assistance in the form of loans to an ESM Member in the framework of a macroeconomic adjustment programme;



purchase bonds or other debt securities in the primary debt market and conduct operations on the secondary
debt market in relation to the bonds of an ESM Member;



grant precautionary financial assistance to ESM Members in the form of credit lines;



provide financial assistance for the recapitalisation of financial institutions through loans to ESM Members’
governments;



recapitalise systemic and viable euro area financial institutions directly under specific circumstances and as
a last resort measure, following the 8 December 2014 ratification of the Direct Recapitalisation of Institutions
instrument.

1.2. OVERVIEW OF THE PRICING STRUCTURE OF THE FINANCIAL ASSISTANCE PROGRAMMES
The total cost of financial assistance to a beneficiary Member State is an aggregate of several distinct elements that
are established in the ESM Pricing Policy:


Base rate – the cost of funding incurred by the ESM, derived from a daily computation of the actual interest
accrued on all bonds, bills, and other funding instruments issued by the ESM;



Commitment fee – the negative carry and issuance costs incurred in the period between the funding by the
ESM and the disbursement to the beneficiary Member State, or for the period from the refinancing of the rele-

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vant funding instrument until its maturity. The commitment fee is applied ex-post on the basis of the negative
carry actually incurred;




Service fee – the source of general revenues and resources to cover the ESM’s operational costs. The service
fee has two components:


up-front service fee (50 bps) generally deducted from the drawn amount;



annual service fee (0.5 bps) paid on the interest payment date;

Margin – paid on the interest payment date. The margin charged differs across financial support instruments:


10 bps for loans and primary market support facilities;



5 bps for secondary market support facilities;



35 bps for precautionary financial assistance;



30 bps for financial assistance provided to an ESM Member for the recapitalisation of its financial institutions.

In addition, the ESM Pricing Policy includes specific elements tied to financial assistance for the Direct Recapitalisation of Institutions. This instrument is currently not used.
Penalty interest may be applied to overdue amounts, which corresponds to a charge of 200 bps over the higher of
either the Euribor rate applicable to the relevant period selected by the ESM or the interest rate which would have
been payable.

1.3. ESM FINANCIAL ASSISTANCE TO SPAIN
The Eurogroup, composed of the Finance Ministers of the euro area member states, reached political agreement on
20 July 2012 that financial assistance should be granted to Spain for the recapitalisation of its banking sector, following an official request from the Spanish government. The financial assistance was designed to cover the estimated
capital requirements along with an additional safety margin, amounting to €100.0 billion. The loans were provided
to Spain’s bank recapitalisation fund, Fondo de Reestructuración Ordenada Bancaria (FROB), and then channelled to
the relevant financial institutions. The assistance was initially committed under a European Financial Stability Facility
(EFSF) programme. On 28 November 2012, the ESM Board of Governors decided that the ESM would assume this
commitment, in line with Article 40(1) and (2) of the ESM Treaty.
This was the ESM’s first financial assistance programme. It was also the first use of the instrument for recapitalising
banks through loans granted to a Member State. No other lenders contributed.
On 3 December 2012, the Spanish government formally requested the disbursement of €39.5 billion in funds. On
5 December 2012, the ESM launched and priced notes, which were transferred to the FROB on 11 December 2012.
The FROB used the notes in the amount of €37.0 billion for the recapitalisation of the following banks: BFA-Bankia,
Catalunya-Caixa, NCG Banco, and Banco de Valencia. The FROB also provided €2.5 billion to Sareb, the asset management company, for assets arising from bank restructuring.
The Spanish government formally requested a second disbursement of €1.8 billion for the recapitalisation of Banco
Mare Nostrum, Banco Ceiss, Caja 3 and Liberbank on 28 January 2013. The ESM subsequently transferred the funds
in the form of ESM notes to the FROB on 5 February 2013.
The ESM financial assistance programme expired on 31 December 2013. In total, the ESM disbursed €41.3 billion to
Spain to recapitalise the banking sector. The remaining undisbursed amount of the facility was cancelled.
On 7 July 2014, the ESM Board of Directors approved Spain’s request to make an early repayment of €1.3 billion of its
loan. This was the first time that a euro area country under a financial assistance programme made an early repay-

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ment request. The repayment took place on 8 July 2014 and was accompanied by a scheduled repayment of unused
funds of €0.3 billion on 23 July 2014.
The ESM received two further early repayment requests from the Spanish authorities in 2015. The authorities submitted the first request on 27 February 2015. The ESM Board of Directors approved this €1.5 billion early repayment
request on 9 March 2015 and the repayment took place on 17 March 2015. On 2 July 2015, the ESM Board of Directors approved another early repayment request from the Spanish government. This €2.5 billion repayment took place
on 14 July 2015.
On 11 November 2016, the ESM received the fourth early repayment from Spain of €1.0 billion, which was approved
by the ESM Board of Directors on 7 November 2016.
The ESM received two further early repayment requests from the Spanish authorities in 2017. On 14 June 2017, the
ESM received the fifth early repayment from Spain of €1.0 billion, which was approved by the ESM Board of Directors
on 1 June 2017. Subsequently, on 5 October 2017, the ESM received the request for the sixth early repayment from
Spain of €2.0 billion, which was approved by the ESM Board of Directors on 26 October 2017 and the repayment took
place on 16 November 2017.
On 30 January 2018 Spain made the request for two further early repayments. On 23 February 2018 and 23 May 2018,
the ESM received respectively the seventh and eighth early repayments from Spain of €2.0 billion and €3.0 billion,
which had been approved by the ESM Board of Directors on 8 February 2018. On 16 October 2018, the ESM received
the ninth early repayment from Spain of €3.0 billion, which had been approved by the ESM Board of Directors on 20
September 2018.
By 31 December 2021 and 2020, Spain had, in total, repaid €17.6 billion of its financial assistance. All repayments
were made in cash.
The outstanding nominal amount of loans granted to Spain as at 31 December 2021 and 2020 is €23.7 billion (see
Note 6).

1.4. ESM FINANCIAL ASSISTANCE TO CYPRUS
The Cypriot government requested stability support on 25 June 2012. In response, the Eurogroup agreed the key
elements of a macroeconomic adjustment programme on 25 March 2013.
The agreement on the macroeconomic adjustment programme led euro area member states to decide on a financial
assistance package of up to €10.0 billion. On 24 April 2013, the ESM Board of Governors decided to grant stability
support to Cyprus. The ESM Board of Directors subsequently approved the Financial Assistance Facility Agreement
(FFA) on 8 May 2013. The ESM disbursed €6.3 billion, and the International Monetary Fund (IMF) contributed around
€1.0 billion. Cyprus exited successfully from its ESM programme on 31 March 2016.
According to the terms of the FFA, the first tranche of financial assistance was provided to Cyprus in two separate
disbursements: the ESM disbursed the first €2.0 billion on 13 May 2013 and transferred the second in the amount of
€1.0 billion on 26 June 2013. The second tranche of assistance, €1.5 billion of ESM floating rate notes, was disbursed
on 27 September 2013. The Cypriot government used the notes for the recapitalisation of the cooperative banking
sector. The third tranche of assistance, €0.1 billion, was disbursed on 19 December 2013. Disbursements of a total of
€1.1 billion were made in 2014, and another €0.6 billion in 2015.
The financial assistance facility was designed to cover Cyprus’s financing needs after including proceeds from burden-sharing measures that the Cypriot government adopted for the banking sector. These needs included budgetary financing, the redemption of medium- and long-term debt, and the recapitalisation of financial institutions. They
excluded the country’s two largest banks, Bank of Cyprus and Cyprus Popular Bank, which the Cypriot government
subjected to restructuring and resolution measures.
The outstanding nominal amount of loans granted to Cyprus as at 31 December 2021 and 2020 is €6.3 billion (see
Note 6).

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1.5. ESM FINANCIAL ASSISTANCE TO GREECE
The EFSF financial assistance programme for Greece expired on 30 June 2015. On 8 July 2015, the Greek government
submitted a request for financial assistance to the Chairperson of the ESM Board of Governors. On 13 July 2015, the
Finance Ministers of the euro area agreed with Greece a set of urgent prior actions in order to start negotiations for
a new programme under the ESM. The ESM Board of Governors approved a new programme on 19 August 2015. At
the same time, the ESM Boards of Governors and Directors approved the FFA with Greece, authorising the ESM to
provide Greece with up to €86.0 billion in financial assistance over three years. Greece successfully exited its programme in August 2018.
The ESM programme focussed on four key areas: restoring fiscal sustainability, safeguarding financial stability, boosting growth, competitiveness and investment, and reforming the public administration. The funds available under the
FFA were earmarked to cover needs related to debt servicing, banking sector recapitalisation and resolution and
budget financing. To return its economy to growth and make its debt burden more sustainable, the Greek government
committed to a series of far-reaching economic reforms.
On 20 August 2015, the ESM approved the first tranche of €26.0 billion in financial assistance for Greece, divided in
two sub-tranches. This decision followed the ESM Board of Directors’ approval of the FFA, specifying the terms of
the financial assistance. The Board of Directors also decided to immediately disburse €13.0 billion in cash to Greece.
This was the first disbursement under the first sub-tranche, of €16.0 billion, to be used for budget financing and debt
servicing needs. The second sub-tranche, of €10.0 billion, was immediately created in ESM floating rate notes and
held in a segregated account. These funds were designated to cover the Greek banking sector’s potential resolution
and recapitalisation costs, with release decisions to be taken on a case-by-case basis.
On 23 November 2015, the Board of Directors authorised the disbursement of €2.0 billion in cash to Greece as the
second disbursement under the €16.0 billion sub-tranche approved in August 2015. This decision followed the Greek
government’s completion of the first set of reform milestones. This disbursement was primarily used for debt servicing.
On 1 December 2015, the Board of Directors decided to release €2.7 billion to Greece to recapitalise Piraeus Bank.
Subsequently, on 8 December 2015, the Board of Directors decided to release €2.7 billion to Greece to recapitalise the
National Bank of Greece. The ESM transferred these amounts under the €10.0 billion sub-tranche, held in ESM notes
in a segregated account. The availability period of the remaining €4.6 billion expired on 31 January 2016.
On 22 December 2015, the Board of Directors approved the disbursement of €1.0 billion to Greece as the third and
final disbursement under the €16.0 billion sub-tranche agreed in August 2015. This decision followed the Greek government’s completion of the second set of reform milestones. This disbursement was also used for debt servicing.
On 17 June 2016, the Board of Directors approved the disbursement of €7.5 billion to Greece as the first disbursement
under the second tranche of €10.3 billion. This disbursement was used for debt servicing and to help clear domestic
arrears.
On 25 October 2016, the Board of Directors approved the disbursement of €2.8 billion to Greece as the second disbursement under the second tranche of €10.3 billion. This €2.8 billion disbursement consisted of two parts: €1.1 billion was approved for release following the full implementation of a set of 15 milestones by the Greek authorities,
and was used for debt servicing. A further €1.7 billion was disbursed to a dedicated account for clearing arrears after
a positive assessment of the clearance of net arrears by Greece.
On 20 January 2017, the ESM Board of Directors approved three schemes aimed at reducing interest rate risk for
Greece. The first was a bond exchange, where floating rate notes disbursed by the ESM to Greece for bank recapitalisation were exchanged for fixed coupon notes. The second scheme allowed the ESM to enter into swap arrangements to reduce the risk that Greece would have to pay a higher interest rate on its loans in case market rates start
rising. The third scheme, which entailed issuing long-term bonds that closely matched the maturity of the Greek
loans, was eventually replaced by additional swap arrangements.

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On 20 February 2017, the ESM received a loan repayment of €2.0 billion from the Greek government. The repayment
was a contractual obligation with the ESM and followed the sale of an asset by one of the banks that took part in the
2015 banking recapitalisation, financed with ESM loans.
On 7 July 2017, the ESM Board of Directors approved the first disbursement of the €7.7 billion under the third tranche
of €8.5 billion. Out of this amount, €6.9 billion was used for debt servicing needs and €0.8 billion for arrears clearance.
On 26 October 2017, the ESM Board of Directors approved the disbursement of €0.8 billion to Greece for the clearance
of arrears.
On 27 March 2018, the ESM Board of Directors approved the fourth tranche of €6.7 billion to Greece for debt service,
domestic arrears clearance and for establishing a cash buffer. The ESM Board of Directors approved the release of the
first disbursement under this tranche amounting to €5.7 billion, which took place on 28 March 2018.
On 14 June 2018, the ESM Board of Directors authorised the release of the remaining amount of the fourth tranche of
ESM financial assistance, approved on 27 March 2018. The disbursement of €1.0 billion was used for the clearance
of arrears.
On 6 August 2018, the ESM disbursed the fifth and final tranche of ESM financial assistance for Greece, amounting to
€15.0 billion. Out of this tranche, €9.5 billion was used for building up Greece’s cash buffer and €5.5 billion was used
for debt service. After the disbursement, the cash buffer reached around €24.0 billion. That sum was to cover around
22 months of Greece’s financing needs after the end of the programme on 20 August 2018.
On 20 August 2018, Greece officially concluded its three-year ESM financial assistance programme with a successful
exit. This followed the disbursement of a total of €61.9 billion by the ESM over three years in support of macroeconomic adjustment and bank recapitalisation in Greece. The remaining €24.1 billion available under the maximum
€86.0 billion programme volume was not utilised and was automatically cancelled.
On 15 June 2021, Greece repaid €27.2 million using part of the dividends received from the Hellenic Corporation of
Assets and Participations (HCAP). This is in line with the agreed repayment mechanism for funds received by the
State from HCAP.
The outstanding nominal amount of loans granted to Greece as at 31 December 2021 is €59.8 billion (31 December
2020: €59.9 billion) (see Note 6).

1.6. ESM COVID-19 PANDEMIC CRISIS SUPPORT
On 9 April 2020, the Eurogroup decided on a comprehensive economic policy response to the Covid-19 crisis. Three
important safety nets for workers, businesses and sovereigns were established, amounting to a package worth €540
billion. The ESM is the safety net for sovereigns and for this purpose created a Pandemic Crisis Support instrument.
It is a credit line to support domestic financing of healthcare related costs due to the Covid-19 crisis, which can be
requested by all ESM Members. On 23 April 2020, the EU Heads of State of Government (European Council) endorsed
this agreement. On 8 May 2020, the Eurogroup agreed on the features of the credit line. It was made operational by the
ESM Board of Governors on 15 May 2020. No Member State has requested this credit line as at 31 December 2021.

2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.

2.1. BASIS OF PRESENTATION
The accompanying financial statements are prepared and presented in accordance with 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

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2003/51/EC of 18 June 2003 and by Directive 2006/46/EC of 14 June 2006 (the ‘Directives’). Their specific application by the ESM is described in the subsequent notes.
The ESM prepares an annual report in respect of each financial year and submits it to the Board of Governors for
approval at its annual meeting. The annual report contains a description of the policies and activities of the ESM,
the financial statements for the relevant financial year, the report of the external auditors in respect of their audit in
respect of said financial statements, and the report of the Board of Auditors in respect of said financial statements
pursuant to Article 24(6) of the ESM By-Laws.
The preparation of financial statements in conformity with the Directives requires the use of certain critical accounting estimates. It also requires management4 to exercise its judgement in applying the ESM’s accounting policies.
Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 2.4.

2.2. CHANGES IN ACCOUNTING POLICIES
As of 1 January 2021, the ESM changed the accounting policy for the calculation of the net profit from sales of securities, included in “Debt securities including fixed income securities”, from FIFO (first-in-first-out) to AVCO (average
cost) to align with common business and accounting practice in financial institutions. The effect of the change on
the existing portfolio was recognised as a one-off charge for the period, which is included in “net profit on financial
operations” within the profit and loss account. Further disclosures are provided in Notes 7, 18, and 21 in relation to
this change in the accounting policy.

2.3. BASIS OF MEASUREMENT
The accompanying financial statements are prepared on a historical cost basis, except for debts evidenced by certificates which are measured at amortised cost, and part of the paid-in capital and reserve fund investments which
are measured at fair value with gains and losses recognised in the fair value reserve. Bond and interest rate futures
are measured at fair value with the changes in the values (mark-to-market) recognised in the profit and loss account.

