2018

Annual Report

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2018

Annual Report

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Contents
5

ESM at a glance

7

Message from the Managing Director

9

Letter of transmittal to the Board of Governors

10

2018 year in review

11

The international role of the euro
01 ECONOMIC DEVELOPMENTS

13

Macroeconomic and financial environment

18

December 2018 Euro Summit marks new chapter for the ESM

21

Programme country experiences

23

Greek programme achievements

32

Resilience of countries that benefited from financial assistance
02 ESM ACTIVITIES

37

Processing the financial transactions of the ESM

39

ALM and Lending activities

42

Funding and Investor Relations

46

Major rating agencies affirm ESM’s high rating position

47

Investment and Treasury

50

Risk and Compliance

55

Focus on the Risk and Control Self-Assessment (RCSA) process

56

ESM: committed to public service, transparency, and accountability
03 INSTITUTIONAL FRAMEWORK AND ORGANISATION

59

The ESM financial assistance toolkit

61

Governance

62

Governance structure

63

Board of Governors

67

Board of Directors

70

Board of Auditors

72

Internal control framework

74

ESM organisational structure

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04 FINANCIAL REPORT
78

Balance sheet

79

Off-balance sheet

80

Profit and loss account

81

Statement of changes in equity

82

Statement of cash flows

83

Notes to the financial statements
05 EXTERNAL AUDITOR’S REPORT ON THE 2018 FINANCIAL STATEMENTS
06 REPORT OF THE BOARD OF AUDITORS ON THE 2018 FINANCIAL STATEMENTS
ACRONYMS AND ABBREVIATIONS

2 0 1 8

ESM at a glance
The European Stability Mechanism (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. Euro
area leaders decided to give the ESM, an intergovernmental institution, a stronger
role in financial assistance ­programmes and agreed to changes in its toolkit.
The leaders’ agreement foresees that:
 The ESM will provide a backstop for the Single Resolution Fund (SRF), a key
element of banking union that is designed to resolve financial problems at
systemic banks in an orderly fashion; ESM’s backstop loans will be granted as
a last resort and be fiscally neutral over the medium term;
 The ESM will take a stronger role in designing, negotiating, and monitoring
future programmes, in full respect of the European Commission and European
Central Bank (ECB) competences;
 The ESM’s precautionary instruments will be reviewed to make them more
effective.
For more information on the new mandates, see ‘December 2018 Euro Summit
marks new chapter for the ESM’.
The ESM raises funds by issuing debt instruments, which are purchased by institutional investors. The proceeds enable the ESM to provide its Members with the
following types of financial assistance:
loans to cover their financing needs;

loans and direct equity injections to recapitalise financial institutions;

primary and secondary debt market purchases of Members’ national
bonds;

credit lines to be used as precautionary financial assistance.

More information about the ESM in general can be found on our website:
www.esm.europa.eu.
Note: The ESM 2018 Annual Report contains the audited financial statements as at 31 December 2018, together
with the report of the external auditor in respect of their audit concerning these financial statements, and the
report of the Board of Auditors in respect of these financial statements. The description of ESM policies and
activities covers the 2018 financial year, except when stated otherwise. The information related to the composition
of the Board of Governors and Board of Directors reflects their composition as of 7 May 2019. The economic
development report (Chapter 1) includes certain information available up to 1 May 2019, but all historic financial
data there set out is limited to the period to 31 December 2018.

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“The ESM reached two milestones
in 2018: Greece exited its ESM
programme successfully and European
leaders decided on a package of
measures to deepen Economic and
Monetary Union, including steps to
strengthen the ESM.”
KLAUS REGLING
Managing Director
European Stability Mechanism

2 0 1 8

Message from the
Managing Director
The ESM reached two milestones in 2018: Greece exited its ESM programme successfully in August after more than eight years under financial assistance, and the Euro
­Summit decided in December on a package of measures to deepen Economic and
­Monetary Union (EMU), including steps to strengthen the ESM.
Greece’s successful programme exit followed those of Ireland, Spain, Cyprus, and
­Portugal. With loans of almost €204 billion from the ESM and its temporary predecessor,
the EFSF, Greece has benefited from the largest financial assistance in modern history,
making the rescue funds the country’s biggest creditor by far. Thanks to our loans’ low
interest rates and long maturities, Greece saved €13 billion in its 2018 budget alone
compared to market financing, calculations for this Annual report show. This amount
represents 7% of Greek GDP. Similar savings will be repeated over many years to
come. This is an unprecedented act of solidarity by the other euro area member states
with Greece.
In a further gesture of support, the Eurogroup approved medium-term debt relief
­measures for Greece in June. They concern an abolition of step-up interest rate margins,
a further 10-year deferral of interest and amortisation, and a 10-year extension of the
maximum weighted average maturity, all related to EFSF loans. We estimate that this
will lead to a cumulative reduction of Greece’s debt-to-GDP ratio of around 30 percentage points until 2060. We also expect Greece’s gross financing needs to fall by around
eight percentage points over the same time horizon. As a result of these medium-term
measures, Greece will not start repaying most of its EFSF loans before 2033, and the
new weighted average loan maturity has been extended to 42.5 years. All of this comes
on top of sizeable short-term debt relief measures implemented in 2017 for Greece.
Also for the longer term, Greece received reassurance on its debt sustainability. The euro
finance ministers committed to reviewing in 2032 whether additional debt measures
are needed to respect Greece’s agreed gross financing needs targets. There is also a
contingency mechanism on debt, which could be activated should Greece be hit by an
unexpectedly adverse scenario. If the Eurogroup were to activate the mechanism, measures could include further re-profiling, and capping and deferral of interest payments to
the EFSF to the extent needed to meet the gross financing needs targets.
In return, Greece pledged to stick to the reforms agreed under the programme, among
them to maintain a primary surplus of 3.5% until 2022 and to comply with EU rules,
particularly related to fiscal and economic policies.
In an effort to continuously improve the work of the ESM, Mário Centeno, the Chair­
person of the ESM Board of Governors, and I have asked former European Commission Vice President Joaquín Almunia to lead an independent evaluation of the financial assistance to Greece. We are looking forward to an interim report of his work in
December 2019 and to the opportunity to consider his results at the ESM Board of
Governors’ Annual Meeting in June 2020.
With Greece’s programme exit, the ESM accomplished its immediate mission to overcome the euro crisis and to safeguard financial stability in the euro area by providing
loans in exchange for economic policy reforms. The ESM can now focus on implementing the December Euro Summit decisions to be better prepared for the next crisis.