2.4. USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates and assumptions that affect
reported income, expenses, assets, liabilities and the disclosure of contingent assets and liabilities. The use of available information and application of judgement are inherent to the formation of estimates.
Actual results in the future could differ from such estimates and the resulting differences may be material to the
financial statements. Any revision to accounting estimates is recognised prospectively in current and future periods.
The ESM is entitled to charge 50 bps of up-front service and 0.5 bps annual service fees to the beneficiary Member
States, to cover the ESM’s operational costs, as Note 1.2 describes. The ESM recognises the up-front service fees
over a seven-year period, to reflect the expected occurrences of the expenses that it aims to cover.
The ESM reviews its loans and advances to euro area beneficiary member states at each reporting date, to assess
whether a value adjustment is required (see Note 2.9). Such assessment requires judgement by the management
and the ESM governing bodies, consistent with the ESM’s mandate as a crisis resolution mechanism that aims at
supporting beneficiary Member States’ return to public financial stability.
No value adjustment was required as at 31 December 2021 and 2020, thus none has been recorded.

4

As per Article 7 (5) of the ESM Treaty, the Managing Director shall conduct, under the direction of the Board of Directors, the current business of
the ESM. As per Article 21 (1) of the ESM By-laws, the Board of Directors shall keep the accounts of the ESM and draw up its annual accounts.

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2.5. FOREIGN CURRENCY TRANSLATION
The ESM uses the euro (€) as the unit of measure of its accounts and for presenting its financial statements.
Foreign currency transactions are recorded at the rates of exchange prevailing on the date of the transaction.
Exchange differences, if any, arising out of transactions settled during the year are recognised in the profit and loss
account as ‘Net profit or loss on financial operations’.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the
closing exchange rates on that date.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the
exchange rates on the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates on the date when the fair value was determined.
The exchange differences, if any, are recognised in the profit and loss account and the related assets and liabilities
are revalued on the balance sheet.

2.6. DERIVATIVE FINANCIAL INSTRUMENTS
The ESM uses derivatives instruments for risk management purposes. Cross-currency asset swaps and foreign
exchange swaps are used to hedge the currency risk into euro5 (see Note 3.3.2), and interest rate swaps to manage
the interest rate risk exposure (see Note 3.3.1).
All cross-currency asset swaps, foreign exchange swaps and interest rate swaps transactions are booked at notional
amount as off-balance sheet items at the date of the transaction.
The ESM uses also short-term interest rate and bond futures contracts to manage the interest rate risk of the paid-in
capital portfolios (see Note 3.3.1). The futures transactions are booked at notional amount as off-balance sheet items
at the date of the transaction.

2.6.1. FOREIGN EXCHANGE SWAPS AND FORWARDS
For the management of its paid-in capital portfolios as well as issuances in USD, the ESM can enter into foreign
exchange swaps and forwards to hedge back into euro non-euro denominated instruments. Ongoing forward and
spot exchange transactions are converted at the spot rates of exchange prevailing on the balance sheet date and
neutralised in ‘Accruals and deferred income’ or ‘Prepayments and accrued income’. The spread between the spot
amount and forward settlement amount is linearly amortised through the profit and loss account in ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’. On the maturity date, the parties exchange the initial
principal amounts at the contractual exchange rate. The difference between the spot and the forward rate at maturity
is recognised under the caption ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’ in the
profit and loss account.

2.6.2. CROSS-CURRENCY ASSET SWAPS AND INTEREST RATE SWAPS
The ESM enters into cross-currency asset swaps in order to hedge investments in non-euro denominated assets in
its paid-in capital portfolios as well as issuances in USD. In a cross-currency swap, payments are exchanged based
on either two floating reference rates, one floating rate and one fixed rate, or two fixed rates, each with a corresponding notional amount denominated in a different currency from a given security (the asset). Notional amounts are
exchanged on the effective date and the maturity date. Ongoing forward and spot exchange transactions are converted at the spot rates of exchange prevailing on the balance sheet date and neutralised in ‘Accruals and deferred
income’ or ‘Prepayments and accrued income’.

5

As per Article 2 (5) of the ESM Investment Guidelines, any currency risk shall be hedged into euro to ensure a limited remaining foreign exchange
risk for the ESM.

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The spread between the spot amount and forward settlement amount is linearly amortised through the profit and
loss account in ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’. Interest payments
exchanged are also included in ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’ in the
profit and loss account.
An interest rate swap is a contract under which floating-rate interest is exchanged for fixed-rate interest or vice-versa.
Interest received and paid under interest rate swaps is accrued and reported under ‘Interest receivable and similar
income’ or ‘Interest payable and similar charges’ in the profit and loss account.
On the maturity date, the difference between the payable and the receivable interest at maturity is recognised under
the caption ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’ in the profit and loss
account.
All interest rate swaps and cross-currency asset swaps contracted with commercial counterparties are concluded
under the contractual framework of ISDA swap agreements and Credit Support Annexes (CSA), which specify the
conditions of exposure collateralisation, in order to offset mark-to-market fluctuations on a daily basis through the
exchange of collateral. These are generally accepted and practised contract types (see also Note 3.6.3). Derivative
operations concluded with selected highly rated public institutions or central banks can be concluded under ISDA
swap agreement only.
The cash collateral received or provided is reported under ‘Amounts owed to credit institutions’ or ‘Loans and
advances to credit institutions’.

2.6.3. FUTURES CONTRACTS
Futures contracts are financial instruments, which provide the ability to buy or sell an underlying item at a forward
date, at a pre-agreed price. Futures contracts are standardised exchange-traded derivative instruments with pre-defined maturity, underlying items and specifications. ESM enters into bond futures and short-term interest rate futures.
At the delivery date of the contract, if positions have not been closed or rolled to the next contract, short bond futures
positions must deliver a bond from a pre-set basket of possible deliverable bonds, with a pre-defined remaining maturity, to the long positions. Short interest rate futures position must deliver the interest earned on a notional amount of
the contracts, to the long position (or vice versa if the interest rate is negative).
The ESM enters in futures contracts with the objective to manage the interest rate risk of the paid-in capital portfolios.
The futures are initially recognised at zero including any transaction costs, and measured subsequently at fair value
with gains and losses recognised in the profit and loss account under the caption ‘Interest receivable and similar
income – Other’ or ‘ Interest payable and similar charges – Other’.
The changes in the values (mark-to-market) of futures positions are recognised in the profit and loss account through
the daily margin calls. Therefore, the carrying amounts of futures represent only the called but not yet settled balances and are recognised under the caption ‘Other assets’ or ‘Other liabilities’.

2.6.4. INTEREST RATE BENCHMARK REFORM (IRBR)
Interest rate benchmarks, such as the Euro OverNight Index Average (EONIA), are widely used in financial contracts.
In recent years, confidence in their reliability and robustness has been undermined, and regulators across the globe
have been pushing for a reform of interest rate benchmarks. The global transition to alternative interest rate benchmark rates replacing Interbank Offered Rates (IBORs) for different currencies is one of the most challenging reforms
to be undertaken in the financial markets with major main milestones due to be achieved by the end of 2021.
In September 2017, the European Central Bank (ECB), the Financial Services and Markets Authority (FSMA – Belgian market supervisor), the European Securities and Markets Authority (ESMA) and the European Commission
announced the launch of the industry working group on euro risk-free rates (RFR). The working group was tasked
with identifying and recommending risk-free rates that could serve as an alternative to the current benchmarks used
in a variety of financial instruments and contracts in the euro area and with developing adoption plans.

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In September 2018, the working group recommended that the euro short-term rate (€STR) become the successor to
EONIA. In order to ensure smooth market adoption, there will be a two-year transition period in two phases.
The first phase dealt with pre-replacement issues (issues affecting financial reporting in the period before the replacement of an existing interest rate benchmark). The first phase of the project culminated with the Interest Rate Benchmark Reform amendments published in September 2019.
The second phase of the project dealt with replacement issues (issues that might affect financial reporting when an
existing interest rate benchmark is replaced). To address it, a dedicated sub-working group on financial accounting and
risk management has been created to specifically analyse the impact on financial accounting and risk management
of the transition from EONIA to €STR. The sub-group comprised representatives of European and international credit
institutions (including the ESM), consulting and accounting firms, clearing houses, investment management firms and
associations. The ECB, ESMA, the European Commission, and the FSMA act as observers in the sub-group.
The potential discontinuation of such benchmarks raises the question of how contracts indexed to them (swaps only
for the ESM) will be affected. In case the market standards do not lead to the discontinuation of the various IBORs in
a consistent way, this could expose the ESM to basis risks between the various versions of IBORs’ successors. The
exposure to basis risks is not specific to the ESM and it has been recognised in the IBOR Global Benchmark Transition
Report, published by the largest industry associations in June 2018, as one of the biggest challenges in the benchmark reform.
In addition, as already highlighted by the ECB, the banking industry is exposed to the following risks: operational
challenges associated with amendments of contracts and introduction of fallback provisions can entail an operational burden, impact on booking infrastructure, adjustments to settlement and payment infrastructures, IT-related
restrictions with regard to the valuation and booking of new products based on the reformed reference rates and
corresponding valuation methodologies.
Changes to the basis for determining contractual cash flows as a result of interest rate benchmark reform are required,
as a practical expedient, to be treated as changes to a floating interest rate, provided that, for the financial instrument,
the transition from the IBOR benchmark to RFR takes place on an economically equivalent basis.
In the context of IBOR reform, the ESM’s assessment of whether a change to an amortised cost financial instrument
is substantial, which was made after applying the practical expedient introduced by IBOR reform during the second
phase. This requires the transition from an IBOR to an RFR to be treated as a change to a floating interest rate, where
the effective interest rate will be updated without modifying the carrying amount of the financial instrument.
As part of its investment and funding activities, the ESM is only exposed to IBOR transition on derivative instruments
used for risk management purposes.
As a consequence of the reform, the new rate called euro short-term rate (€STR) replaced the EONIA and became the
official euro risk-free-rate (RFR) benchmark on 3 January 2022. As a result, since 1 October 2019, EONIA is no longer
computed but calculated as €STR +8.5bp. This reform had an impact on all remunerations and valuations currently
based on EONIA (i.e. derivatives for the ESM). For derivatives, this affected the remuneration of posted derivatives
collateral as well as the discounting rate used for the valuation of existing and future interest rate- and cross-currency
swaps.
The transition to €STR flat from EONIA flat for the remuneration of cash collateral for derivatives and consequently
of the discount curve (CSA based discounting) resulted in one-off compensation fee payments to offset the mark-tomarket losses that one counterparty faced following the shift of the discount curve by around 8.5 bps. The purpose
of the compensation was to maintain the same financial status as before the change for both counterparties to the
contract (net zero impact).
In 2021, the ESM already agreed with all existing commercial counterparties the transition to €STR and received or
paid compensation accordingly. The compensation payments were agreed and paid separately for the outstanding funding and investment exposures with each counterparty. The one-off cash compensation is recognised in the
ESM’s profit and loss account at trade date for the investment-related activities (see Note 25). The compensation
received for the funding activity-related derivatives (see Note 3.6.1) was directly and fully retroceded to the beneficiary
Member States.

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2.7. CASH IN HAND, BALANCES WITH CENTRAL BANKS AND POST OFFICE BANKS
Cash in hand, balances with central banks and post office banks include cash in hand, demand deposits and other
short-term highly liquid investments with original maturities of three months or less. Bank overdrafts, if any, are
shown within borrowings in liabilities on the balance sheet.

2.8. DEBT SECURITIES INCLUDING FIXED-INCOME SECURITIES
The ESM has established the following portfolios for the management of its financial assets:

2.8.1. PAID-IN CAPITAL AND RESERVE FUND INVESTMENTS
The ESM’s capital provisions are laid down in Chapter 3 of the ESM Treaty. The initial aggregate nominal value of
paid-in shares was €80.0 billion and has been increased to €80.5 billion due to the accession of Latvia and Lithuania.
The net income generated by ESM operations and the proceeds of the financial sanctions received from the ESM
Members under the multilateral surveillance procedure, the excessive deficit procedure, and the macroeconomic
imbalances procedure established under the Treaty on the Functioning of the European Union (TFEU) are put aside in
a reserve fund, in accordance with Chapter 5 of the ESM Treaty.
The paid-in capital and the reserve fund (the Investment Portfolios) are invested in accordance with the ESM Investment Guidelines approved by the Board of Directors. The main objective of such investments is to ensure liquidity, the
availability of maximum lending volume and the creditworthiness of the ESM.
According to the investment principles defined in the Investment Guidelines, an appropriate level of diversification
of the investment portfolios shall be maintained to reduce the ESM’s overall risk. Diversification shall be attained
through allocation between various asset classes, geographical areas (and notably supranational institutions, and
issuers outside the euro area), issuers and instruments.
According to the ESM Investment Guidelines, any currency risk shall be hedged into euro to ensure a limited remaining foreign exchange risk for the ESM. Derivatives shall be used for risk management purposes (see Note 3.6.2).
In accordance with the Investment Guidelines, the Investment Portfolios are divided in the Short-term tranche, the
Medium- and long-term tranche and the Hold-to-maturity tranche. The assets of the reserve fund are invested in full
in the Short-term tranche:
Short-term tranche (STT)
The tranche with the highest liquidity requirements is the Short-term tranche. The main objective of the Shortterm tranche is to enable the ESM to face any temporary disbursement to cover any liquidity shortfall, due to
a non-payment by a beneficiary Member State. This tranche is invested in liquid investment instruments with
a capital preservation objective at a one-year horizon, for a high level of confidence, to the extent possible in light
of prevailing market conditions.
Medium/ Long-term tranche (MLTT)
The main objective of the Medium/ Long-term tranche is to ensure the ESM’s financial strength. This tranche is
managed to enhance the return of the Investment Portfolios, subject to the investment objectives and constraints
specified in the Investment Guidelines. This tranche is also mainly invested in liquid instruments.
Hold-to-maturity tranche (HTMT)
The objective of the Hold-to-maturity tranche is to reinforce the long-term financial strength of the ESM. This
tranche shall be invested to enhance the return of the Investment Portfolios, subject to the other investment
objectives specified in the Investment Guidelines.

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The assets in the Hold-to-maturity tranche are intended to be held to maturity, and may be monetised only:
i. in order to raise liquidity if, in accordance with the ESM High Level Risk Policy, it is necessary to meet due
payments to ESM creditors and to avoid or limit a capital call under Article 9(3) of the ESM Treaty;
ii. outside of the situation referred in “i”. above, to post collateral for derivatives used for risk management
purposes in the Investment Portfolios;
iii. in case any asset loses its eligibility, the ESM may decide to reduce the exposure to this given asset, within
an appropriate timeframe and manner to minimise any impact on market prices.
The paid-in capital and the reserve fund investments in the Short-term and Medium/ Long-term tranches are initially
recognised at fair value including any transaction costs, and measured subsequently at fair value with gains and
losses recognised in the fair value reserve, except for impairment losses and foreign exchange gains and losses, until
the financial asset is derecognised. Unrealised gains or losses are accumulated in the fair value reserve until the asset
is sold, collected or otherwise disposed of, or until the asset is determined to be impaired.
If the financial asset is determined to be impaired, the cumulative gain or loss previously recognised in the ‘Fair value
reserve’ is recognised in the profit and loss account. Interest, however, is recognised on a straight-line basis.
The paid-in capital investments in the Hold-to-maturity tranche are initially recognised at cost and measured subsequently at amortised cost.
As of 1 January 2021, the ESM has changed the accounting policy for the calculation of net profit of the securities
sales from FIFO (first-in-first-out) to AVCO (average cost). This change led to a one-off charge for the period, which is
included in the net profit on financial operations (see Note 7 and Note 21).

2.8.2. LIQUIDITY BUFFER INVESTMENTS
The ESM’s borrowing strategy must meet several objectives and principles to comply with the purpose established
in Article 3 of the ESM Treaty. The general borrowing strategy must therefore offer the possibility to react rapidly to
unexpected market developments, including the build-up of liquidity buffers and ensuring market access, even in
a difficult market environment.
As per the ESM Investment Guidelines, the management of the liquidity buffer follows the same investment restrictions as the Short-term tranche of the paid-in capital described in Note 2.8.1.

2.8.3. DETERMINATION OF FAIR VALUE
The determination of fair values of financial assets and liabilities is based on quoted market prices or dealer price
quotations, when such prices are regularly available from an exchange, dealer, broker, industry group, pricing service
or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s
length basis.
Where the fair values of financial instruments recorded on the balance sheet cannot be derived from regular market
prices, as described above, they are determined using valuation techniques that include the use of mathematical
models. The chosen valuation techniques incorporate factors that market participants would take into account in
pricing a transaction and are based whenever possible on observable market data. If such data is not available,
a degree of judgement is required in establishing fair values.

2.9. LOANS AND ADVANCES TO CREDIT INSTITUTIONS AND TO EURO AREA MEMBER STATES
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not traded on
an active market. Loans and advances are initially recognised at their net disbursement amounts, and subsequently
measured at cost.

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Transaction costs and premiums/discounts are amortised in the profit and loss account through interest receivable
and similar income. Interest income on loans and advances to credit institutions and to euro area member states are
also included in ’Interest receivable and similar income’ in the profit and loss account (see Note 2.18).
Specific value adjustments are accounted for in the profit and loss account in respect of loans and advances presenting objective evidence that all or part of their outstanding balance is not recoverable (see Note 2.4) and are deducted
from the corresponding asset in the balance sheet.
The underlying securities purchased under the agreements to resell (“reverse repos”) are not recognised on the balance sheet while the consideration paid is recorded as loans and advances to credit institutions as appropriate. The
counterparties enter into an irrevocable commitment to complete the operation on a date and a price fixed at the
outset. The difference between the sale and the repurchase price is treated as interest and recognised over the life of
the agreement (see Note 5).

2.10. INTANGIBLE ASSETS
Intangible assets are recorded on the balance sheet at their acquisition cost, less accumulated amortisation. Amortisation is calculated on a straight-line basis over the estimated life of each item purchased. Intangible assets comprise
computer software that are amortised within three years.

2.11. TANGIBLE ASSETS
Tangible assets are recorded on the balance sheet at their acquisition cost, less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated life of each item purchased, as set out below:


permanent equipment, fixtures and fittings: nine years or until the end of the building’s rent period;



furniture and office equipment: five years;



IT equipment: three years.

If works performed on leased properties are capitalised (as fixture and fittings) then the estimated life of those assets
should not exceed the duration of the lease agreement.

2.12. PREPAYMENTS AND ACCRUED INCOME
Prepayments and accrued income are related either to invoices received and paid in advance for expenses related
to subsequent reporting periods, or to any income related to the reporting period which will only be received in the
course of a subsequent financial year. It includes the spot revaluation, the spread amortisation and also the accrued
interest income of ongoing derivative transactions (see Note 2.6).

2.13. AMOUNTS OWED TO CREDIT INSTITUTIONS
Amounts owed to credit institutions are presented in the financial statements at their redemption amounts. Transaction costs and premiums/discounts are amortised in the profit and loss account through interest payable and similar
charges/income (see Note 2.18). Interest expense on amounts owed to credit institutions are also included in ’Interest payable and similar charges’ in the profit and loss account.
The underlying securities sold under the repurchase agreements (“repos”) are not derecognised on the balance sheet
while the consideration received is recorded as amounts owed to credit institutions as appropriate and carried at
the amounts of the cash received on the balance sheet. The counterparties enter into an irrevocable commitment to
complete the operation on a date and a price fixed at the outset. The difference between the sale and the repurchase
price is treated as interest and recognised over the life of the agreement (see Note 11).

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2.14. DEBTS EVIDENCED BY CERTIFICATES
Debts evidenced by certificates are presented at their amortised cost. Transaction costs and premiums/discounts
are amortised in the profit and loss account through ‘Interest payable and similar charges’. Interest expenses on debt
instruments are also included in ‘Interest payable and similar charges’ in the profit and loss account (see Note 2.18).

2.15. PROVISIONS
Provisions are intended to cover liabilities, the nature of which are clearly defined and which at the date of the balance
sheet are either likely to be incurred, or certain to be incurred but uncertain as to the amount or as to the date on which
they will arise.
Where there are similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

2.16. SUBSCRIBED CAPITAL
On 31 December 2021 and 31 December 2020, the ESM’s shareholders were the 19 euro area member states. In accordance with Article 8 of the ESM Treaty, the authorised capital is €704.8 billion, which is divided into 7,047,987 shares,
with a nominal value of €100,000 each. The authorised capital was subscribed by the shareholders according to the
contribution key provided in Article 11 and calculated in Annex I of the ESM Treaty. The authorised capital is divided
into paid-in shares and callable shares, where the total aggregate nominal value of paid-in shares is €80.5 billion.
In accordance with Article 4 of Directive 86/635/EEC as amended, the authorised capital stock is recognised in equity
as subscribed capital. The callable shares are presented as ‘Subscribed capital unpaid’ on the asset side of the balance sheet. Called capital not yet paid by the shareholders is recognised on the asset side of the balance sheet as
‘Subscribed capital called but not paid’.

2.17. ACCRUALS AND DEFERRED INCOME
Accruals and deferred income are related to payments received before the balance sheet date but not exclusively
related to the reporting period, together with any charges which, though relating to the financial year in question, will
only be paid in a subsequent financial year. It includes the spot revaluation, spread amortisation and also the accrued
interest expense of ongoing derivative transactions (see Note 2.6).

2.18. INTEREST RECEIVABLE AND PAYABLE
Interest income and expenses for all interest-bearing financial assets and financial liabilities are recognised on an
accrual basis within ‘Interest receivable and similar income’ and ’Interest payable and similar charges’ in the profit
and loss account.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss,
interest income is recognised using the rate of interest applied to discount the future cash flows for the purpose of
measuring the impairment loss.
On the balance sheet, accrued interest receivable is included in ‘Prepayments and accrued income’ under assets while
accrued interest payable is included in ‘Accruals and deferred income’ under liabilities.

2.19. EMPLOYEE BENEFITS
The ESM operates a pension plan with defined contribution characteristics funded through payments to an external
insurance company. This insurance scheme also covers the risk of death and disability.

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The pension plan is funded by contributions from the employer as well as from the employees. The plan is accounted
for as a defined contribution plan and corresponding payments are recognised as employee benefit expenses as they
fall due.

2.20. COMPENSATION PAYMENTS FROM ESM MEMBERS
Payments received from a Member State as compensation for expenses or losses (see Note 24) incurred in a previous period are recorded as ‘Extraordinary income’ in profit or loss of the period in which they become receivable. Such
compensation payments are made with a view to preserve the ESM’s capital and are granted on a case-by-case basis,
subject to conditions not controlled by the ESM. Therefore, a receivable is evidenced either through a notification of
the payment or the respective transfer of money.

2.21. TAXATION
Within the scope of its official activities, the ESM, its assets, income, property and its operations and transactions
shall be exempt from all direct taxes under Article 36 of the ESM Treaty. ESM Members have agreed to remit or refund
all indirect taxation, subject to certain exceptions under the same provision of the ESM Treaty.

3. Risk management
This section presents information about the approach of the ESM to risk management and risk controls and its risk
exposure, in relation to the primary risks associated with its use of financial instruments. These are:


credit risk;



market risk;



liquidity risk; and



operational risk.

3.1. RISK MANAGEMENT ORGANISATION
The ESM follows a prudent approach to risk-taking to limit potential losses and to ensure continuity in fulfilling its
mandate and meeting its commitments.
According to the ESM’s High Level Risk Policy (published on the ESM website) and its Annex, the targeted risk appetite
should preserve the ESM’s funding capacity, ensure the highest creditworthiness, and avoid unexpected capital calls.
The High-Level Risk Policy and its Annex describe the risk appetite and the framework for identifying, assessing, monitoring and managing risks consistent with the risk appetite. It covers all ESM financial and non-financial risks, and
both on- and, if applicable, off-balance sheet items. The risk profile is defined by a set of limits to maintain all types
of risks within the risk appetite. The ESM does not aim at generating profit on financial support granted to beneficiary
Member States and aims to manage its investment portfolios prudently, in accordance with the ESM Investment
Guidelines and ESM’s risk policies.
The ESM operates under the principles of the three lines of defence approach: departments and business functions
assume direct responsibility for day-to-day risk management. All staff are responsible for ensuring that risks relating
to their operations are identified, followed up, and reported to Risk Management. Risk Management exercises central
oversight of risk and ensures that all business functions, comprehensively and consistently, implement the risk management framework.
The Managing Director bears full accountability for the implementation and functioning of the risk management
framework, adequate reporting to the Board of Directors, and for further developing the High Level Risk Policy and
the Annex.

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The Chief Risk Officer (who is also the ESM’s Deputy Managing Director) reports directly to the Managing Director. The
Chief Risk Officer is responsible and accountable for informing the Managing Director on all risks which the institution
may face to ensure enforcement and oversight. The Managing Director reports risk-related information to the Board
of Directors, principally through the Board Risk Committee.
To support the implementation of the ESM’s risk policies, an Internal Risk Committee (IRC) has been created. The IRC
translates the risk appetite into an internal limit structure, which is described in the High Level Risk Policy approved
by the Board of Directors. The IRC assists the Managing Director in ensuring the adequacy of the ESM’s internal limit
structure and limit setting, providing recommendations on changes to the internal limit structure, on the identification
of relevant risks, and on the suitability of methods to monitor and manage them. On a periodical basis, the IRC conducts a risk self-assessment and reports the result to the Managing Director.
The ESM established an information security function within the Risk division to provide independent oversight and
monitoring of information technology operations and other ‘first line of defence’ divisions managing information
security. The aim is to strengthen the confidentiality, integrity, and availability of valuable or sensitive information and
enhance resilience to cyber security risks. The information security function establishes risk guidelines for the ESM’s
information security strategy and for the design of information security controls. The function also maintains the
ESM’s information security policy and conducts periodic reviews of user access to information.

Covid-19 pandemic impact and risk management response
In 2021, the euro area countries showed a strong rebound in economic development after the significant
drop in GDP they saw in 2020 in the context of the pandemic and the global recession. Robust national
and EU-level policy responses have helped to contain the consequences of the pandemic. Moreover,
progress in vaccinations and the opening of economic sectors helped economies to grow again. In addition, all euro area countries including the ESM beneficiary Member States (BMS), continued to maintain
favourable market access.
During 2021, the ESM risk assessment and impairment assessment methodology duly captured (via
its Early Warning System) the severe impact from the pandemic, together with the related risks and the
recent developments. In particular, the assessment focused on whether the effects of the pandemic
triggered a significant increase in credit risk and if it would materialise in an expected credit loss (ECL). In
that context, a complete assessment of a wide range of inputs based on forward-looking information was
performed, to ensure a comprehensive assessment of all short-term and medium-to-long term factors
and consequences. As described above, inputs include short-term economic data, vulnerability indicators, liquidity balances and market indicators, together with medium-to-long term risks, policy measures
and mitigating factors.
All those factors, and in particular the strong liquidity position and market access of BMS, have and are
expected to continue to adequately balance the economic shock caused by the pandemic and address
the related risks. The liquidity risk can be a major concern in a crisis context, therefore the positive funding
performance of BMS, including the vulnerable ones, represents a remarkable balancing element. Considering all these elements, as of 31 December 2021 the assessment did not identify a significant increase in
credit risk on the ESM’s exposures to BMS. The overall credit quality of the ESM loans portfolio remained
stable.
Risk Management also continued to closely monitor credit risk developments of ESM investment/funding
issuers and counterparties, and in particular those issuers and counterparties whose ratings were identified to be more at risk of facing downward rating pressures amid the Covid-19 pandemic. In stark contrast
to 2020, credit rating agencies took several positive credit rating actions on ESM investment/funding issuers and counterparties. The agencies thereby reversed some of the negative actions they took in 2020. In
particular, rating agencies’ views on financial institutions became more positive in 2021, due to improving
economic conditions and better than expected performance through the pandemic. Risk Management
reported on relevant credit risk developments, which were discussed in the Internal Risk Committee and
in the Board Risk Committee on a quarterly basis.

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Brexit and risk management response
The United Kingdom (UK) formally exited the European Union (EU) on 29 March 2019. Subsequently, the
European Commission reached on 24 December 2020 an agreement with the United Kingdom on the
terms of its future cooperation with the European Union: the EU-UK Trade and Cooperation Agreement.
Following the agreement reached between the EU and the UK, the ESM decided to again allow for investments in UK-based issuers, including sovereign bonds. As at 31 December 2021, the ESM does not have
any investment exposure to UK-based assets but only some GBP-denominated investments (hedged
back to euro) from highly rated issuers based outside the UK.
In terms of derivative exposure, the ESM materially reduced derivative trades to UK-based banks from the
period 2019 to 2021 by novating its exposure to EU-based banks. As of 31 December 2021, the ESM had
no derivative exposure to UK-based derivative counterparties.

3.2. CREDIT RISK
Credit risk is defined as the potential for loss arising from the inability of a counterparty, issuer, or other obligor to fulfil
its contractual obligations for full value when due as a result of a significant deterioration in creditworthiness. Counterparty risk includes potential for loss arising from default of a counterpart to derivatives contracts, which are used by
both investment and funding activities for risk management. Issuer risk is a particular form of credit risk and derives
from investment in securities of the paid-in capital, reserve fund and excess liquidity. Credit concentration risk is
defined as the potential for loss arising from undiversified, correlated exposure to a particular group of counterparties.
Given the nature of the ESM’s mandate, where credit risk from lending arises as a result of support to beneficiary
Member States under a financial assistance facility agreement (FFA), the credit risk in the ESM’s lending exposure
is accepted. The ESM has established an early warning procedure to ensure that it receives any repayments due by
a beneficiary Member State under a FFA in a timely manner. The Note 3.2.4 below further describes the ESM’s treatment of loans to euro area member states.

3.2.1.	EXPOSURE TO CREDIT RISK WITHOUT TAKING INTO ACCOUNT ANY COLLATERAL OR OTHER CREDIT
ENHANCEMENTS
The following table shows the direct exposure to credit risk for the components of the balance sheet. For on-balance-sheet positions, these exposures are based on net carrying amounts as reported on the balance sheet.
Exposure

Exposure

(in €‘000)

31.12.2021

31.12.2020

Cash in hand, balances with central banks and post office banks
Loans and advances to credit institutions
Debt securities including fixed-income securities

60,401,825
7,098,396
44,438,750

58,217,164
11,084,040
44,252,290

On balance sheet credit risk exposure
Exposure at default on derivatives (1)

111,938,971
1,651,622

113,553,494
1,309,518

Credit risk exposure

113,590,593

114,863,012

(1)

The cash-collateral is included in the calculation of the Exposure at Default and reported as exposure in the on-balance sheet items.

This table does not include the loans and advances to euro area member states as the ESM does not manage
the credit risk on beneficiary Member States, while it monitors its exposures through the Early Warning System, as
described in Note 3.2.4.

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3.2.2. RISK PROFILE OF COUNTERPARTIES AND ISSUERS
The following tables show the breakdown of the financial assets by credit rating. For ‘Debt securities including
fixed-income securities’, the credit ratings of individual issuances (or in the case of short-term securities, their longterm rating equivalents) are presented. If issuance ratings are unavailable, the issuer’s rating is presented. For other
financial assets, the credit ratings of the counterparties are presented.
These tables do not include the breakdown of the ‘Loans and advances to euro area member states’, as the ESM
risk function does not manage the inherent risk of non-payment of the beneficiary Member States, as described in
Note 3.2.4.

(in €’000)

Credit rating(1)

Clean carrying value
31.12.2021

Cash in hand, balances with central banks and post office banks

not rated(2)
AA

60,395,136
6,689

Loans and advances to credit institutions

not rated(3)
AA
AAA+
A
A-

949,799
1,107,053
403,299
2,811,275
344,590
1,482,380

AAA
AA+
AA
AAA+
A

25,688,225
3,635,186
7,480,937
1,485,344
1,028,412
5,120,646

Debt securities including fixed-income securities

Total

111,938,971

Based on the worst rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale used by Fitch.
(2)
“Not rated” means balances placed with Eurosystem central banks, which do not have ratings.
(3)
“Not rated” means balances placed with Eurex Clearing, which are not rated.
(1)

(in €’000)

Credit rating(1)

Clean carrying value
31.12.2020

Cash in hand, balances with central banks and post office banks

not rated(2)
AA

58,215,304
1,860

Loans and advances to credit institutions

not rated(3)
AA
AAA+
A-

980,547
808,773
2,461,920
4,449,170
2,383,630

AAA
AA+
AA
AAA+
A

24,862,836
3,173,727
8,382,359
1,488,911
1,205,264
5,139,193

Debt securities including fixed-income securities

Total

113,553,494

Based on the worst rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale used by Fitch.
(2)
“Not rated” means balances placed with Eurosystem central banks, which do not have ratings.
(3)
“Not rated” means balances placed with Eurex Clearing, which are not rated.
(1)

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3.2.3. CREDIT RISK ON DEBT SECURITIES INCLUDING FIXED-INCOME SECURITIES
The ESM invests in assets that fulfil the high credit risk standards set by the Investment Guidelines. To mitigate the
credit risk on its investments, the ESM has also established a detailed structure of credit limits. The ESM measures
credit exposures and monitors limits compliance daily.