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The year-end summit decisions illustrate both Europe’s determination to make the euro area
more resilient and the political will to move EMU forward even without the threat of an existential crisis. The decisions also show that the ESM has become a key pillar in the currency union’s
institutional architecture.
According to the Euro Summit, the ESM receives a broadened mandate and becomes the backstop for bank resolution within banking union. This backstop will only be activated if the funds
of the Single Resolution Fund are insufficient to resolve a bank in crisis. To repay its loans to
the ESM within three-to-five years, the SRF would receive levies from European banks. As is the
case with all country programmes, there will be no transfer of taxpayers’ money. By 2024 at the
latest, the backstop will be fully operational.
The ESM will also play a stronger role in future programmes in close cooperation with the European Commission and in full respect of its prerogatives according to the EU Treaty. Together
with the Commission, the ESM will design, negotiate, and monitor future programmes. Building
on the Memorandum of Understanding (MoU) signed in April 2018, the ESM and the Commission agreed in November on their future cooperation and the Euro Summit endorsed the agreement. The two institutions will work in tandem, drawing strength from the complementarity of
our respective expertise.
Additionally, the Euro Summit decided to make the ESM precautionary credit lines more ­efficient
and easier to use, and to strengthen the role of the ESM in matters of debt sustainability. It is
the ESM’s role to take a creditor’s perspective. In the future, the Commission and the ESM will
jointly prepare a debt sustainability analysis for programme countries. In addition, when appropriate, and if requested by the Member State, the ESM may facilitate the dialogue between its
Members and private investors. This involvement would take place on a voluntary, informal,
non-binding, temporary, and confidential basis.
Furthermore, the euro area intends to introduce single limb collective action clauses by 2022
and to include this commitment in the ESM Treaty. These Euro Summit decisions are not
intended to lead to more debt restructurings but to more transparency and predictability.
Lastly, the summit mandated the Eurogroup to work in two areas where Member States still
have very different views: a common European deposit insurance scheme and a budgetary
instrument for convergence and competitiveness of the area.
We know that a European deposit insurance is important for the completion of banking union.
Views diverge on the preconditions needed, but it would ultimately be very beneficial to overcome
the fragmentation of Europe’s financial markets. Also, the past ESM and EFSF programmes
would have been much smaller if we had had a common deposit insurance.
Regarding the euro area budget, the summit asked the finance ministers to work on the design,
the modalities of implementation, and the timing of the budgetary instrument for convergence and competitiveness. This is a positive step as it will encourage structural reforms and
strengthen competitiveness in the euro member states. This will enhance the resilience of the
monetary union as a whole.
I also see good economic reasons to talk about fiscal instruments for macroeconomic stabilisa­
tion. There are several proposals on the table that would not lead to permanent transfers. Following the European elections, I would welcome broadening the discussion. We could also consider a
revision of the fiscal rules, to make them more effective, and a stabilisation facility at the euro area
level operating outside a crisis situation. But this is beyond the current political mandate.
The efforts to deepen EMU and enhance its resilience, together with the completion of banking
union and capital markets union, would also help to strengthen the international role of the euro.
A more balanced multipolar currency system that comprises the US dollar, the euro, the renminbi,
and perhaps one or two other currencies would, over time, improve the functioning of the international monetary system and protect Europe’s interests.

2 0 1 8

Letter of transmittal to the
Board of Governors
13 June 2019
Dear Chairperson,
I have the honour of presenting to the Board of Governors (BoG) the annual report in
respect of the financial year 2018, 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 during 2018. It also contains the audited financial statements as at 31 December 2018, as drawn up by the Board of Directors (BoD) on
26 March 2019 pursuant to Article 21 of the By-Laws, which are presented in
­Chapter IV. ­Furthermore, the report of the external auditor in respect of the financial
statements is presented in Chapter V and the report of the Board of Auditors (BoA)
in respect of the financial statements in Chapter VI. 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

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2018 year in review
08.02

22.03
Following the third review of its programme, the BoG
approves the Supplemental MoU with Greece.
Five days later the BoD approves a €6.7 billion loan
tranche and the release of a €5.7 billion disbursement.

ESM BoD approves Spanish request to make two
voluntary early repayments towards its ESM loan,
totalling €5 billion.
EFSF BoD elects Austrian Harald Waiglein as new
Chairperson.

29.06
The Euro Summit agrees to further strengthen the ESM.
01.08

Following the fourth review of its programme,
the BoG approves the Supplemental
MoU with Greece. The BoD approves a
€15 billion loan tranche to the country.

20.08

20.09

Greece officially concludes and exits from its three-year
ESM financial assistance programme, finalising the last of
the rescue funds’ programmes entered into since 2012.

ESM BoD approves an additional €3 billion early
repayment from Spain.
08.10

10.10
Third High-level Dialogue of Regional Financing
Arrangements, co-organised by the ESM, takes
place in Bali, Indonesia, on the margins of the annual
meeting of the International Monetary Fund and the
World Bank Group.

BoG appoints Irena Petruškevičienė and Noel Camilleri
as members of the BoA, each for a non-renewable
three-year term.

16.10
ESM issues $3 billion in bonds, its second deal in the
US dollar market.
14.11

ESM and European Commission agree on a joint
position for their future cooperation in anticipation of
the broadening of the ESM’s mandate.
22.11
EFSF BoD approves the implementation of a set of
medium-term debt relief measures for Greece.
14.12
Euro Summit endorses a package of proposals on
deepening EMU, including strengthening the ESM in
full respect of the Commission and ECB competences
as laid down in the EU legal framework. This includes
providing a backstop to the SRF; a stronger role for the
ESM in designing, negotiating, and monitoring future
programmes; a joint position on future ­cooperation
­between the European Commission and the ESM;
­improving the effectiveness of ESM ­precautionary
credit lines; and greater involvement in debt
­sustainability ­issues.

2 0 1 7
8

The international role
of the euro
Public debate and market interest in the international role of the euro rose in 2018,
partly in response to a more sceptical attitude of the US towards the established
multilateral system. Some observers have argued that the international monetary
system could become more multipolar, where next to the dollar, the euro and the
renminbi play a more significant role, thereby making the system more balanced.
The European Commission, some central bank officials, and the ESM have all
recently addressed the matter.1 In December 2018, the Euro Summit encouraged
further work, taking note of a related European Commission communication.2 The
summit adopted an agenda to deepen monetary union and to strengthen the ESM,
both pre-conditions to strengthening the international role of the euro. Another
important step is to further enhance financial market integration.
Given the topic’s relevance, it was an appropriate time for the ESM to ask its Governors, the 19 euro area finance ministers, to share their views on the subject. You will
read their individual perspectives throughout these pages.
The euro is the world’s second-most important currency, although its role suffered
during the European sovereign debt crisis. About 20% of allocated foreign currency
reserves are held in euros, and the common currency was used in over 30% of global
payments in 2017.3
There are several structural factors that explain why the euro is trailing the US dollar on an international scale, which can be addressed by pushing ahead with the
December 2018 agenda to deepen monetary union. Euro-denominated financial
markets are smaller than those denominated in US dollars,4 and European markets
are also more fragmented. Without more integrated and liquid financial markets, it
will be challenging for the euro to play a stronger role in the global currency system
than that commensurate with its share in world trade.
When reflecting on the euro’s international role, the ESM Governors made important
points. For some ministers, a strengthened international euro role is a matter of sovereignty and one that provides better protection for Europe. Others insist that work
on the resilience of monetary union is the key as it is market participants who decide
on a currency’s use. Most shared the view that deepening Economic and Monetary
Union (EMU), and completing both banking union and capital markets union, would
contribute to a stronger international role for the euro. This view is also shared by
many international investors.
1

2

3

4

European Commission (2018) ,’President Jean-Claude Juncker’s State of the Union address
2018’, 12 September 2018. http://europa.eu/rapid/press-release_SPEECH-18-5808_en.htm;
ECB (2019), ’The euro’s global role in a changing world: A monetary policy perspective‘, 15 February
2019. https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190215~15c89d887b.en.html;
ESM (2018), ’The future of the Economic and Monetary Union and the role of the ESM‘, Speech, 28
November 2018. https://www.esm.europa.eu/speeches-and-presentations/future-economic-andmonetary-union-and-role-esm-speech-klaus-regling
European Commission (2018), ‘Towards a stronger international role of the euro’ 5 December 2018:
https://ec.europa.eu/info/sites/info/files/com-2018-796-communication_en.pdf
International Monetary Fund COFER and SWIFT data, cited in ECB: The international role of the euro,
Interim report, June 2018.
The outstanding stock of US dollar-denominated fixed income securities, for example, is more than oneand-a-half times the stock of euro-denominated fixed income securities. And for safe assets (sovereign
and SSA bonds rated AA- or above), the contrast is even more striking, as US-dollar denominated bonds
account for over 70% of the outstanding stock, according to ESM estimates based on Bloomberg data.

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01

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Economic developments

Macroeconomic and
financial environment
01

The euro area economy continued to grow in 2018,
albeit at a slower pace than in 2017, in line with the
maturing global economic cycle. Global growth deceleration is reflected in the slowdown of both advanced
economies and emerging markets. Still, the euro area
economy is supported by improvements in labour
markets, the accommodative monetary stance, and
the available fiscal space in some countries. These
fundamentals should support a gradual adjustment to
weaker global activity. The outlook remains positive,
but the overall balance of risks tends to the downside
due to trade disputes, Brexit, and geopolitical tensions.

Figure 1
World economic activity and exports
of goods and services
(y/y growth, in %)
6
5
4
3
2
1
0

Euro area economic performance moderates
After the peak of economic growth in 2017, euro area
growth slowed, following the cyclical downturn of the
global economy. In addition to a maturing cycle, trade
disputes and Brexit have set a less dynamic path for
global trade that, starting from 2018, is expected to
converge with lower world gross domestic product
(GDP) growth (Figure 1). Oil prices continued to fall
while the euro exchange rate (Figure 2) remained
broadly stable in nominal terms. US growth held up
on the back of fiscal stimulus, but its impact is fading,
adding to the downside risks for the euro area.
Euro area GDP growth eased to 1.8% in 2018 after
expanding by 2.4% in 2017. Apart from weaker external demand, some temporary factors affecting the
car industry in the second half of 2018 contributed to
the overall deceleration.

2013

2014

2015

World GDP volume

2016
2017
2018
World exports of goods
and services, volume

Source: European Commission forecast-Autumn 2018

Figure 2
Euro effective exchange rate
(Group of 19 countries, Q1/1999=100)
105
100
95
90
85
80

2015
2016
2017
2018
Nominal effective exchange rate
Real effective exchange rate (consumer price index)
Real effective exchange rate (producer price index)
Real effective exchange rate (gross domestic product
deflator)

Source: European Central Bank

S TA B I L I T Y

M E C H A N I S M

The composition of euro area GDP also reflects the
weaker global environment (Figure 3). After sizeable
positive contributions in 2017 and the first half of
2018, net export contribution to growth turned negative. This impact is partly offset by the build-up of
inventories mostly seen in the third quarter and to
a great extent related to the abovementioned oneoff factors. Both investment and total consumption
remained robust pointing to improvements in the
business climate and labour market recovery followed by considerable wage increases.
The slowdown appears to be synchronised, with all
large euro area countries recording more moderate
growth rates (Figures 4 and 5). While countries differed noticeably in their cyclical position and labour
market improvements, the synchronised slowdown
could also delay further convergence of euro area
members.
Figure 3
Contributions to real gross domestic
product growth
(y/y growth in %, contributions in percentage points)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5

Net exports
Investment
Private consumption

Inventories and valuables
Government consumption
Real gross domestic
product growth

Figure 4
Real gross domestic product growth in 2018
(in %)
9
8
7
6
5
4
3
2
1
0

IT
BE
FR
DE
EL
Euro area
PT
ES
AT
NL
FI
LU
LT
EE
CY
SK
LV
SI
MT
IE

E U R O P E A N

Note: EFSF/ESM programme countries in yellow.
Source: European Commission Economic Forecast-Autumn 2018

Figure 5
Real gross domestic product growth for selected
countries
(y/y growth in %, quarterly data)
5
4
3
2
1
0
-1
-2
-3
-4

Mar 12
Jul 12
Nov 12
Mar 13
Jul 13
Nov 13
Mar 14
Jul 14
Nov 14
Mar 15
Jul 15
Nov 15
Mar 16
Jul 16
Nov 16
Mar 17
Jul 17
Nov 17
Mar 18
Jul 18
Nov 18

|

Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
Q2 16
Q3 16
Q4 16
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18

1 4

Germany

Spain

France

Italy

Euro area

Source: Eurostat

Source: Eurostat

“More action is needed to strengthen the
international role of the euro. There are short-term
measures we can take, but nothing replaces the
credibility boost that completing our Economic and
Monetary Union would produce. This would support
our economies, protect our social model, and make
Europe’s voice heard across the world.”