3.2.4. CREDIT RISK IN RELATION TO LOANS TO EURO AREA MEMBER STATES
The ESM, as per its mandate, grants financial assistance to euro area member states experiencing severe financial
problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Members. The
assistance, therefore, aims at providing financial support according to rules that differ from those of financial markets, given that the overall aim is to support the beneficiary Member State’s return to public financial stability.
The determination and close monitoring of debt sustainability and conditionality attached to all financial assistance
to beneficiary Member States, as negotiated with the European Commission in liaison with the European Central Bank
(ECB) and whenever possible the IMF, are aimed at addressing and substantially reducing credit risk. It is the mutual
understanding of the ESM Members that ESM loans enjoy preferred creditor status that is similar to the IMF, while
accepting preferred creditor status of the IMF over the ESM. This does not apply to ESM loans for programmes that
existed when the ESM Treaty was signed. Moreover, for the financial assistance to Spain it was decided to not apply
the preferred creditor status. The ESM has implemented an early warning procedure as requested by the ESM Treaty
to monitor the ability of the beneficiary Member State to repay its obligations. Findings are summarised in a regular
report analysed by the Internal Risk Committee.
The ESM provided financial assistance to Spain for the recapitalisation of its financial sector, which must be repaid by
2027. The ESM also provided financial assistance to Cyprus, which implemented a macroeconomic adjustment programme. Furthermore, starting from August 2015, the ESM provided financial assistance to Greece. Note 6 provides
a breakdown of all disbursed amounts, as well as the movements during the year.
From an investor’s point of view, the ESM’s capital structure and the possibility of capital calls mitigate the risk
arising from beneficiary Member States’ non-payment and potential losses from other risks. Under Article 9 of the
ESM Treaty, there are different instances when a capital call can be made to cover losses or avert non-payment, as
described in Note 15. These mechanisms provide the strongest possible assurance that ESM debt securities will be
serviced and repaid.

3.3. MARKET RISK
Market risk is the risk of loss arising from changes in the value of financial assets and liabilities due to fluctuations
in interest rates, foreign currency exchange rates, and other factors affecting the price of securities / financial instruments (e.g. credit spreads and basis risk).

3.3.1. INTEREST RATE RISK
Interest rate risk is defined as the potential for loss arising from adverse movements in interest rates. The main
sources of interest rate risk include asset or liability re-pricing following market movements, yield curve shifts, and
changes in interest rate credit spread.
Interest rate risk on Lending and Funding is the risk of a mismatch between the interest rate re-pricing of loans
granted to beneficiary Member States and of its funding raised through bills and bond issuances. The exposure to
interest rate risk arises from differences in repricing and maturity characteristics of the different asset, liability, and
hedging instruments.
All funding costs are passed through to beneficiary Member States under financial assistance, as defined by the ESM
Pricing Policy.

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Interest rate risk on investments is the risk of market loss due to an adverse change in the overall level of interest
rates affecting the value of the investment portfolios’ holdings. This risk is monitored and controlled daily through
risk indicators and stress tests. Duration bands, cumulated and partial sensitivities, one day Value at Risk (VaR) with
a 99% level of confidence are part of the daily measures that frame the interest rate risk potential exposure. To complement these measures, a series of stress tests with flattening, steepening and parallel shifts of all or a selected
number of interest rate curves is daily processed as part of the risk report.
In addition, capital volatility and capital preservation measures frame and limit the Short-term and the Medium/Longterm tranches interest rate risk exposures in line with the Risk Appetite of the Institution as described and published
in the ESM Investment Guidelines.
Capital volatility is defined as a yearly limit to market losses over a one-year horizon for the Medium/Long-term
tranche. The one-year VaR 99% should be lower than 3% of the market value of the tranche.
Capital preservation is defined as protecting shareholders from losses on the paid-in capital, which currently stands
at €80.5 billion. The market value of the Short-term tranche (including the Reserve Fund) and the Medium/Long-term
tranche, together with the Hold-to-maturity tranche valued at amortised cost, shall not fall below this value over
a relevant investment horizon, for a high level of confidence. The relevant investment horizon is set in relation to the
nature of each portfolio:


For the Short-term tranche, the capital shall be preserved at a one-year horizon, for a high level of confidence,
to the extent possible considering prevailing market conditions.



For the Medium/Long-term tranche, the capital shall be preserved at a three-year horizon for a high level of
confidence, to the extent possible considering prevailing market conditions.

To assess capital preservation with a ‘high level of confidence’, a vast array of scenarios of interest rate movements
are used to analyse the market value evolution of the Short-term and the Medium/Long-term tranches investments
over the relevant investment horizons.
Scenario analyses are different to sensitivity analysis as they assess the impact of a range of different setups and
correlations over a multi-year period, while sensitivity analysis assesses the linear and instantaneous impact to
a given change in interest rates.
These scenarios, developed in cooperation with Investment and Treasury, are agreed at the Internal Risk Committee
(IRC) and endorsed by the Board Risk Committee (BRC).
Capital preservation scenario analysis results are reported at least once a year to IRC/BRC and for any major investment portfolio strategy proposal to the Investment Management Committee (IMC).
The preservation of the maximum lending capacity of the ESM requires the investment portfolios’ market value to
remain above €75.0 billion, with the Short-term, Medium/Long-term and Hold-to-maturity tranches valued in markto-market. However, the Hold-to-maturity tranche is considered as being interest rate insensitive in the other risk
measures as it is valued at amortised cost.
Derivatives contracted with commercial banks are fully collateralised, thanks to the exchange of cash and highly rated
securities, regulated by collateral agreements (ISDA and Credit Support Annex).
The interest rate risk on the ESM investment portfolios is managed prudently to support the ESM’s financial stability
mandate, which requires the ESM to maintain financial soundness including in periods of market stress.

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3.3.2. CURRENCY RISK
Currency risk is defined as the potential for loss arising from changes in exchange rates and shall be minimised by
limiting net currency exposure, in line with the risk appetite of the Institution.
The ESM is exposed to currency risk whenever there is a currency mismatch between its assets and liabilities. Potential sources of currency risk are paid-in capital investments in non-euro denominated assets and funding activities in
foreign currencies.
In 2021 and 2020, the ESM undertook investment activities in foreign currency assets, mainly Japanese yen and US
dollars. In compliance with the Article 2(5) of the ESM Investment Guidelines, currency risk is hedged into euro to
ensure a limited remaining foreign exchange risk for the ESM (see Note 3.6).
The ESM also conducts funding activities in US dollars. In 2017, the ESM decided to broaden its investor base and
spread its funding liquidity risk across the euro and dollar markets. On 31 October 2017, the ESM priced its inaugural
US dollar issue, raising $3.0 billion. On 23 October 2018, the ESM raised $3.0 billion by issuing a new 2-year bond, its
second deal in the dollar market, followed by a 5-year $2.0 billion bond issuance on the 11 September 2019. On 10
September 2020 and 9 September 2021, the ESM raised respectively $3.0 billion and $2.0 billion, and the ESM has
hedged the proceeds back into euros (see Note 3.6.1.2).
As is the case for derivatives used to manage interest rate risk, operations contracted with commercial banks are fully
collateralised, thanks to the exchange of cash and highly rated securities, regulated by collateral agreements (ISDA
and Credit Support Annex).
31 December 2021

(in €‘000)

ASSETS
Cash in hand, balances with central
banks and post office banks
Loans and advances to credit
institutions
Loans and advances to euro area
member states
Debt securities including fixedincome securities
Prepayments and accrued income
Total financial assets
LIABILITIES
Amounts owed to credit institutions

Euro (EUR)

Japanese
Yen (JPY)

US Dollar
(USD)

Swedish
Krone (SEK)

Other
currencies

Total

60,401,825

-

-

-

-

60,401,825

7,098,396

-

-

-

-

7,098,396

89,867,531

-

-

-

-

89,867,531

33,007,675

4,664,193

5,486,739

266,358

1,013,785

44,438,750

906,076

2,530

67,568

1,218

-

977,392

191,281,503

4,666,723

5,554,307

267,576

1,013,785

202,783,894

1,006,032

-

-

-

-

1,006,032

108,096,457

-

8,810,094

-

-

116,906,551

9,535

-

-

-

-

9,535

891,375

51,621

75,842

1,269

-

1,020,107

Total financial liabilities

110,003,399

51,621

8,885,936

1,269

-

118,942,225

Shareholders’ equity(1)

83,846,061

-

-

-

-

83,846,061

Total shareholders’ equity

83,846,061

-

-

-

-

83,846,061

Off-balance sheet derivatives

2,291,444

(4,614,458)

3,358,026

(268,285)

(1,014,508)

(247,781)

Net of financial position

(276,513)

644

26,397

(1,978)

(723)

(252,173)

Debt securities in issue
Other liabilities
Accruals and deferred income

(1)

Excluding subscribed capital unpaid.

31 December 2020
(in €‘000)
ASSETS
Cash in hand, balances with central
banks and post office banks
Loans and advances to credit
institutions
Loans and advances to euro area
member states
Debt securities including fixedincome securities
Prepayments and accrued income
Total financial assets
LIABILITIES
Amounts owed to credit institutions

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Euro (EUR)

Japanese
Yen (JPY)

US Dollar
(USD)

Swedish
Krone (SEK)

Other
currencies

Total

58,217,164

-

-

-

-

58,217,164

11,084,040

-

-

-

-

11,084,040

89,894,688

-

-

-

-

89,894,688

34,952,927

4,895,465

3,488,002

287,095

628,801

44,252,290

858,363

3,376

36,155

1,050

-

898,944

195,007,182

4,898,841

3,524,157

288,145

628,801

204,347,126

983,059

-

-

-

-

983,059

111,013,922

-

6,497,423

-

-

117,511,345

11,565

-

-

-

-

11,565

1,207,880

74,879

68,558

2,129

-

1,353,476

Total financial liabilities

113,216,426

74,879

6,566,011

2,129

-

119,859,445

Shareholders’ equity(1)

84,493,139

-

-

-

-

84,493,139

Total shareholders’ equity

84,493,139

-

-

-

-

84,493,139

Off-balance sheet derivatives

2,268,435

(4,819,614)

3,193,138

(284,026)

(592,217)

(234,284)

Net of financial position

(433,948)

4,348

151,284

1,990

36,584

(239,742)

Debt securities in issue
Other liabilities
Accruals and deferred income

(1)

Excluding subscribed capital unpaid.

3.4. LIQUIDITY RISK
The ESM will honour its obligations under its issued debt securities from proceeds that stem from its support programmes, supported by its subscribed capital. The ESM monitors its liquidity position daily by assessing its funding
liquidity risk and market liquidity risk.
Funding liquidity risk is defined as the risk of loss arising from difficulty in securing the necessary funding, or from
a significantly higher cost of funding than normal levels, due to a deterioration of the ESM’s creditworthiness, or at
a time of unfavourable market conditions (such as periods of market stress). Funding liquidity risk is managed by
maintaining permanent market access to a wide investor base with different funding instruments, multiple credit lines
and maintaining an adequate liquidity buffer. The market presence in the USD market, which started in 2017, reduces
further the funding liquidity risk as it gives access to additional investors in a different market. At the end of December 2021, the ESM’s liquidity buffer stood at €21.1 billion (2020: €18.3 billion).
Market liquidity risk is defined as the potential for loss arising from a position that cannot easily be liquidated without
significantly and negatively influencing its market price. Market liquidity risk is minimised by investing in high credit
quality liquid assets, ensuring the ESM does not hold a significant portion of a security issuance and adopting adequate measurements that allow the timely detection of liquidity deteriorations.
Despite the general context of uncertainty in the global financial markets due to the Covid-19 pandemic, the ESM
continued to maintain a robust liquidity position and diversified access to the necessary liquidity sources, also thanks
to its prudent approach to liquidity management.
The tables below analyse the ESM’s financial assets and liabilities and the shareholders’ equity by maturity based on
the period remaining between the balance sheet date and the contractual maturity date.

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31 December 2021
(in €‘000)

M E C H A N I S M

Less than 3 From 3 months
months
to 1 year

ASSETS
Cash in hand, balances with central
banks and post office banks
Loans and advances to credit
institutions
Loans and advances to euro area
member states
Debt securities including fixed-income
securities
Prepayments and accrued income
Total financial assets

From 1 to 5
years

More than 5
years

Total

60,401,825

-

-

-

60,401,825

7,098,396

-

-

-

7,098,396

-

-

2,215,000

87,652,531

89,867,531

61,820

2,365,985

13,368,076

28,642,869

44,438,750

490,759

485,600

118

542

977,019

68,052,800

2,851,585

15,583,194

116,295,942

202,783,521

LIABILITIES
Amounts owed to credit institutions

1,006,032

-

-

-

1,006,032

Debt securities in issue

16,790,867

19,482,261

41,302,182

39,331,241

116,906,551

9,535

-

-

-

9,535

258,498

427,426

52,290

281,520

1,019,734

18,064,932

19,909,687

41,354,472

39,612,761

118,941,852

-

-

-

83,846,061

83,846,061

-

-

-

83,846,061

83,846,061

49,987,868

(17,058,102)

(25,771,278)

(7,162,880)

(4,392)

Other liabilities
Accruals and deferred income
Total financial liabilities
Shareholders’ equity(1)
Total shareholders’ equity

(2)

Net of financial position
(1)
(2)

Excluding subscribed capital unpaid.
Shareholder equity has no defined maturity.

2 0 2 1

31 December 2020
(in €‘000)

Less than 3 From 3 months
months
to 1 year

ASSETS
Cash in hand, balances with central
banks and post office banks
Loans and advances to credit
institutions
Loans and advances to euro area
member states
Debt securities including fixed-income
securities
Prepayments and accrued income
Total financial assets

A N N U A L

R E P O RT

|

85

From 1 to 5
years

More than 5
years

Total

58,217,164

-

-

-

58,217,164

11,084,040

-

-

-

11,084,040

-

-

2,215,000

87,679,688

89,894,688

301,335

1,456,158

20,757,537

21,737,260

44,252,290

370,811

527,927

-

206

898,944

69,973,350

1,984,085

22,972,537

109,417,154

204,347,126

LIABILITIES
Amounts owed to credit institutions

983,059

-

-

-

983,059

17,496,679

15,521,121

41,607,472

42,886,073

117,511,345

Other liabilities

11,565

-

-

-

11,565

Accruals and deferred income

340,845

418,427

92,983

501,221

1,353,476

18,832,148

15,939,548

41,700,455

43,387,294

119,859,445

-

-

-

84,493,139

84,493,139

-

-

-

84,493,139

84,493,139

51,141,202

(13,955,463)

(18,727,918)

(18,463,279)

(5,458)

Debt securities in issue

Total financial liabilities
Shareholders’ equity(1)
Total shareholders’ equity

(2)

Net of financial position
Excluding subscribed capital unpaid.
(2)
Shareholder equity has no defined maturity.
(1)

3.5. OPERATIONAL RISK
Operational risk is defined as the potential loss or damage, and/or the inability of the ESM to fulfil its mandate, resulting from inadequate or failed internal processes, people, and systems or from external events. The categorisation of
the ESM operational risks is based on guidance from the Basel Committee on Banking Supervision, as follows:


execution, delivery, and process management;



legal and conduct;



regulatory compliance;



third party;



fraud;



business continuity and technology;



information security (including Cyber);



data management;



people; and



damage to physical assets.