MÁRIO CENTENO
Minister of Finance, Portugal,
Chairperson of the ESM Board of Governors

2 0 1 8

A N N U A L

R E P O RT

Euro area inflation reached a six-year high in 2018,
averaging 1.7% over the year, up from 1.5% in 2017
(Figures 6 and 7). The slight upswing was mostly
driven by the energy component given the recovery in
oil prices. Core inflation, measured as headline inflation excluding unprocessed food and energy prices,
marginally accelerated to 1.2% from 1.1% in 2017.
Inflation expectations rose over the year, supported by
the oil price recovery and broad-based wage acceleration among euro area member states, which should
support core inflation in the future.

Fiscal balances in the euro area continued improving
in 2018 in an environment characterised by favourable borrowing conditions (Figure 8). Low financing
costs and cyclical conditions helped governments to
compensate for the lack of improvement in structural
balances, particularly for countries with high levels
of debt. Overall, debt dynamics at the euro area level
remained favourable as the debt-to-GDP ratio continued its decline (Figure 9).

Figure 6
Contributions to harmonised index of consumer
price inflation rate

(in % of GDP)
3
2
1
0
-1
-2
-3
-4
-5
-6
-7

Government balance
Structural balance

Government primary balance
Structural primary balance

Note: Shaded area=forecast
Source: European Commission Economic Forecast-Autumn 2018

4.0

Note: Shaded area=forecast
Source: European Commission Economic Forecast-Autumn 2018

3.5
3.0
2.5
2.0
1.5
1.0

IE
CY
EL
FI
IT
PT
NL
Euro area
ES
MT
DE
SI
LU
AT
FR
BE
LT
SK
LV
EE

0.5

Note: EFSF/ESM programme countries in yellow.
Source: Eurostat

2020

2019

2018

2017

2016

2015

2014

(in %)

96
94
92
90
88
86
84
82
80

2013

Figure 7
Harmonised index of consumer price inflation rates
in 2018

(in % of GDP)

2012

Source: Eurostat

Figure 9
Euro area government debt

2011

Energy
Services
Headline harmonised
index of consumer prices

2010

Food, alcohol, and tobacco
Non-energy industrial goods

0.0

Figure 8
Euro area budget balances

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Dec 15
Feb 16
Apr 16
Jun 16
Aug 16
Oct 16
Dec 16
Feb 17
Apr 17
Jun 17
Aug 17
Oct 17
Dec 17
Feb 18
Apr 18
Jun 18
Aug 18
Oct 18
Dec 18

2.8
2.4
2.0
1.6
1.2
0.8
0.4
0.0
-0.4
-0.8
-1.2

1 5

01

(y/y inflation in %, contributions in percentage points)

|

M E C H A N I S M

1.14

0.1

1.12

0.0

1.10

German 10-year government
bond yields, in %

EUR/USD exchange
rate, right-hand scale

Source: Bloomberg

Figure 11
10-year sovereign credit spreads of selected euro
area member states vs Germany
350

4
3
2
1
0
-1
-2
-3
-4
-5

Note: Shaded area=forecast
Source: European Commission Economic Forecast-Winter interim
forecast 2019

300
250
200
150
100
50
0

(in %)

2007

(in basis points)

Figure 12
Euro area real gross domestic product growth
forecast

France
Source: Bloomberg

Italy

Spain

Portugal

Ireland

2020

1.16

0.2

2019

1.18

0.3

2018

1.20

0.4

2017

0.5

2016

1.22

2015

1.24

0.6

2014

0.7

The outlook for inflation also shows risks to the
downside. The capacity of corporates to pass higher
energy and wage input costs to final consumer prices
is diminishing. The latest oil price decline, together
with the global slowdown and the low pass-through
of wages to final prices, increased downside risks for
inflation looking forward (Figure 13).

2013

1.26

2012

0.8

The euro area is expected to lose some momentum
in line with global trade and output trends (Figure 12),
but fundamentals should sustain domestic demand,
cushioning somewhat the effects of the global trade
slowdown. The ECB’s still accommodative monetary policy, the potential use of fiscal stimulus by
countries with fiscal space, the strong labour market
conditions in some countries, and wage acceleration
could strengthen domestic demand in the coming
period. Still, labour market shortages could cap euro
area growth. Moreover, increases in compensation
per employee may pose challenges for countries with
low productivity gains, as post-crisis competitiveness
gains may erode. Overall, therefore, risks to the euro
area growth outlook have moved to the downside.
Uncertainties relate to global trade disputes, Brexit
negotiations, the possibility of a US slowdown, and
other political risks.

2011

Figure 10
German bond yields and the euro exchange rate

Euro area heads towards a soft landing in line
with a maturing global cycle

2010

The ECB’s monetary policy normalisation, by tapering
its net asset purchases, proceeded smoothly in 2018,
but the global slowdown and US Federal Reserve’s
dovish monetary policy response led markets to
­
expect a more cautious monetary policy tightening
from the ECB going forward after it announced a new
series of targeted longer-term refinancing operations. While the euro weakened and German bund
yields declined (Figure 10), sovereign credit spreads
(­Figure 11) ­widened to various degrees across the
euro area. Market volatility resurfaced, fuelled by
idiosyn­­cratic risks, such as Brexit and policy uncertainty in Italy, but these challenges remained contained and did not become systemic. Against this
backdrop, countries that had previously undertaken
adjustment programmes remained resilient and
retained stable market access. For more information on this topic, see ‘Resilience of ex-programme
­countries and limited contagion’.

2009

S TA B I L I T Y

2008

E U R O P E A N

29 Dec 17
16 Jan 18
01 Feb 18
19 Feb 18
07 Mar 18
23 Mar 18
10 Apr 18
26 Apr 18
14 May 18
30 May 18
15 Jun 18
03 Jul 18
19 Jul 18
06 Aug 18
22 Aug 18
07 Sep 18
25 Sep 18
11 Oct 18
29 Oct 18
14 Nov 18
30 Nov 18
18 Dec 18

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29 Dec 17
10 Jan 18
22 Jan 18
01 Feb 18
13 Feb 18
23 Feb 18
07 Mar 18
19 Mar 18
29 Mar 18
10 Apr 18
20 Apr 18
02 May 18
14 May 18
24 May 18
05 Jun 18
15 Jun 18
27 Jun 18
09 Jul 18
19 Jul 18
31 Jul 18
10 Aug 18
22 Aug 18
03 Sep 18
13 Sep 18
25 Sep 18
05 Oct 18
17 Oct 18
29 Oct 18
08 Nov 18
20 Nov 18
30 Nov 18
12 Dec 18
24 Dec 18

1 6

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“Although the euro is the second international
currency, the crisis and recent tensions demonstrate
that a strengthening of the international role of
the euro is warranted. Delivering on Economic and
Monetary Union and capital markets union is crucial.
Creating a stable economic and financial environment
will better protect European citizens and businesses
and contribute to higher global growth.”