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Management has no tolerance for material operational risks, including those originating from third party/vendor
engagements, which may result in the ESM’s inability to effectively fulfil its mandate, or in significant loss and/or
reputational damage. No material operational risk losses were identified in 2021 and in 2020.
All departments are responsible for the proactive mitigation of operational risks, and for the robustness of the controls in their processes. If operational risk events occur, they are reported to Risk Management through an internal
operational risk register. Formal escalation procedures have been established involving the Internal Risk Committee
and the Board Risk Committee to ensure the active involvement of senior management and, where necessary, the
Board of Directors.
All departments, with support from the Operational Risk function, perform a root-cause analysis of operational risk
events and implement improvements, as necessary, in the underlying processes and controls to reduce the probability of reoccurrence. This approach is complemented by annual risk control self-assessments for each department,
and bi-annual business continuity risk assessment, to identify and assess the ESM’s top operational risks (based on
potential likelihood and impact). Risk Management monitors these risks and reports on them to the Internal Risk
Committee and to the Board Risk Committee.
The ESM was working in a full telework set-up since the beginning of the Covid-19 pandemic and had operated
smoothly thanks to the Business Continuity framework. During 2021, the ESM has adopted a hybrid work set-up,
where employees are allowed to work partly from the office and partly from home. No operational risk events had
a direct link to this hybrid work set-up during 2021.

3.6. DERIVATIVES
The ESM uses derivative instruments as described in Note 2.6 for risk management purposes and this as part of its
investment and funding activities. In 2015, the ESM entered into foreign exchange derivative transactions such as
foreign exchange swaps and forward contracts to hedge the currency risk related to short-term non-euro denominated investments. Since 2017, the ESM has also entered into interest rate swaps to manage globally the investment
portfolio’s interest rate exposure and to decrease the interest rate volatility on Greece’s debt repayments. Longer-term
cross-currency asset swaps were contracted as well to hedge longer-term non-euro denominated investments and to
hedge in euro the issuances in USD. In 2019, the ESM also started to use bond futures and in 2020 short-term interest
rate futures to manage the interest rate risk of the paid-in capital portfolio.
On 31 December 2021, the derivative instruments had a maximum maturity up to 30 years (2020: maximum maturity
up to 30 years) and were concluded with international financial institutions and commercial banks.

3.6.1. FUNDING-RELATED DERIVATIVES
The derivatives used in the context of funding are:


Interest rate swaps;



Cross-currency asset swaps;



Foreign exchange (FX) swaps.

3.6.1.1. INTEREST RATE SWAPS
Interest rate swaps exchange future interest payments, usually a fixed interest rate for a floating rate, or vice versa, to
reduce or increase exposure to fluctuations in interest rates based on a specified notional amount.
On 20 January 2017, the ESM Board of Directors approved three schemes aimed at reducing interest rate risk for
Greece. Amongst others, it allowed the ESM to enter into interest rate swaps arrangements that aimed to stabilise the
ESM’s overall cost of funding for Greece, i.e. to reduce the risk that Greece would have to pay a higher interest rate on
its loans in case market rates start rising.

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The following table shows the interest rate swaps according to their notional amount and fair value. The notional
amounts are disclosed off balance sheet.
Interest rate swaps
(in €’000)
Notional amount
Positive fair value
Negative fair value

31.12.2021
58,710,000
735,724
(7,261,579)

31.12.2020
57,790,000
1,435,610
(11,823,214)

3.6.1.2. CROSS-CURRENCY ASSET SWAPS
Cross-currency asset swaps are derivative contracts under which two counterparties agree to exchange interest
payments (fixed-fixed, fixed-float and float-float) and principal denominated in two different currencies. In a cross-currency asset swap, interest payments and principal in one currency are exchanged for equally valued principal and interest payments in a different currency. Interest payments are exchanged at fixed intervals during the life of the contract.
Starting in 2017, the ESM broadened its investor base and spread its funding liquidity risk across the euro and dollar
markets (see Note 3.3.2). The ESM hedges the currency risk of these transactions in US dollars using cross-currency
asset swaps contracts.
The following table shows the cross-currency swaps according to their notional amount and fair value. The notional
amounts are disclosed off balance sheet.

Cross-currency assets swaps

(in €’000)

Notional amount
Positive fair value
Negative fair value

31.12.2021
8,829,242
232,434
(17,432)

31.12.2020
6,519,436
(239,636)

3.6.1.3. FOREIGN EXCHANGE (FX) SWAPS
In a foreign exchange swap, two parties agree to exchange the principal amounts of two different currencies at the
beginning of the transaction and the amounts to exchange at maturity.
Starting from 2020, the ESM entered into FX swaps with short-term maturities to hedge the cash in USD temporarily
held at the BIS in order to cover the potential risk of not being able to repay the USD to the bond investors on time at
maturity of the bond issuances in USD.
There were no FX swaps positions as at 31 December 2021 and as at 31 December 2020.

3.6.2. INVESTMENT-RELATED DERIVATIVES
The derivatives used in the context of investment activity are:


Interest rate swaps;



Cross-currency asset swaps;



Bond and interest rate futures contracts.

3.6.2.1. INTEREST RATE SWAPS
Interest rate swaps exchange future interest payments, usually a fixed interest rate for a floating rate, or vice versa, to
reduce or increase exposure to fluctuations in interest rates based on a specified notional amount.

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Starting in 2017, the ESM has used interest rate swaps to manage the interest rate risk of the paid-in capital portfolio.
The following table shows the interest rate swaps according to their notional amount and fair value. The notional
amounts are disclosed off balance sheet.
Interest rate swaps
(in €’000)
Notional amount
Positive fair value
Negative fair value

31.12.2021
12,855,500
99,444
(156,674)

31.12.2020
9,965,500
56,486
(349,018)

3.6.2.2. CROSS-CURRENCY ASSET SWAPS
Cross-currency asset swaps are derivatives contracts under which two counterparties agree to exchange interest
payments (fixed-fixed, fixed-float and float-float) and principal denominated in two different currencies. In a cross-currency asset swap, interest payments and principal in one currency are exchanged for equally valued principal and interest payments in a different currency. Interest payments are exchanged at fixed intervals during the life of the contract.
Starting in 2017, the ESM has invested in non-euro denominated securities with longer maturities (above 2 years),
using cross-currency swaps to hedge their cash flows in euro.
The following table shows the cross currency-asset swaps according to their notional amount and fair value. The
notional amounts are disclosed off balance sheet.
Cross-currency asset swaps
(in €’000)
Notional amount
Positive fair value
Negative fair value

31.12.2021
11,237,408
100,380
(302,425)

31.12.2020
9,162,983
164,944
(224,036)

3.6.2.3. FUTURES CONTRACTS
The ESM also uses futures contracts to manage portfolio interest rate risk by either buying or selling futures contracts.
The following tables show the bond and short-term interest futures contracts according to their notional amount.
The notional amounts are disclosed off balance sheet. The fair value of futures contracts is zero at year-end, as the
contracts are settled on a daily basis.
Bond futures contracts
(in €’000)
Notional amount
Interest rate futures contracts

(in €’000)

Notional amount

31.12.2021
556,500

31.12.2020
-

31.12.2021
200,000

31.12.2020
-

3.6.3. CREDIT RISK ON DERIVATIVES
Credit risk exposure for derivatives arises from the potential loss that the ESM would incur if a counterparty were
unable to honour its contractual obligations. There are three main forms of credit risk related to derivatives. First, for
cross-currency asset swaps and FX swaps, the exchange of notional principal at the beginning and maturity of a trade
can lead to settlement risk. Second, the default of a derivative counterparty over the life of the derivative can lead to
a loss, if changes in the mark-to-market (MtM) value of the position are not fully collateralised at the time of default.

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Third, when using derivatives, the ESM is exposed to replacement risk. This is the loss the ESM would face if it had to
replace a trade from a defaulted counterparty with a new counterparty.
With regard to derivative transactions, the ESM has contracted FX and interest rate derivatives since 2015. Operations
contracted with commercial banks are fully collateralised, thanks to the exchange of cash and highly rated securities.
The exposure after collateral posting is then limited to the intraday market movements and their impact on the market
value of the exposure and on the posted collateral value.
The ESM has put in place a series of procedures to safeguard against losses arising from the use of such instruments.


Contractual framework

All of the ESM’s derivatives transactions are governed by best practice International Swaps and Derivatives Association (ISDA) agreements. In addition, for all commercial counterparties, the ESM has put in place Credit Support
Annexes (CSAs) for over-the-counter transactions, which specify the conditions of exposure collateralisation on
a daily basis.


Counterparty selection

The minimum rating of a counterparty at the outset of a trade is BBB+/Baa1. The ESM has the right of early termination if the rating of the counterparty drops below a certain level. The ESM sets derivative limits per counterparty,
based on forecasted exposure at default. The ESM approach is aligned with the Basel Committee’s recommended
standardised approach for measuring counterparty credit risk exposures to quantify exposure at default per counterparty. The methodology also considers potential losses that could occur in between the default and the replacement
of the cancelled trade.


Collateralisation

Exposures towards commercial banks (exceeding limited thresholds) are fully collateralised by cash and/or securities. On a daily basis, the ESM monitors and values its derivative positions, and calls or releases collateral, as applicable. Below a certain counterparty credit rating, the ESM receives an additional independent amount from counterparties, in line with recommendations of the Basel Committee.


Settlement limits

The ESM limits settlement risk for bilateral FX swaps and cross-currency asset swaps through settlement limits
for counterparties, based on these counterparties’ creditworthiness. Settlement risk is measured and monitored on
a daily basis.
In the context of the United Kingdom leaving the EU, the ESM has reviewed any exposures that it has towards counterparties based in the United Kingdom and has taken pre-emptive measures, as applicable, to mitigate the impact
on the ESM’s business operations.

4. Cash in hand, balances with central banks and post office banks
The composition of cash in hand, balances with central banks and post office banks is as follows:
(in €’000)
Current account balances with euro area central banks(1)
Current account balances with other banks(2)

31.12.2021
60,395,136
6,689

31.12.2020
58,215,304
1,860

Total cash in hand, balances with central banks and post office banks

60,401,825

58,217,164

During the financial year, the ESM held balances with national central banks from France (Banque de France), Germany (Deutsche Bundesbank), Italy (Banca
d’Italia) and the Netherlands (De Nederlandsche Bank), as well as with the European Central Bank.
(2)
The ESM holds current accounts for operational purposes with a state-owned bank as well as clearing accounts with custodians. No current account is held
with post office banks.
(1)

The cash balance with euro area central banks is comprised of paid-in capital, the reserve fund and the liquidity buffer
investment.

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M E C H A N I S M

5. Loans and advances to credit institutions
The following table shows the breakdown of the other loans and advances to credit institutions:
(in €’000)
Cash collateral provided
Reverse repos
Other deposits

31.12.2021
6,146,994
949,799
1,603

31.12.2020
10,101,890
980,547
1,603

Total loans and advances to credit institutions

7,098,396

11,084,040

Other deposits consist entirely of the lease guarantee deposit in relation to the ESM rental agreement. The cash collateral provided relates entirely to derivatives transactions. The reverse repurchase agreements (’reverse repos’) are
centrally cleared transactions on regulated markets.

6. Loans and advances to euro area member states
In accordance with Article 9 of the ESM Treaty, the Board of Governors may decide to grant financial assistance in the
form of a loan to an ESM Member (see Note 26).
The following table shows the geographical breakdown of loans per financial assistance programme and by borrowing country:

(in €’000)
Loans to euro area member states
- to Spain
- to Cyprus
- to Greece
Total

(in €’000)
Loans to euro area member states
- to Spain
- to Cyprus
- to Greece
Total

No. of
loans

Nominal amount

Clean carrying value as at
31 December 2021

5
9
11

23,721,460
6,300,000
59,846,071

23,721,460
6,300,000
59,846,071

25

89,867,531

89,867,531

No. of
loans

Nominal amount

Clean carrying value as at
31 December 2020

5
9
11

23,721,460
6,300,000
59,873,228

23,721,460
6,300,000
59,873,228

25

89,894,688

89,894,688

The following table shows the movements of the loans to euro area member states during 2020 and 2021:
(in €’000)
1 January 2020 balance
New disbursements
Early repayments

89,894,688
-

31 December 2020 balance

89,894,688

(in €’000)
1 January 2021 balance
New disbursements
Early repayments
- from Greece

89,894,688
(27,157)
(27,157)

31 December 2021 balance

89,867,531

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Following the unfolding of Covid-19, the ESM has performed a qualitative assessment of the pandemic’s effect on its
loan book. In this context, a vulnerability assessment, including a wide range of inputs, has been performed at country
level, evaluating the sensitivity of relevant exposures to the Covid-19 crisis. Such assessment returned the outcome
that, as of 31 December 2021, the overall credit quality of the ESM loans portfolio remained satisfactory.

7. Debt securities including fixed-income securities
The following table shows the details of the paid-in-capital portfolio debt securities valuation:
31.12.2021 (in €’000)
Short-term, Medium/ Long-term
tranche
Hold-to-maturity tranche
Total debt securities including fixed
income securities
31.12.2020 (in €’000)
Short-term, Medium/ Long-term
tranche
Hold-to-maturity tranche
Total debt securities including fixed
income securities

Amortised cost

Unrealised gains

Carrying amount

Nominal amount

34,580,515

(44,749)

34,535,766

34,373,801

9,902,984

-

9,902,984

9,598,630

44,483,499

(44,749)

44,438,750

43,972,431

Amortised cost

Unrealised gains

Carrying amount

Nominal amount

37,549,098

913,359

38,462,457

37,202,598

5,789,833

-

5,789,833

5,479,267

43,338,931

913,359

44,252,290

42,681,865

On 31 December 2021, the amortised cost of the debt securities invested in the Short-term tranche and in the
Medium/ Long-term tranche was €34.6 billion (31 December 2020: €37.5 billion), against a carrying amount at fair
value of €34.5 billion (31 December 2020: €38.5 billion). The difference represents the unrealised result and is recognised directly in the equity within the fair value reserve.
The debt securities invested in the Hold-to-maturity tranche are initially recognised at cost and measured subsequently at amortised cost (see Note 2.8.1), less impairment where needed.
On 31 December 2021, the total carrying amount of the debt securities in the paid-in capital portfolios was €44.4
billion (31 December 2020: €44.3 billion).
In respect of the paid-in capital portfolio invested in debt securities, the ESM has an established investment policy
setting strict eligibility criteria that restrict investment to issuers with the highest credit quality. The ESM’s risk management defines a limit structure to mitigate the maximum exposure per issuer.
On 31 December 2021, the debt securities including fixed income securities also included investments in money
market securities that were not listed on regulated markets with a total carrying value of €149.5 million (31 December
2020: €156.9 million). Their fair values were determined using valuation techniques, as disclosed in Note 2.8.3. All
other securities were listed on regulated markets and the fair values of these assets are based on quoted market
prices.
The ESM invests in debt securities issued by public bodies and other issuers. Public bodies include central banks, central governments, regional governments, local governments, supranational institutions and governmental agencies. On
31 December 2021, debt securities issued by public bodies amounted to €21.7 billion (31 December 2020: €22.3 billion), while debt securities issued by other borrowers amounted to €22.7 billion (31 December 2020: €22.0 billion).
Starting from 2015, the ESM has invested part of the paid-in capital portfolio in short-term assets denominated in
a foreign currency (see Note 3.3.2). Starting in 2017, the ESM has invested in non-euro denominated securities with
longer maturities.

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M E C H A N I S M

As of 1 January 2021, the ESM has changed the accounting policy for the calculation of the costs of debt securities
sold from FIFO (first-in-first-out) to AVCO (average cost). This change led to a one-off charge of €3.6 million for the
period, which is included in the net profit on financial operations (see Note 21).
The following table presents the details of the paid-in capital portfolio debt securities if the FIFO valuation method
would have been consistently applied in 2021 instead of a switch to AVCO.
31.12.2021
(in €’000)
Short-term, medium-term and longterm tranche
Hold-to-maturity tranche
Total debt securities including fixed
income securities

Amortised cost

Unrealised gains

Carrying amount

Nominal amount

34,581,052

(45,286)

34,535,766

34,373,801

9,902,984

-

9,902,984

9,598,630

44,484,036

(45,286)

44,438,750

43,972,431

8. Intangible assets
The following table shows the movements of intangible assets during 2021:
(in €’000)

Software

Total intangible assets

Historical cost
1 January 2021 balance

202

202

Additions

33

33

31 December 2021 balance

235

235

Accumulated amortisation
1 January 2021 balance

(195)

(195)

Amortisation

(17)

(17)

31 December 2021 balance

(212)

(212)

31 December 2021 balance

23

23

31 December 2020 balance

7

7

Net book value

9. Tangible assets
The following table shows the movements of tangible assets during 2021:
(in €’000)
Historical cost
1 January 2021 balance

Fixtures and fittings

Furniture and office equipment

Total tangible assets

10,902

3,004

13,906

69

597

666

31 December 2021 balance

10,971

3,601

14,572

Accumulated depreciation
1 January 2021 balance

(6,054)

(2,401)

(8,455)

Depreciation

(1,408)

(340)

(1,748)

31 December 2021 balance

(7,462)

(2,741)

(10,203)

31 December 2021 balance

3,509

860

4,369

31 December 2020 balance

4,848

603

5,451

Additions

Net book value

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10. Prepayments and accrued income
The following table shows the breakdown of prepayments and accrued income. The receivables are due within a year:
(in €’000)
Interest receivable on:
- Debt securities including fixed-income securities
- Loans and advances to euro area member states
- Loans and advances to credit institutions

31.12.2021

31.12.2020

91,697
346,496
404

104,390
388,049
328

Amounts charged to the EFSF for administrative services (Notes 20/26)
Commitment fee receivable
Prepayments
Prepayments and accrued income on derivatives(1)

8,311
1,854
528,630

9,540
6,590
884
389,163

Total prepayments and accrued income

977,392

898,944

“Prepayments and accrued income on derivatives” represent the spot revaluation, spread amortisation and accrued income of ongoing derivative transactions
(see Note 2.12).
(1)

11. Amounts owed to credit institutions
On 31 December 2021, the €1,006.0 million (31 December 2020: €983.1 million) of amounts owed to credit institutions were composed of cash collateral received for the derivatives €55.8 million (31 December 2020: €2.1 million)
and repurchase agreements (“repo”) €950.2 million (31 December 2020: €980.9 million).

12. Debts evidenced by certificates
The following table discloses the details of debt securities in issue outstanding on 31 December 2021, together with
the coupon rates and due dates.
Type of funding
programmes
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding

ISIN code
EU000A1U9803
EU000A1U9803(²)
EU000A1U9894
EU000A1U9894(²)
EU000A1U9902
EU000A1U9928
EU000A1U9928(²)
EU000A1U9936
EU000A1U9936(²)
EU000A1U9936(²)
EU000A1U9944
EU000A1U9944(²)
EU000A1U9951
EU000A1U9951(²)
EU000A1U9951(²)
EU000A1U9969
EU000A1U9969(²)
EU000A1U9977
EU000A1U9985(¹)
EU000A1U9985(²)
EU000A1U9985(²)
EU000A1Z99A1
EU000A1Z99A1(²)
EU000A1Z99B9
EU000A1Z99B9(²)

Nominal amount
(in €’000)
3,000,000
990,750
3,000,000
999,850
3,000,000
1,500,000
1,000,000
1,000,000
1,000,000
750,000
3,000,000
2,500,000
3,000,000
961,100
989,750
3,000,000
1,000,000
2,500,000
3,000,000
996,500
998,550
3,500,000
1,500,000
3,000,000
1,500,000

Issue date
20/11/2013
27/06/2014
23/09/2015
29/09/2016
20/10/2015
17/11/2015
31/03/2016
01/12/2015
01/03/2016
05/09/2018
02/03/2016
19/07/2016
22/04/2016
28/07/2016
11/11/2016
03/05/2016
18/10/2016
19/07/2016
18/10/2016
16/11/2017
23/02/2018
01/02/2017
14/06/2017
14/03/2017
19/06/2018

Maturity date
20/11/2023
20/11/2023
23/09/2025
23/09/2025
20/10/2045
17/11/2036
17/11/2036
01/12/2055
01/12/2055
01/12/2055
02/03/2026
02/03/2026
22/04/2024
22/04/2024
22/04/2024
03/05/2032
03/05/2032
18/07/2042
18/10/2022
18/10/2022
18/10/2022
02/11/2046
02/11/2046
15/03/2027
15/03/2027

Coupon
2.125%
2.125%
1.000%
1.000%
1.750%
1.625%
1.625%
1.850%
1.850%
1.850%
0.500%
0.500%
0.125%
0.125%
0.125%
1.125%
1.125%
0.875%
N/A
N/A
N/A
1.800%
1.800%
0.750%
0.750%

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Type of funding
programmes
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Short-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding

S TA B I L I T Y

M E C H A N I S M

ISIN code
EU000A1Z99D5
EU000A1Z99E3
EU000A1Z99F0
EU000A1Z99F0(²)
EU000A1Z99G8
EU000A1Z99G8(²)
EU000A1Z99H6
EU000A1Z99H6(²)
EU000A1Z99J2(¹)
EU000A1Z99K0
EU000A1Z99L8
EU000A1Z99M6
EU000A1Z99M6(²)
EU000A1Z99N4
EU000A1Z99P9
XS1704649158(⁴)
XS2051117195(⁴)
XS2226989015(⁴)
XS2384361684(⁴)
ESMNBOND0001(³)
ESMNBOND0002(³)
ESMNBOND0003(³)
ESMNBOND0004(³)
ESMNBOND0005(³)
ESMNBOND0006(³)
ESMNBOND0007(³)
ESMNBOND0008(³)
ESMNBOND0009(³)
ESMNBOND0010(³)
ESMNBOND0011(³)
ESMNBOND0012(³)
ESMNBOND0013(³)
ESMNBOND0014(³)
ESMNBOND0015(³)
ESMNBOND0016(³)
ESMNBOND0017(³)
ESMNBOND0018(³)
ESMNBOND0019(³)
ESMNBOND0020(³)
ESMNBOND0021(³)
EU000A2SB992(¹)
EU000A3JZP37(¹)
EU000A3JZP60(¹)
EU000A3JZP94(¹)
EU000A3JZQC6(¹)
EU000A3JZQF9(¹)
EU000A3JZQJ1(¹)
EU000A3JZQK9(¹)
EU000A3JZQM5(¹)
EU000A3JZQN3(¹)
EU000A3JZQQ6(¹)
EU000A3JZQR4(¹)
EU000A3JZQS2(¹)
EU000A3JZQT0(¹)
EU000A3JZQU8(¹)
EU000A3JZQV6(¹)
EU000A3JZQW4(¹)

Nominal amount
(in €’000)
2,000,000
4,000,000
3,250,000
1,500,000
1,500,000
3,000,000
2,000,000
1,000,000
3,500,000
3,000,000
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
2,648,773
1,765,848
2,648,773
1,765,848
80,000
30,000
25,000
25,000
25,000
30,000
40,000
150,000
50,000
50,000
50,000
50,000
40,000
25,000
110,000
40,000
100,000
60,000
25,000
50,000
50,000
1,099,360
1,091,000
1,099,900
1,100,000
1,099,620
1,100,000
1,099,330
1,492,100
1,099,850
1,499,450
1,099,960
1,500,000
1,499,740
1,098,400
1,499,250
1,499,580
1,099,560

Issue date
23/05/2018
31/07/2018
05/09/2018
05/09/2018
14/05/2019
16/10/2018
05/03/2019
14/05/2019
29/10/2019
17/02/2020
04/03/2020
26/10/2020
11/10/2021
15/03/2021
04/05/2021
31/10/2017
11/09/2019
10/09/2020
09/09/2021
22/01/2016
10/02/2016
09/03/2016
09/03/2016
31/03/2016
11/04/2016
03/08/2016
09/08/2016
19/08/2016
19/08/2016
19/09/2016
19/10/2016
19/10/2016
27/10/2016
14/03/2017
31/03/2017
21/04/2017
27/11/2017
11/12/2017
12/12/2017
19/12/2017
14/01/2021
11/02/2021
11/03/2021
15/04/2021
13/05/2021
10/06/2021
15/07/2021
22/07/2021
12/08/2021
19/08/2021
16/09/2021
23/09/2021
07/10/2021
14/10/2021
21/10/2021
04/11/2021
11/11/2021

Maturity date
23/05/2033
31/07/2023
05/09/2028
05/09/2028
17/01/2022
17/01/2022
05/03/2029
05/03/2029
14/03/2025
10/02/2023
04/03/2030
16/12/2024
16/12/2024
15/12/2026
15/10/2031
03/11/2022
11/09/2024
10/09/2025
08/09/2023
22/01/2041
11/02/2041
09/03/2056
09/03/2056
22/03/2046
11/04/2046
03/08/2056
09/08/2056
19/08/2053
18/08/2056
19/09/2051
19/10/2054
19/10/2056
27/10/2056
14/03/2047
30/03/2057
21/04/2047
27/11/2057
11/12/2057
12/12/2057
19/12/2057
13/01/2022
10/02/2022
10/03/2022
14/04/2022
12/05/2022
16/06/2022
14/07/2022
20/01/2022
11/08/2022
17/02/2022
15/09/2022
17/03/2022
06/01/2022
13/10/2022
21/04/2022
03/02/2022
10/11/2022

Coupon
1.200%
0.100%
0.750%
0.750%
N/A
N/A
0.500%
0.500%
N/A
N/A
0.010%
N/A
N/A
N/A
0.010%
2.125%
1.375%
0.375%
0.250%
1.572%
1.360%
1.559%
1.559%
1.316%
1.220%
1.156%
1.150%
1.025%
1.064%
1.030%
1.145%
1.125%
1.086%
1.800%
1.850%
1.573%
1.591%
1.530%
1.505%
1.442%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

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Continued from the previous page
Type of funding
programmes
Short-term Funding
Short-term Funding

ISIN code
EU000A3JZQX2(¹)
EU000A3JZQY0(¹)

Total(5)

Nominal amount
(in €’000)
1,499,920
1,500,000

Issue date
18/11/2021
09/12/2021

Maturity date
19/05/2022
03/03/2022

Coupon
N/A
N/A

116,447,762

Zero-coupon bond.
(2)
Tap issue.
(3)
N-bond with technical ISIN: the ESM issued its first N-bond (Namensschuldverschreibung) in 2016. N-Bonds are privately placed, long-term funding
instruments that are neither centrally cleared nor listed.
(4)
USD denominated debt securities issued starting from 2017.
(5)
The difference with the total amount in the balance sheet comes from the premium and discount amortisations. The debts evidenced by certificates are
presented at their amortised cost in balance sheet (see Note 2.14).
(1)

The following table discloses the details of debt securities in issue outstanding on 31 December 2020, together with
the coupon rates and due dates.
Type of funding
programmes
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Short-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding

ISIN code
EU000A1U9803
EU000A1U9803(²)
EU000A1U9811
EU000A1U9894
EU000A1U9894(²)
EU000A1U9902
EU000A1U9928
EU000A1U9928(²)
EU000A1U9936
EU000A1U9936(²)
EU000A1U9936(²)
EU000A1U9944
EU000A1U9944(²)
EU000A1U9951
EU000A1U9951(²)
EU000A1U9951(²)
EU000A1U9969
EU000A1U9969(²)
EU000A1U9977
EU000A1U9985(¹)
EU000A1U9985(²)
EU000A1U9985(²)
EU000A1Z99A1
EU000A1Z99A1(²)
EU000A1Z99B9
EU000A1Z99B9(²)
EU000A1Z99D5
EU000A1Z99E3
EU000A1Z99F0
EU000A1Z99F0(²)
EU000A1Z99G8(¹)
EU000A1Z99G8(²)
EU000A1Z99H6
EU000A1Z99H6(²)
EU000A1Z99J2(¹)
EU000A1Z99K0(¹)

Nominal amount
(in €’000)
3,000,000
990,750
6,000,000
3,000,000
999,850
3,000,000
1,500,000
1,000,000
1,000,000
1,000,000
750,000
3,000,000
2,500,000
3,000,000
961,100
989,750
3,000,000
1,000,000
2,500,000
3,000,000
996,500
998,550
3,500,000
1,500,000
3,000,000
1,500,000
2,000,000
4,000,000
3,250,000
1,500,000
1,500,000
3,000,000
2,000,000
1,000,000
3,500,000
3,000,000

Issue date
20/11/2013
27/06/2014
04/03/2014
23/09/2015
29/09/2016
20/10/2015
17/11/2015
31/03/2016
01/12/2015
01/03/2016
05/09/2018
02/03/2016
19/07/2016
22/04/2016
28/07/2016
11/11/2016
03/05/2016
18/10/2016
19/07/2016
18/10/2016
16/11/2017
23/02/2018
01/02/2017
14/06/2017
14/03/2017
19/06/2018
23/05/2018
31/07/2018
05/09/2018
05/09/2018
14/05/2019
16/10/2018
05/03/2019
14/05/2019
29/10/2019
17/02/2020

Maturity date
20/11/2023
20/11/2023
04/03/2021
23/09/2025
23/09/2025
20/10/2045
17/11/2036
17/11/2036
01/12/2055
01/12/2055
01/12/2055
02/03/2026
02/03/2026
22/04/2024
22/04/2024
22/04/2024
03/05/2032
03/05/2032
18/07/2042
18/10/2022
18/10/2022
18/10/2022
02/11/2046
02/11/2046
15/03/2027
15/03/2027
23/05/2033
31/07/2023
05/09/2028
05/09/2028
17/01/2022
17/01/2022
05/03/2029
05/03/2029
14/03/2025
10/02/2023

Coupon
2.125%
2.125%
1.375%
1.000%
1.000%
1.750%
1.625%
1.625%
1.850%
1.850%
1.850%
0.500%
0.500%
0.125%
0.125%
0.125%
1.125%
1.125%
0.875%
N/A
N/A
N/A
1.800%
1.800%
0.750%
0.750%
1.200%
0.100%
0.750%
0.750%
N/A
N/A
0.500%
0.500%
N/A
N/A

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E U R O P E A N

S TA B I L I T Y

M E C H A N I S M

Continued from the previous page
Type of funding
programmes
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding

ISIN code
EU000A1Z99L8
EU000A1Z99M6(¹)
XS1704649158(⁴)
XS2051117195(⁴)
XS2226989015(⁴)
ESMNBOND0001(³)
ESMNBOND0002(³)
ESMNBOND0003(³)
ESMNBOND0004(³)
ESMNBOND0005(³)
ESMNBOND0006(³)
ESMNBOND0007(³)
ESMNBOND0008(³)
ESMNBOND0009(³)

Nominal amount
(in €’000)
2,000,000
2,000,000
2,444,789
1,629,859
2,444,789
80,000
30,000
25,000
25,000
25,000
30,000
40,000
150,000
50,000

Issue date
04/03/2020
26/10/2020
31/10/2017
11/09/2019
10/09/2020
22/01/2016
10/02/2016
09/03/2016
09/03/2016
31/03/2016
11/04/2016
03/08/2016
09/08/2016
19/08/2016

Maturity date
04/03/2030
16/12/2024
03/11/2022
11/09/2024
10/09/2025
22/01/2041
11/02/2041
09/03/2056
09/03/2056
22/03/2046
11/04/2046
03/08/2056
09/08/2056
19/08/2053

Coupon
0.010%
N/A
2.125%
1.375%
0.375%
1.572%
1.360%
1.559%
1.559%
1.316%
1.220%
1.156%
1.150%
1.025%

Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Long-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding

ESMNBOND0010(³)
ESMNBOND0011(³)
ESMNBOND0012(³)
ESMNBOND0013(³)
ESMNBOND0014(³)
ESMNBOND0015(³)
ESMNBOND0016(³)
ESMNBOND0017(³)
ESMNBOND0018(³)
ESMNBOND0019(³)
ESMNBOND0020(³)
ESMNBOND0021(³)
EU000A2SB901(¹)
EU000A2SB919(¹)
EU000A2SB927(¹)
EU000A2SB935(¹)
EU000A2SB943(¹)

50,000
50,000
50,000
40,000
25,000
110,000
40,000
100,000
60,000
25,000
50,000
50,000
1,999,760
1,998,870
1,499,770
1,999,910
1,999,120

19/08/2016
19/09/2016
19/10/2016
19/10/2016
27/10/2016
14/03/2017
31/03/2017
21/04/2017
27/11/2017
11/12/2017
12/12/2017
19/12/2017
24/09/2020
08/10/2020
15/10/2020
22/10/2020
05/11/2020

18/08/2056
19/09/2051
19/10/2054
19/10/2056
27/10/2056
14/03/2047
30/03/2057
21/04/2047
27/11/2057
11/12/2057
12/12/2057
19/12/2057
18/03/2021
07/01/2021
14/10/2021
22/04/2021
04/02/2021

1.064%
1.030%
1.145%
1.125%
1.086%
1.800%
1.850%
1.573%
1.591%
1.530%
1.505%
1.442%
N/A
N/A
N/A
N/A
N/A

Short-term Funding

EU000A2SB950(¹)

1,490,470

12/11/2020

11/11/2021

N/A

Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding

EU000A2SB968 ¹
EU000A2SB976(¹)
EU000A2SB9J1(¹)
EU000A2SB9M5(¹)
EU000A2SB9Q6(¹)
EU000A2SB9T0(¹)
EU000A2SB9U8(¹)
EU000A2SB9W4(¹)
EU000A2SB9X2(¹)
EU000A2SB9Z7(¹)

1,999,700
1,499,740
1,000,000
1,488,850
1,499,100
1,498,830
1,993,350
1,499,650
1,999,680
1,498,700

19/11/2020
03/12/2020
17/04/2020
14/05/2020
11/06/2020
16/07/2020
23/07/2020
13/08/2020
20/08/2020
17/09/2020

20/05/2021
04/03/2021
15/04/2021
13/05/2021
10/06/2021
15/07/2021
21/01/2021
12/08/2021
18/02/2021
16/09/2021

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

Total(5)

( )

117,026,437

Zero-coupon bond.
(2)
Tap issue.
(3)
N-bond with technical ISIN: the ESM issued its first N-bond (Namensschuldverschreibung) in 2016. N-Bonds are privately placed, long-term funding
instruments that are neither centrally cleared nor listed.
(4)
USD denominated debt securities issued starting from 2017.
(5)
The difference with the total amount in the balance sheet comes from the premium and discount amortisations. The debts evidenced by certificates are
presented at their amortised cost in balance sheet (see Note 2.14).
(1)

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The following table shows the movements of the debt securities in issue in 2020 and 2021:
(in €’000)
1 January 2020 balance
Issuance during the year
Maturities during the year
Exchange adjustments
Premiums/discounts amortisation

110,413,094
71,664,572
(63,785,109)
(607,557)
(173,655)

31 December 2020 balance

117,511,345

(in €’000)
1 January 2021 balance
Issuances during the year
Maturities during the year
Exchange adjustments
Premiums/discounts amortisation

117,511,345
54,480,809
(55,459,930)
617,510
(243,183)

31 December 2021 balance

116,906,551

Debt securities issued in or after October 2019 were issued under Luxembourgish law as the governing law. Debt
securities issued before October 2019 and tapped after this date remain under English law. N-bonds are always
issued under German law, and United States dollar-denominated debt securities are always issued under English law.