ALEXANDER DE CROO
Deputy Prime Minister, Minister of Finance and
Development Cooperation, Belgium,
ESM Governor

01

Figure 13
Euro area inflation forecast
(in %)
4.0
3.5
3.0
2.5
2.0
1.5
1.0

Note: Shaded area=forecast
Source: European Commission Economic Forecast-Winter interim
forecast 2019

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

0

2007

0.5

While the US Federal Reserve paused its tightening
cycle, monetary policy normalisation in Europe is
expected to continue at a very gradual pace. In the
first half of 2019, markets focused on the ECB’s new
series of targeted longer-term refinancing operations,
and subsequently attention may shift to the outlook
for policy rates. Liquidity provision and the potential
for new monetary policy tools may also come under
market scrutiny. Against this backdrop, sovereign
credit spreads will most likely be driven by countryspecific factors, including markets’ perception of
political risks. Nevertheless, progress on EMU deepening can mitigate the risk of unwarranted financial
market volatility.

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December 2018 Euro Summit marks new chapter for
the ESM
The Euro Summit
endorsed a package of
measures to deepen
EMU, assigning the
ESM a stronger role in
safeguarding financial
stability.

In December, the Heads of State or Government endorsed a package of reforms to
reinforce the resilience of the euro area. The measures included enhancing the ESM’s
role, as well as a commitment to work on completing banking union and designing
a budgetary instrument for convergence and competitiveness for the euro area countries. The agreement on the ESM’s future built upon the recognition of its effectiveness in providing stability support to euro area members and on the understanding
reached between the European Commission and the ESM on their future cooperation. This marks an important milestone in the institution’s further development.
The package of proposals included a Term sheet on ESM reform, agreed by the euro
area finance ministers at their December Eurogroup meeting, and reproduced in full:

Term sheet on the European Stability Mechanism reform

4 December 2018

The European Stability Mechanism (ESM) has played a key role in crisis management by providing timely and effective stability support to euro area member states
in order to safeguard the financial stability of the Euro Area as a whole and of its
Member States. The ESM will be further developed to strengthen the resilience and
crisis resolution capacities of the euro area. The ESM will notably take a stronger
role in the design, negotiation and monitoring of financial assistance programmes
and will provide a backstop for the Single Resolution Fund (SRF), in full respect of
the Commission and ECB competences as laid down in the EU legal framework. The
Commission and the ESM, within their respective competences and according to the
modalities agreed in their joint position on future cooperation, will follow and assess
macroeconomic and financial risks as well as debt sustainability. The Commission
and the Managing Director of the ESM will sign the MoU detailing the conditionality.
Conditionality remains an underlying principle of the ESM Treaty and all ESM instruments, but the exact terms need to be adapted to each instrument.

Common backstop to the SRF
At the latest by the end of the transition period the common backstop will be established. The ESM will provide the common backstop to the SRF in the form of a revolving credit line. The terms of reference on this backstop are attached. The size of the
credit line will be aligned with the target level of the SRF and will have a nominal cap
set above the initial size.
Equivalent treatment will be ensured with non euro area member states participating
in the Banking Union, via parallel credit lines to the SRF as well as appropriate governance arrangements.
The backstop will be a last resort instrument subject to the principle of fiscal neutrality in the medium term.
The common backstop will cover all possible uses of the SRF, according to the
current regulation, including liquidity provision, subject to, where needed, adequate
safeguards, to be discussed in 2019. These safeguards should be without prejudice
to the existing legal competences of the ECB and the SRB. The Direct Recapitalisation Instrument will be replaced by the common backstop at the time it is introduced.
Procedures will be put in place to allow for swift and efficient decision making to
fit the timeline of resolution, whilst respecting national constitutional requirements.

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Disbursements under the common backstop will be approved by a unanimous
­decision of the ESM Board of Directors guided by a number of criteria.
The backstop will be introduced earlier provided that sufficient progress has been
made in risk reduction to be assessed in 2020. We endeavour to find an agreement
on limited Intergovernmental Agreement (IGA) changes. Risk reduction requirements will be commensurate with the level of ambition of the common backstop in
the transition period compared to that of the steady state.
The political decision on the early introduction of the backstop will be informed by
the assessment of the institutions and competent authorities in 2020 including
with respect to minimum requirement for own funds and eligible liabilities (MREL)
build-up and trend in non-performing loans (NPLs) reduction.5 The SRF should be
able to access the backstop for banks of all participating Member States.

The effectiveness of precautionary instruments will be enhanced for countries
with sound economic fundamentals, which could be affected by an adverse shock
beyond their control.
As regards the precautionary conditioned credit line (PCCL), the eligibility process
will be made more transparent and predictable. The existing ex ante eligibility criteria assessing the sound economic and financial performance of the Member State
concerned will be clarified.
They will be used in an assessment on the basis of quantitative and qualitative
­elements related to the economic and fiscal performance of Member States.
As a rule, Member States need to meet quantitative benchmarks (i.e the debt benchmark, the minimum benchmark and a deficit below 3% of GDP6) and to comply with
qualitative conditions related to EU surveillance (i.e not experiencing Excessive
Imbalances and not being subject to the Excessive Deficit Procedure).
Sustainability of general government debt will always be needed.
A formal commitment from the eligible beneficiary Member State to continuous
adherence to the ex ante eligibility criteria (highlighting the main elements of its
­policy strategy) would take place at the moment the facility is approved by the BoG
in a Letter of Intent (LoI) signed by the beneficiary Member State.
Compliance with the ex ante eligibility criteria will be assessed at least every six
months by the competent institutions. In case of non-compliance, access to the
funds would be discontinued. Upon the Member State’s request, and in line with ESM
decision-making processes, the arrangement can be changed to an enhanced conditions credit line (ECCL) or a full macroeconomic adjustment programme.

5

6

This assessment will be made against the aim of 5% gross NPLs, and 2.5% net NPLs or adequate
provisioning, for all SRB banks and progress thereto. Banks should build up subordinated bail-in buffers
steadily in line with the 2024 targets and 2022 intermediate targets. There should be appropriate
monitoring by the competent authorities to assess progress. As regards NPLs reduction, competent
authorities define individual strategies for the reduction of NPL stocks for relevant banks. In case these
aims are not met, Member States will undertake specific efforts also involving their insolvency/debt
enforcement regimes to reach these goals in a short period of time.
The minimum benchmark is the level of the structural balance providing a safety margin against the
3% Treaty threshold under normal cyclical conditions. It is mainly used as one of three inputs into the
calculation of the minimum MTO. The debt benchmark requires a Member State to have a debt to DGP
ratio below 60% or a reduction in this ratio of 1/20th per year. The three benchmarks need to be met in
the 2 years preceding the request for support.

01

ESM toolkit

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The ECCL instrument will continue to be available as foreseen in the current ESM
guideline. Access to an ECCL shall be open to ESM Members that do not comply
with some of the eligibility criteria required for accessing a PCCL but whose general
economic and financial situation remains sound.
As regards the financing terms of precautionary instruments, the margin will be set
at 35 bp in case of an extension of maturities, a step-up margin of 50 bp will be
applied.
Once the credit line is drawn, in case of non-compliance with the LoI for the PCCL
or with the MoU for the ECCL, which is not due to events outside the control of the
government as assessed by the ESM BoD, an additional margin of 50 bps will be
applied, which increases by 65 bp after six months, and access to the funds would
be discontinued.

Debt sustainability issues
There is broad support for the need to improve the existing framework for promoting debt sustainability in the euro area. We intend to introduce single limb collective
action clauses (CACs) by 2022 and to include this commitment in the ESM Treaty.
We also reaffirm the principle that financial assistance should only be granted to
countries whose debt is sustainable and whose repayment capacity is confirmed.
This will be assessed by the Commission in liaison with the ECB, and the ESM as
described in the attached working arrangements. The debt sustainability assessment will be done on a transparent and predictable basis, while allowing sufficient
margin of judgement.
Finally, when appropriate and if requested by the Member State, the ESM may facilitate the dialogue between its Members and private investors. This involvement
would take place on a voluntary, informal, non-binding, temporary, and confidential
basis.

Cooperation between the ESM and the Commission
The ESM and the Commission have also agreed on new modalities of cooperation
within and outside financial assistance programmes, in full respect of the EU legal
framework (see joint position on future cooperation between the European Commission and the ESM in annex). This agreement is without prejudice to the role and
competences of the ECB as defined in the existing legal framework.

“Twenty years after its introduction, the euro plays
an important international role. Since market
participants ultimately decide on the use of a
currency, it is important to ensure trust in the euro.
Increasing the resilience of Economic and Monetary
Union, including the deepening of banking union
and capital markets union, and strengthening the
competitiveness of its member states are key
elements in this.”

OLAF SCHOLZ
Federal Minister of Finance, Germany,
ESM Governor

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Programme country experiences
Ireland

Real GDP grew at an annual rate of 6.7% in 2018.
­Domestic demand indicators support the evidence of
strong growth despite distortions from multinational
corporations. Domestic demand adjusted for the activities of multinationals grew at an annual rate of 4.5% during the year, driven by private consumption and domestic components of investment.7 The latest release for
unemployment was 5.6% in February. The strong labour
market and the still tight housing ­market ­represent
supply-­­side constraints that could hamper future growth.
Consumer price inflation (CPI) remained subdued in
2018 despite robust internal demand and sustained
employment growth. Goods prices are the main drag
on inflation due to weak sterling and an improvement
in the calculations of some CPI components, although
their combined negative effect on prices is less than offset by increases in housing rents and higher service and
energy prices.
Ireland’s general government balance was close to balance in 2018, as the Exchequer recorded a small surplus
by end-2018. This is mainly due to better-than-expected
corporation tax receipts. The high reliance of Ireland
on this potentially unstable source of revenues makes
the Irish fiscal position relatively vulnerable. Persistent
slippages in health sector expenditures could further
increase the fiscal vulnerability in Ireland. The general
government debt remains above €200 billion and the
7

Final modified domestic demand is composed of private and
public consumption, and modified gross fixed capital formation
(excluding aircraft related to leasing and R&D related intellectual
property). Change in inventories is excluded given its high volatility.

debt-to-GDP ratio for 2018 was at 64%. However, such a
ratio may be an imprecise measure of the debt b
­ urden
for the economy given that the activities of multi­­
national enterprises distort the GDP figures.
Ireland enjoys favourable market access. In 2018,
it issued over €17 billion in benchmark bonds with
a weighted average maturity at issuance of 11.8 years,
and a weighted average yield at issuance of 1.1%. The
National Treasury Management Agency has taken
advantage of the favourable market conditions brought
by the ECB’s asset purchases to lengthen the maturity
profile of the debt and to reduce its average interest
rate. Buy and sell orders of Irish government bonds were
quite balanced during the second half of 2018, according to high-frequency indicators, following a spike in
volatility in European sovereign bond markets in May.
Strong economic growth, sizeable cash buffers, and
an ‘A’ credit rating support Ireland’s favourable market
access.
Irish banks showed signs of recovery in an improving
operating environment. Banks’ active engagement
in portfolio sales and restructuring helped to reduce
non-performing loans (NPLs). However, the share of
mortgages in long-term arrears is still sizeable. NPL
resolution activities contributed to further reducing the
coverage ratio, which compares unfavourably to the
euro area average. Nevertheless, Irish banks’ capital
and liquidity ratios sit well above the regulatory minimum requirement and provide additional buffers. In the
long term, increasing competition and sectoral changes
require banks to increase their digital capacity and
improve their operational efficiency to stay profitable.
Under its Early Warning System, the ESM’s monitoring
shows very limited risks for Ireland in meeting its loan
service payments. However, Ireland faces a number of
external downside risks and, potentially, an overheating domestic economy approaching full employment.
These risks warrant the prudent accumulation throughout the upcoming years of a fiscal capacity and close
monitoring of Ireland’s macroeconomic and financial
market dynamics.

01

The Irish economy grew strongly in 2018, backed by
buoyant domestic economic activity. Year-end data
point to a small Exchequer cash surplus for 2018, driven
by over-performing corporate tax receipts. Irish banks
showed capital and liquidity buffers well above regulatory
requirements, but long-term arrears, sectoral changes,
and operational efficiency represent key challenges. The
main risks to the economic outlook stem from Brexit, volatility related to the activity of multinational companies,
and an overheating of the economy in the medium-run.
These risks warrant the prudent accumulation throughout the upcoming years of a fiscal capacity.