13. Other liabilities
On 31 December 2021, the other liabilities were composed of suppliers’ invoices and staff cost related payables not
yet settled, amounting to €9.5 million (31 December 2020: €11.6 million).

14. Accruals and deferred income
The following table shows the breakdown of the accruals and deferred income:
(in €’000)
Interest payable cash and cash equivalents
Interest payable on loans to credit institutions
Interest payable on debts evidenced by certificates
Deferred income on up-front service fee
Accruals and deferred income on derivatives(1)

31.12.2021
25,638
4,011
219,065
92,984
678,409

31.12.2020
25,344
4,399
284,593
138,103
901,037

Total accruals and deferred income

1,020,107

1,353,476

“Accruals and deferred income on derivatives” represent the spot revaluation, spread amortisation and accrued expense of ongoing derivative transactions (see
Notes 2.17 and 2.6).
(1)

As explained in Note 2.4, the amortisation of the up-front service fee is recognised in the profit and loss account on
a linear basis under ‘Interest receivable and similar income on loans to euro area member states’.

15. Subscribed capital
(in €’000)
1 January 2020

Subscribed capital

Subscribed, uncalled capital

Subscribed, called capital

704,798,700

(624,250,300)

80,548,400

Subscription to the authorised capital

-

-

-

Authorised capital calls

-

-

-

704,798,700

(624,250,300)

80,548,400

31 December 2020

9 8

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E U R O P E A N

S TA B I L I T Y

(in €’000)

M E C H A N I S M

Subscribed capital

Subscribed, uncalled capital

Subscribed, called capital

704,798,700

(624,250,300)

80,548,400

Subscription to the authorised capital

-

-

-

Authorised capital calls

-

-

-

704,798,700

(624,250,300)

80,548,400

1 January 2021

31 December 2021

On 31 December 2021, the ESM’s shareholders were the 19 euro area member states. The contribution key for subscribing to the ESM authorised capital is based on the key for subscription, by the national central banks of the ESM
Members, of the ECB’s capital.
Latvia joined the ESM on 13 March 2014 and subscribed to an authorised capital of 19,353 shares with a par value
of €100,000 each, representing €1.9 billion of subscribed capital of which €221.2 million was called. On 31 December 2018 Latvia had completed all instalments for the payment of paid-in shares. Lithuania joined the ESM on 3 February 2015 and subscribed to an authorised capital of 28,634 shares with a par value of €100,000 each, representing
€2.9 billion of subscribed capital, of which €327.2 million was called. On 31 December 2019 Lithuania had completed
all instalments for the payment of paid-in shares.
On 31 December 2021, the authorised capital was €704.8 billion (31 December 2020: €704.8 billion), divided into
7,047,987 shares (31 December 2020: 7,047,987 shares), with a par value of €100,000 each, and is split according to
the contribution key. Out of the total authorised capital, €624.3 billion (31 December 2020: €624.3 billion) is callable.
On 31 December 2021, the total called subscribed capital amounted to €80.5 billion is paid (31 December 2020:
€80.5 billion).

ESM Members
31 December 2021
Federal Republic of Germany
French Republic
Italian Republic
Kingdom of Spain
Kingdom of the Netherlands
Kingdom of Belgium
Hellenic Republic
Republic of Austria
Portuguese Republic
Republic of Finland
Ireland
Slovak Republic
Republic of Slovenia
Republic of Lithuania
Republic of Latvia
Grand Duchy of Luxembourg
Republic of Cyprus
Republic of Estonia
Malta
Total

ESM Key (%) Number of shares
26.8992
1,895,854
20.2003
1,423,716
17.7506
1,251,062
11.7953
831,332
5.6650
399,267
3.4454
242,832
2.7910
196,710
2.7581
194,388
2.4863
175,236
1.7811
125,531
1.5777
111,195
0.9849
69,418
0.4670
32,917
0.4063
28,634
0.2746
19,353
0.2482
17,490
0.1945
13,705
0.1847
13,020
0.0898
6,327
100.00

7,047,987

Subscribed capital
(in €’000)
189,585,400
142,371,600
125,106,200
83,133,200
39,926,700
24,283,200
19,671,000
19,438,800
17,523,600
12,553,100
11,119,500
6,941,800
3,291,700
2,863,400
1,935,300
1,749,000
1,370,500
1,302,000
632,700

Subscribed capital called
and paid
(in €’000)
21,666,900
16,271,040
14,297,850
9,500,940
4,563,050
2,775,220
2,248,110
2,221,580
2,002,700
1,434,640
1,270,800
793,350
376,190
327,200
221,200
199,890
156,630
148,800
72,310

704,798,700

80,548,400

There are three different instances when a capital call can be made, in accordance with Article 9 of the ESM Treaty.


A general capital call under Article 9(1) of the ESM Treaty concerns payment of the initial capital and an increase
of paid-in capital that could be necessary, for example, to raise the lending capacity. To initiate such a call, the
Managing Director of the ESM would make a proposal to the Board of Governors outlining the objective of such
a call, the amounts and contributions for each shareholder, and a proposed payment schedule. The Board of
Governors, by mutual agreement, may call in authorised capital at any time.

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A capital call under Article 9(2) of the ESM Treaty to replenish the paid-in capital could happen for two reasons:


to cover a shortfall due to a non-payment by a beneficiary country and,



if losses occurring due to other factors reduce the countervalue of the paid-in capital below the threshold of
15% of the maximum lending volume of the ESM.

The Managing Director would make a proposal to the Board of Directors, which would specify the losses incurred and
the underlying reasons. A simple majority of the Board of Directors is required to agree to call in capital under these
circumstances.


An emergency capital call, under Article 9(3) of the ESM Treaty to avoid default of an ESM payment obligation
to its creditors.

The Managing Director has responsibility for making such a capital call to ESM shareholders if there were a risk of
default. As stated in the ESM Treaty, the ESM shareholders have irrevocably and unconditionally undertaken to pay on
demand such a capital within seven days of receipt of the demand.
If an ESM Member fails to meet the required payment under a capital call made pursuant to Article 9(2) or (3) of the
ESM Treaty, a revised increased capital call would be made to all ESM Members by increasing the contribution rate
of the remaining ESM Members on a pro-rata basis, according to Article 25 (2) of the ESM Treaty. When the ESM
Member that failed to contribute settles its debt to the ESM, the excess capital is returned to the other ESM Members.

16. Reserve fund
As foreseen by Article 24 of the ESM Treaty the Board of Governors shall establish a reserve fund and, where appropriate, other funds. Without prejudice to the distribution of dividends pursuant to Article 23 of the ESM Treaty, the
net income generated by the ESM operations and the proceeds of possible financial sanctions received from the
ESM Members under the multilateral surveillance procedure, the excessive deficit procedure and the macroeconomic
imbalances procedure established under the Treaty on the Functioning of the European Union (TFEU) are put aside
in a reserve fund, in accordance with Chapter 5 of the ESM Treaty. The primary purpose of the reserve fund is the
absorption of potential losses.
On 17 June 2021, the Board of Governors decided at their annual general meeting to appropriate the net result of
2020 amounting to €392.9 million to the reserve fund. As a result the outstanding balance of the reserve fund as at
31 December 2021 is €3.0 billion (31 December 2020: €2.6 billion).

17. Interest receivable and similar income on loans and advances to euro area member states
Interest receivable and similar income on loans and advances to euro area member states are detailed as follows:
(in €’000)
Interest on loans (1)

2021
956,277

2020
1,073,153

Amortisation up-front service fee

45,120

47,408

-

6,590

1,001,397

1,127,151

Commitment fee
Total interest and similar income

The interest on loans comprises base rate interest representing the cost of funding of the ESM, the margin and the annual service fee as the ESM Pricing
Policy defines them.
(1)

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18. Net interest receivable and similar income on debt securities including fixed-income securities
The geographical breakdown of the interest receivable and similar income on debt securities including fixed-income
securities is detailed as follows:
(in €’000)
Euro area issuers
Other EU issuers
EU supranational organisations

2021
34,768
4,156
17,907

2020
45,512
4,240
12,443

Total European Union

56,831

62,195

Other non-EU issuers
Other supranational organisations

38,821
36,632

34,608
24,702

Total outside the European Union

75,453

59,310

Total interest and similar income(1)

132,284

121,505

As detailed under 2.2, the calculation method for results on debt securities including fixed income securities was changed in 2021 from FIFO to AVCO. For 2020
figures the FIFO method was used. If the FIFO method had been applied throughout 2021, the net interest result would have been €131,783 thousand.
1)

The 2020 figures have been restated to achieve a correct allocation of some countries as other non-EU issuers.

19. Interest payable and similar charges on cash and cash equivalents
On 31 December 2021, the interest payable and similar charges on cash and cash equivalents represent negative interest
paid on the balances with central banks and amount to €291.9 million (2020: €309.2 million). The ESM is being charged
a negative interest rate of -0.50% per annum. To limit the negative implications on ESM’s paid-in capital, some Member
States have compensated the ESM for the amount charged by their national central banks on the part of ESM paid-in
capital that is held in cash deposits. The compensation has been recorded as an extraordinary income (see Note 24).

20. Other operating income
The EFSF has asked the ESM to provide administrative and other support services to assist it in performing its
activities. To formalise this cooperation, the ESM and EFSF entered into a service level agreement (SLA) from 1 January 2013. On 17 July 2020, the fees calculation section of the Annex to the SLA between the EFSF and the ESM has
been amended to reflect the level of activity for cost allocations between the two institutions. Under the amended
agreement’s terms, the ESM is entitled to charge the EFSF service fees to achieve a fair cost-sharing arrangement. For
the services during the financial year 2021, the ESM charged the EFSF €33.1 million (2020: €33.1 million), from which
€8.3 million (2020: €9.5 million) had yet to be paid on the balance sheet date (see Note 10).
In 2021, the internal tax on salaries retained from staff members amounts to €2.0 million (2020: €1.9 million). Salaries
are recorded on a gross basis within staff costs. In accordance with Article 36(5) of the ESM Treaty, such internal tax
is for the benefit of the ESM.

21. Net profit on financial operations
Net profit on financial operations is detailed as follows:
(in €’000)
Net realised result of sales of debt securities (1)

2021
154,954

2020
208,289

Net foreign exchange result

(2,323)

3

One-off adjustment for the change of accounting policy

(3,615)

-

Total net result on financial operations

149,016

208,292

(1)

For 2020 figures the FIFO method was used.

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The net realised result of sales of debt securities reflects gains and losses realised at the date of derecognition of the
respective financial assets. Up to that date, the debt securities as part of the Short-term tranche and the Medium/
Long-term tranche of the paid-in capital portfolio are carried at fair value and unrealised gains and losses are recorded
in the equity within the fair value reserve.
As of 1 January 2021, the ESM changed the accounting policy for the calculation of the net profit from sales of securities from FIFO to AVCO. The one-off adjustment in the above table represents the impact of the remeasurement of
the outstanding securities portfolio from FIFO to AVCO as of 1 January 2021.
For comparative reasons, the following table provides the net result on financial operations if the FIFO method would
have been applied throughout 2021:
(in €’000)
Net realised result of sales of debt securities

2021
152,377

2020
208,289

Net foreign exchange result

(2,323)

3

Total net result on financial operations

150,054

208,292

(in €’000)
Salaries(1) and allowances
Social security costs
Pension costs

2021
28,900
1,479
8,598

2020
26,721
1,203
8,924

Total staff costs

38,977

36,848

22. Staff costs
Staff costs are detailed as follows:

Of which €2.05 million (31 December 2020: €1.98 million) relate to the ESM Management Board members, including €0.39 million (2020: €0.38 million) to the
ESM Managing Director.
(1)

The ESM employed 221 persons on 31 December 2021 (203 on 31 December 2020).
In addition to its own employees, the ESM has expenses for employees seconded from other international financial
institutions, as well as interim staff, temporary staff hired from external agencies and trainees. The related costs
amount to €2.0 million for the 2021 financial year (2020: €1.9 million) and are accounted for as ‘Other administrative
expenses’ (see Note 23).
The pension costs represent the ESM’s contributions during the financial year to the outsourced employee retirement
plan.
Social security costs include the ESM’s contributions during the financial year to the healthcare scheme and for death
and disability coverage, which is outsourced to external insurance companies.

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23. Other administrative expenses
Other administrative expenses consist of fees paid for professional services and miscellaneous operating expenses
and are detailed as follows:
(in €’000)
Outsourced services (mainly IT, HR and accounting services)

2021
13,451

2020
11,951

Advisory services

10,492

10,206

Rental and office building related services

5,232

5,557

Other services

3,502

2,657

Treasury related services

3,054

2,582

IT hardware

3,023

2,982

Interim and secondment fees (Note 22)

2,047

1,859

Legal services

969

967

Rating agencies fees

576

453

42,346

39,214

Total other administrative expenses

24. Extraordinary income
In 2021, the extraordinary income, totaling €216.2 million, was composed of the amounts received from the Federal
Republic of Germany, the French Republic, the Italian Republic and the Kingdom of the Netherlands, to compensate
the ESM for a part of the negative interest charged on the cash held at their national central banks during 2020. These
represent €84.1 million, €62.4 million, €54.5 and €15.2 million respectively.
In 2020, the extraordinary income, totaling €235.7 million, was composed of the amounts received from the Federal
Republic of Germany, the French Republic and the Italian Republic, to compensate the ESM for a part of the negative
interest charged on the cash held at their national central banks during 2019. These represent €131.7 million, €98.0
million and €6.0 million respectively.

25. Derivatives
The ESM uses derivatives for risk management purposes only, as described in Note 2.6. Since 2015, the ESM has
been entering into foreign exchange derivative transactions such as foreign exchange swaps and foreign exchange
forward contracts to hedge the currency risk related to short-term non-euro denominated investments. Starting from
2017, the ESM has entered into interest rate swaps and cross-currency asset swaps for the purpose of hedging interest rate risk on euro and non-euro denominated issued debt, as well as euro and non-euro denominated investments.
Since 2019, the ESM started to also use bond futures and since 2020 short-term interest rate futures to manage the
interest rate risk of the paid-in capital portfolio.
All derivatives transactions are booked at notional value as off-balance sheet items at the date of the transaction.
On 31 December 2021, the derivative financial instruments had a maximum maturity up to 30 years (31 December
2020: maximum maturity up to 30 years) and were concluded with euro area central banks, international financial
institutions or commercial banks.