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U

DE

D

2 0 1

M E C H A N I S M

8

N

C

L

S TA B I L I T Y

A

M

M E

C O

Greece
E

S M

P R O

G

R

2 2

After Greece exited its ESM programme in August 2018,
the European Commission activated enhanced surveillance for the initial post-programme period and Greece
rejoined regular European economic policy coordination. The economic recovery proceeded for the second year, and Greece outperformed the fiscal target
for the fourth successive year. To secure economic
and financial sector improvements as well as to reestablish market trust, Greece needs to consolidate and
continue the reforms pursued during the programme.
After the ESM programme ended in August, the
Commission activated “enhanced surveillance”,
under which Greece committed to completing all
key reforms adopted under the programme and to
specific actions in particular policy areas. To verify
Greece’s progress with its commitments and in line
with the enhanced surveillance framework, regular
missions are conducted by the European Commission
in liaison with the ECB, in which the ESM participates
under its Early Warning System. The Commission’s
resulting quarterly enhanced surveillance reports also
serve as a basis for euro area members’ bi-annual
decision to release funds related to the Eurogroup’s
June 2018 debt relief measures. For more information on these and related measures, see ‘Greek programme achievements’.
The completion of the third and fourth reviews
unlocked €21.7 billion of ESM financing between
March and August 2018. During the three-year programme, the ESM disbursed €61.9 billion of the up-to€86 billion envelope, of which €7 billion was dedicated
to arrears clearance and €11.4 billion to the build-up
of a cash buffer. Greece’s end-2018 cash resources
of €26.8 billion are sufficient to cover financing needs
for at least two years. Greece raised €3 billion with
a 3-year bond in February, but challenging market
conditions did not favour another issuance in 2018.
In December 2018, the Public Debt Management
Agency announced an up-to-€7 billion 2019 issuance
programme. Between January and March 2019, it
raised €5 billion through the issuance of a 5-year and
a 10-year bond.
In 2018, Greece progressed further in clearing its
stock of arrears to the private sector. Domestic
resources and programme funds decreased the overall stock by more than €8 billion since the arrears
clearance programme started in June 2016. To pay

remaining arrears of €1.4 billion in December 2018
and stop creating new ones, Greece has needed to
intensify efforts to further modernise its public financial management system.
Greek banks meet capital requirements as of end2018 and liquidity is much improved, but they still suffer from the highest euro area NPL ratio. Banks have
broadly met supervisory targets on NPL reduction to
end-2018 but the targets are becoming increasingly
challenging. The government improved the efficiency
of the out-of-court workout law and the electronic
auction platform for asset sales. It also began assessing how it can further support the banks, for example
through an asset protection guarantee scheme. The
Hellenic Financial Stability Fund (HFSF) developed
a strategy for the sale of its stakes in the systemic
banks in the following years.
The Hellenic Corporation of Assets and Participations (HCAP) launched governance and operational
reforms of state-owned enterprises, and restructured
its real estate management entity.
The conclusion of the ESM programme in 2018 and
Greece’s ongoing commitments helped to improve
confidence, but challenges to sustainable growth
remain. Economic activity rose by 1.9%, driven by net
exports and consumption which compensated for
weak investments. General government debt is still
high at 181.1% of GDP. The primary surplus reached
4.4% of GDP, according to Eurostat. This implies
a primary surplus of 4.3% in programme terms, outperforming the fiscal target of 3.5% of GDP in 2018,
the fourth year of outperformance. While income
taxes were robust, lower-than-envisaged public
investment also boosted the surplus. The authorities
legislated a new set of fiscal measures in 2018, cancelling the accelerated recalibration of pensions in
line with the pension reform of 2016 that was scheduled to be implemented in 2019. The resulting higher
expenditure reduces the financial scope for growthenhancing policies. For the future, it will be important
that Greece combines its post-programme commitments with policies and public investments that support the economy’s recovery, strengthen market confidence, and sustain growth.

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Greek programme achievements
In August 2018, Greece exited its third financial assistance programme after a decade
of adjustment. During these years, Greece implemented substantial reforms to
restore sustainability to public finances, strengthen the banking sector’s resilience,
and improve the economy’s competitiveness. During this time, Greece received
almost €290 billion in official sector financial assistance and extensive debt relief. To
enhance Greece’s long-term growth potential as well as to protect European partners’
large exposure, key programme reform successes must be preserved and prudent
policies pursued. Greece’s still existing vulnerabilities and challenging reform targets
will require closer post-programme country monitoring than the other euro area postprogramme countries for some time.

01

What has been achieved?
According to the ESM Sovereign Vulnerability Index,8 Greece’s vulnerabilities have
declined substantially since 2009, when the current account deficit exceeded 12%
of GDP and the fiscal deficit 15% of GDP (Figure 14). During the adjustment years,
Greece steered its economy to safer waters by improving fiscal and external balances,
reducing labour costs, and making the banking sector more resilient (Figure 15).
Figure 14
Evolution of the vulnerability score

Greece reduced its
macroeconomic
imbalances after
broad-based, in-depth
reforms over a decade.

4.0
3.5
3.0
2.5

2.3

2.2

2.2

2.1

1.9

2.0

1.9
1.6

1.6

1.6

1.5
1.0
2003

2006

2009

2012

2015

2018

Source: ESM

8

Lennkh, R.A, Moshammer, E., and Valenta, V. (2017), A Comprehensive Scorecard for Assessing
Sovereign Vulnerabilities, ESM, Working Paper 23, April 2017. https://www.esm.europa.eu/publications/
comprehensive-scorecard-assessing-sovereign-vulnerabilities

“The euro is our currency. It is up to us, the ministers,
the politicians, to agree and implement what is
required for the common currency to be strong and
credible. International recognition will follow.”

MARTIN HELME
Minister of Finance, Estonia,
ESM Governor

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M E C H A N I S M

Figure 15
Improvement in fiscal and external balance
(in % of GDP)
2
0
-2
-4
-6
-8
-10
-12
-14

Current account balance

2018

2017

2016

2015

2014

2013

2012

-18

2011

-16
2010

|

2009

2 4

Government balance excluding bank support

Source: Eurostat

Fiscal consolidation
paved the way to
a balanced budget.