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The following table discloses the details of result on derivative contracts during the year ending on 31 December 2021.
Interest receivable
and similar income
290,863

Interest payable
and similar charges
(692,940)

Net result
(402,077)

Interest result on cross-currency asset swaps

128,535

(143,078)

(14,543)

Amortised up-front payments on cross-currency asset swaps

37,617

(6,094)

31,523

Unwind result on cross-currency asset swaps

8,115

(4,794)

3,321

Unwind result on Interest rate swaps

7,166

(4,010)

3,156

Result on futures

14,434

-

14,434

Result on IRBR compensation fee

70,384

(71,286)

(902)

Total

557,114

(922,202)

(365,088)

(in €’000)
Interest result on interest rate swaps(1)

(2)

(1)

The net result from the IRS executed to reduce Greece’s interest rate risk is passed through to Greece (see Note 3.6.1.1).

One-off compensation fee received or paid by the ESM for the change from EONIA to €STR of the euro short-term benchmark interest rate, applied to cash
collateral concluded under the contractual framework of ISDA swap agreements (see Note 2.6.4). The net loss of €902 thousand is mainly due to investment(2)

related activities.

The following table discloses the details of result on derivative contracts during the year ending on 31 December 2020.
Interest receivable
and similar income
230,438

Interest payable
and similar charges
(602,946)

Net result
(372,508)

Interest result on cross-currency asset swaps

180,836

(111,605)

69,231

Amortised up-front payments on cross-currency asset swaps

37,618

(3,349)

34,269

Up-front payments on unwind cross-currency asset swaps

3,191

(712)

2,479

Unwind result on cross-currency asset swaps

1,350

(4,222)

(2,872)

Spread on foreign exchange swaps

-

(467)

(467)

Unwind result on interest rate swaps

2,125

(2,465)

(340)

Result on futures

4,968

-

4,968

460,526

(725,766)

(265,240)

(in €’000)
Interest result on interest rate swaps(1)

Total
(1)

The net result from the IRS executed to reduce Greece’s interest rate risk is passed through to Greece (see Note 3.6.1.1).

The realised part included in ‘Interest receivable and similar income’ amounts to €557.1 million
(31 December 2020: €460.5 million), while for ‘Interest payable and similar charges’ this represents €922.2 million
(31 December 2020: €725.8 million).

26. Related-party transactions
KEY MANAGEMENT
The ESM has identified members of the Board of Governors, Board of Directors and the Management Board as key
management personnel.
The members of the Board of Governors and the Board of Directors were not entitled to remuneration during the
period.

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TRANSACTIONS WITH SHAREHOLDERS
The ESM granted loans to Spain, Cyprus and Greece, which are also ESM shareholders, as disclosed in more detail in
Note 6. In the course of its investment activity, the ESM purchases debt securities issued by its shareholders. Such
securities are reported as ‘Debt securities including fixed-income securities’ on the balance sheet. On 31 December
2021, the total carrying amount of purchased securities issued by shareholders of the ESM was €2.9 billion (31
December 2020: €3.2 billion).
In 2017 Member States expressed their willingness to compensate the ESM up to the amount of negative interest
charged by their national central banks with the intention to limit the negative implications on ESM’s paid-in capital.
The transfers were made under certain conditions and following parliamentary approval. In 2021 and 2020, the ESM
received payments from France, Germany, Italy, and the Netherlands (in 2021 only) to compensate for the negative
interest charged on the cash balances held with their respective national central banks (see Note 24).
On 30 September 2021, €84.1 million was received from Germany, on 6 October 2021, €54.5 was received from Italy,
on 7 October 2021, €15.2 million was received from the Netherlands and on 18 October 2021, the ESM received €62.4
million from France. These amounts were recorded as extraordinary income in 2021 (see Note 24).

TRANSACTIONS WITH THE EUROPEAN FINANCIAL STABILITY FACILITY (EFSF)
The EFSF is a public limited liability company (Société Anonyme) incorporated under Luxembourg law on 7 June 2010
following decisions taken by the euro area member states on 9 May 2010 within the framework of the Ecofin Council.
The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to euro area member states within the framework of a macroeconomic adjustment programme.
The EFSF was created as a temporary rescue mechanism. In accordance with its Articles of Association, the EFSF
will be dissolved and liquidated when all financial assistance provided to euro area member states and all funding
instruments issued by the EFSF have been repaid in full. As of 1 July 2013, the EFSF may no longer engage in new
financing programmes or enter into new loan facility agreements.
The EFSF has asked the ESM to provide certain administrative services and other support services to facilitate the
performance of its activities. To formalise this cooperation, the two institutions have entered into a service level
agreement. In 2020, the SLA Annex was amended to reflect the level of activity for cost allocations between the two
institutions. The amendment did not result in a material impact in 2021 compared to previous years. In line with the
terms of this agreement, the ESM charged the EFSF €33.1 million for the financial year 2021 (31 December 2020:
€33.1 million), from which €8.3 million (31 December 2020: €9.5 million) had not yet been paid at balance sheet date
(see Note 10). The ESM recognised these amounts as other operating income in the profit and loss account.

27. Audit fee
The total fees paid for 2021 by the ESM to Ernst & Young, Société Anonyme are presented as follows:
(in €’000)
Audit fees
Audit related fees

2021
275
92

2020
275
92

Total Audit fees

367

367

In 2021 and 2020, the external auditors provided the ESM with audit-related services in relation to with the US-dollar
denominated bond issuance.

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28. Events after the reporting period
Following Russia’s invasion of Ukraine on 24 February 2022, all countries of the European Union and many other
countries worldwide, including the US, the United Kingdom and Canada started imposing heavy financial and commercial sanctions on Russia and related companies, financial institutions and wealthy individuals, with the aim of
forcing Russia to stop the conflict. Those measures include in particular the freezing of assets held abroad by the
Russian central bank and the ban of major Russian banks from the SWIFT system. Beyond the impact on Russia, the
sanctions will most likely have an effect on financial markets and economies globally. As a consequence, the ESM’s
activities may be affected as well. As of today, the concrete magnitude of the effects cannot be reliably assessed. The
ESM is analysing direct and indirect implications on its activities and continues to closely monitor the situation to be
ready to implement mitigating action, as needed.
There have been no other material post-balance sheet events which could require disclosure or adjustment to the 31
December 2021 financial statements.

05

External auditor’s report on the
2021 financial statements

To the Board of Governors of the European
Stability Mechanism

Report on the audit of the financial statements
Opinion
We have audited the financial statements of the European Stability Mechanism (the “Entity” or “ESM”), which
comprise the balance sheet as at 31 December 2021,
the profit and loss account, the statement of changes
in equity and the statement of cash flows for the year
then ended, and the notes to the financial statements,
including a summary of significant accounting policies.
In our opinion, the accompanying financial statements
give a true and fair view of the financial position of the
Entity as at 31 December 2021, and of the results of its
operations and its cash flows for the year then ended
in accordance with the general principles of the 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 2006/46/EC of 14 June 2006
(the ”Directives”).

for the audit of the financial statements » section of
our report. We are also independent of the Entity in
accordance with the International Code of Ethics for
Professional Accountants, including International Independence Standards issued by the International Ethics
Standards Board for Accountants (“IESBA Code”) as
adopted for Luxembourg by the CSSF together with the
ethical requirements that are relevant to our audit of the
financial statements, and have fulfilled our other ethical
responsibilities under those ethical requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit
of the financial statements of the current period. These
matters were addressed in the context of the audit of
the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.

Impairment of loans and advances

Basis for opinion
We conducted our audit in accordance with EU Regulation N° 537/2014, the Law of 23 July 2016 on the audit
profession (the “Law of 23 July 2016”) and with International Standards on Auditing (“ISAs”) as adopted for
Luxembourg by the “Commission de Surveillance du
Secteur Financier” (“CSSF”). Our responsibilities under
those Regulation, laws and standards as adopted for
Luxembourg by the CSSF are further described in the
« Responsibilities of the “réviseur d’entreprises agréé”

As at 31 December 2021, loans and advances to euro
area Member States amount to EUR 89.9 billion and
relate to financial assistance granted to Spain, Cyprus
and Greece in line with ESM’s mission to provide financial assistance to euro area countries experiencing or
threatened by severe financing problems. These loans
were granted to recapitalise banks in Spain, and as part
of a macroeconomic adjustment programme in the
case of Cyprus and Greece. As at 31 December 2021
no impairment has been recorded by ESM on these outstanding loans.

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We considered this as a key audit matter as ESM applies
complex judgements with respect to the estimation of
the amount and timing of the future cash ﬂows when
determining the necessity to record or not an impairment loss on the loans granted.
To assess the required impairment allowance and in
accordance with article 13(6) of the ESM Treaty - the
ESM 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 - ESM assesses individually each loan and advance
granted to the beneficiary ESM Members on a regular
basis through the analysis of the main following indicators of the beneficiary country:


the liquidity situation of the sovereign;



the market access;



the long-term sustainability of public debt;



the banking prospects, whenever relevant to
assess repayment flows;



the review of the medium-term economic and
financial outlook;



the identification of default events.

The determination of the necessity to record an impairment will be based on the identiﬁcation of impairment
events and judgements to estimate the impairment
against speciﬁc loans and advances.
Refer to notes 2 and 6 to the financial statements.

How the matter was addressed in our audit
We assessed the design and implementation and
tested the operating effectiveness of the key controls
over ESM’s processes for establishing and monitoring
speciﬁc impairment estimation. This included:






the testing of the entity level controls over the
process, including the review and approval of the
assumptions made by the Management and the
Board of Directors;
the testing of the quarterly Early Warning System
reports issued per country and checking if impairment recommendations have been adequately
applied;
the testing of assumptions underlying judgements
made by the Management and the Board of
Directors when an impairment event occurs on

expected cash flows and estimated recovery from
any underlying collateral;


the testing of a sample of loans to form our own
assessment as to whether impairment events
have occurred and to assess whether impairment
was identiﬁed and recorded in a timely manner,
where required;



the reading and assessment of the related contents of the major internal committees’ minutes;



checking that reimbursements and waivers
granted are made in accordance with the terms
and conditions agreed;



reconciling amounts disbursed with the loan
agreements and ensuring that loans granted to
ESM Members are within the limit of commitments approved by the governing bodies of ESM.

Responsibilities of the Board of Directors and of
those charged with governance for the financial
statements
The Board of Directors is responsible for the preparation and fair presentation of the financial statements in
accordance with the general principles of the 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 2006/46/EC of 14 June 2006 (the
”Directives”), and for such internal control as the Board
of Directors determines is necessary to enable the
preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Board of Directors is responsible for assessing the entity’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
concern basis of accounting unless the Board of Directors either intends to liquidate the Entity or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for
overseeing the Entity’s financial reporting process.

Responsibilities of the “réviseur d’entreprises
agréé” for the audit of the financial statements
The objectives of our audit are to obtain reasonable
assurance about whether the financial statements as
a whole are free from material misstatement, whether
due to fraud or error, and to issue a report of the “révi-

2 0 2 1

seur d’entreprises agréé” that includes our opinion. Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with EU Regulation N° 537/2014, the Law of 23 July
2016 and with the ISAs as adopted for Luxembourg by
the CSSF will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in
the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the
basis of these financial statements.
As part of an audit in accordance with EU Regulation
N° 537/2014, the Law of 23 July 2016 and with ISAs as
adopted for Luxembourg by the CSSF, we exercise professional judgement and maintain professional skepticism throughout the audit.
We also:


Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from
fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of
internal control.



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Evaluate the overall presentation, structure and
content of the financial statements, including the
disclosures, and whether the financial statements
represent the underlying transactions and events
in a manner that achieves fair presentation.

We communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.
We also provide those charged with governance with
a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate
threats or safeguards applied.
From the matters communicated with those charged
with governance, we determine those matters that were
of most significance in the audit of the financial statements of the current period and are therefore the key
audit matters. We describe these matters in our report
unless law or regulation precludes public disclosure
about the matter.

Report on other legal and regulatory requirements



Obtain an understanding of internal control relevant
to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Entity’s internal control.

In 2017, the Board of Governors had appointed Ernst
& Young as the ESM’s external auditor for a three-year
term, renewable once. We have been re-appointed as
“réviseur d’entreprises agréé” by the Board of Governors
on 11 June 2020 for a three-year term and the duration
of our uninterrupted engagement, including previous
renewals and reappointments, is five years.



Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the
Board of Directors.

We confirm that the audit opinion is consistent with the
additional report to the audit committee or equivalent.



Conclude on the appropriateness of Board of Directors’ use of the going concern basis of accounting
and, based on the audit evidence obtained, whether
a material uncertainty exists related to events or
conditions that may cast significant doubt on the
Entity’s ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are
required to draw attention in our report of the “réviseur d’entreprises agréé” to the related disclosures
in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
up to the date of our report of the “réviseur d’entreprises agréé”. However, future events or conditions may cause the Entity to cease to continue as
a going concern.

We confirm that the prohibited non-audit services
referred to in EU Regulation No 537/2014 were not provided and that we remained independent of the Entity in
conducting the audit.

Ernst & Young
Société anonyme
Cabinet de révision agréé

Bernard Lhoest | Papa Saliou Diop
Luxembourg, 28 March 2022

06

Report of the Board of Auditors
on the 2021 financial statements

Luxembourg, 28 March 2022
The Board of Auditors of the European Stability Mechanism (ESM) was set up pursuant
to Article 30 of the Treaty establishing the ESM and Article 24 of the ESM By-Laws.
The Board of Auditors is independent from the Board of Directors and its members are
appointed directly by the Board of Governors6.
This Board of Auditors report in respect of the financial statements is addressed to
the Board of Governors in accordance with Article 23 (2) (d) of the ESM By-Laws. It
is delivered in respect of the financial statements of the ESM for the year ended 31
December 2021.
The Board of Auditors notes that based on its own work and considering the work of
the external auditor, to the best of its judgement, no material matters have come to
its attention that would prevent it from recommending that the Board of Governors
approve the financial statements of the ESM for the year ended 31 December 2021.
On behalf of the Board of Auditors
Baudilio Tomé Muguruza
Chairperson

6

The Board of Auditors carries out independent audits of regularity, compliance, performance and risk
management of the ESM, inspects the ESM accounts, and monitors and reviews the ESM’s internal and
external audit processes and their results. Information on the audit work of the Board of Auditors, its audit
findings, conclusions and recommendations for the year ended 31 December 2021 will be included in the
annual report, to be prepared in accordance with Article 24(6) of the ESM By-Laws and submitted to the
Board of Governors.

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A N N U A L

R E P O RT

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Acronyms and abbreviations
ALM

Asset and Liability Management

IMF

International Monetary Fund

BoA

Board of Auditors

IT

Information technology

BoD

Board of Directors

NGEU

Next Generation EU

BoG

Board of Governors

NGFS	Network of Central Banks and Supervisors for
Greening the Financial System

ECB

European Central Bank

EFSF

European Financial Stability Facility

EIB

European Investment Bank

EMU

Economic and Monetary Union

EONIA

Euro Overnight Index Average

ESG

Environmental, Social, and Governance

ESM

European Stability Mechanism

GDP

Gross domestic product

EURO AREA

NPL

Non-performing loan

PRI

Principles for Responsible Investment

SRB

Single Resolution Board

SRF

Single Resolution Fund

UN

United Nations

VAT

Value added tax

€STR

Euro short-term rate

NON-EURO AREA

COUNTRY CODE

COUNTRY NAME

COUNTRY CODE

COUNTRY NAME

BE
DE
EE
IE
EL
ES
FR
IT
CY
LV
LT
LU
MT
NL
AT
PT
SI
SK
FI

Belgium
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Austria
Portugal
Slovenia
Slovakia
Finland

US
UK

United States
United Kingdom

EUROPEAN STABILITY MECHANISM
6a Circuit de la Foire Internationale
L-1347 LUXEMBOURG
Tel: (+352) 260 962 0
info@esm.europa.eu
www.esm.europa.eu