The government fiscal balance vastly improved from a 15.1% of GDP deficit in 2009
to surpluses since 2016. Greece’s fiscal consolidation built upon a policy mix affecting both expenditures and revenues, notably through a series of reforms:
•

Personal income tax:
Harmonised and broadened tax base, integrated the solidarity surcharge into
the personal income tax, and adjusted the tax rates over income groups with
increasing progressivity. Further widening of the tax base and reduction of tax
rates is legislated for 2020.

•

VAT:
Widened the base for the standard tax rate, increased tax rates, and limited
reduced VAT regimes.

•

Pensions:
Lowered main and auxiliary pensions, streamlined eligibility criteria, and harmonised benefit and contribution rules.

•

Public administration:
Reduced public sector employment, wage and non-wage benefits for public servants, and rationalised the fragmented special wage grids.

•

Revenue administration:
Established an Independent Authority of Public Revenue, improved tax collection
by optimising tax audits, promoting and facilitating the use of electronic payments, and reducing corruption.

•

Health system:
Rationalised all off-patent drug prices, provided a claw-back mechanism for
pharmaceuticals, and required diagnostic and private clinics to comply with
spending ceilings.

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Figure 16
Nominal unit labour costs
(2010=100)
115
110
105
100
95
90
85
80
75

Spain

Portugal

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Greece

01

2001

65

2000

70

Cyprus

Ireland

Source: AMECO

Figure 17
Unemployment rate
30%
25%
20%
15%
10%
5%
0%

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: Eurostat

Labour market reforms – implemented mainly from 2010 to 2014 – reduced labour
costs, removed rigidities, and introduced more flexible wage bargaining schemes
(Figure 16). Further efforts helped to safeguard the opening clause in collective
bargaining, allowing for rationalisation of the legal framework on dismissals and
industrial action, tackling undeclared work, and strengthening active labour market
policies. These reforms have contributed to job creation in recent years, reducing the
unemployment rate from its peak of 27.8% in 2013 to 18.4% at end-2018 (Figure 17).
Since 2008, Greece has lost almost a quarter of its GDP (Figure 18). Over recent
years, however, output has stabilised and growth resumed in 2017 and 2018, with
a positive outlook. Looking ahead, key reforms adopted throughout the programmes
will translate into further output gains, supporting investment and exports. Reforms
to improve the business environment focused on product markets and the privatisation of public assets and their improved management:

Labour costs
decreased and the
country’s wage
competitiveness
improved.

Output growth
resumed with
a positive outlook,
thanks to productivityboosting reforms.

S TA B I L I T Y

•

M E C H A N I S M

Product market reforms:
Implemented OECD competition toolkits, removed undue restrictions on regulated professions, facilitated setting up a business, removed barriers to entrepreneurship, simplified and modernised customs procedures and investment
licensing procedures. As a result, between 2009 and 2019, Greece rose more
than 30% on the World Bank’s ‘starting a business’ indicator, and improved its
score in the Global Competitiveness Index since a collapse in 2012. But Greece
still ranks quite low versus its euro area peers and should continue implementation efforts.

•

Privatisations and HCAP:
Privatised a variety of public assets during the programmes to improve the
efficiency of the economy, by shifting resources to the private from the public
sphere. Concretely, the privatisations reduce the public cost of these assets,
attract foreign investment, and enhance their contribution to the Greek economy.
Despite delays in implementation, the privatisation programme has advanced
and will continue during the post-programme period. Beyond this, Greece established a new structure, HCAP, to manage public assets, aiming to improve the
quality of public services, enhance the value of public enterprises and real estate,
and create revenue streams from them. Reforms in HCAP companies should
strengthen Greece’s corporate governance culture, generate funds for domestic
investment, and support broader growth.

Figure 18
Real gross domestic product
(Growth in %, contributions in percentage points)

15
10
5
0
-5

Changes in inventories
Exports
Private consumption

Source: Hellenic Statistical Authority (ELSTAT)

Imports
Investment
Public consumption
Real gross domestic
product growth

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

-15

2003

-10
2002

E U R O P E A N

2001

|

2000

2 6

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Figure 19
Government debt
200

380

180

330

160

280

140

230

120

180

2018

2017

2016

2015

2014

2013

130

Government debt
(in € billions, right-hand scale)

01

Government debt
(in % of gross domestic product)

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

80

2000

100

Source: Eurostat

The Greek banking sector has undergone waves of stress leading to structural
change. Four large banks control over 95% of the market as smaller players have
been merged or liquidated. The four systemic banks have received three rounds of
recapitalisation, 40% of which came from private investors, in 2013 to restore capital
adequacy ratios from losses arising from the write-off of Greek government bonds
and again in 2014 and 2015 to cover losses from the increase in NPLs. The banks
also experienced large-scale deposit outflows, which made them reliant on emergency liquidity assistance and even required capital controls to safeguard financial stability. Deposit outflows peaked in 2012 and, after a short period of recovery,
peaked again in 2015. Bank deposits stabilised in 2018, enabling the government
to relax capital controls gradually. As part of the 2015 recapitalisation, Greece introduced strict rules to reform bank governance. The ongoing reforms are focused
on legislation to reduce the NPL ratio, which remains the highest in the euro area,
and generate new bank lending to support the recovery. Banks met NPL reduction
targets up to the end of 2018, and have reduced the stock of NPLs by more than
€20 billion since 2016.
Greece received substantial debt relief both from private creditors in 2012 and
from the official sector in 2011, 2012, 2016 and, just before the end of the third
programme, in June 2018. All these debt measures have improved debt dynamics (Figure 19). Greece’s debt is expected to remain on a declining path, with gross
financing needs below 15% of GDP in the medium term and below the 20% threshold
in the long-term under the baseline scenario. European partners also committed to
providing additional debt relief measures in 2032, if needed and provided that the EU
fiscal framework is respected.

Safeguarding banking
sector stability
was crucial to the
adjustment.

Risks to debt
sustainability have
been broadly mitigated
with several sets of
debt relief measures.

Challenges in the post-programme environment
Public finances need to remain on a sustainable path, while incorporating more
growth-oriented policies. Already implemented or adopted reforms, such as the
labour market reform and the lowering of income taxes in combination with a broadening of the tax base, need to be safeguarded and should not be reversed. In the
event of court rulings overturning key structural reforms, the recurrent fiscal impact
should be largely addressed by reforms within the same policy field. Further structural reforms are necessary to boost productivity and enhance competitiveness,
complementing the country’s growth strategy. These include reforms to make the
economic environment more business friendly, reduce the time needed to resolve
legal disputes, further improve the effectiveness of public administration while maintaining it at its current size, and enhance the efficiency of state-owned enterprises’

Despite programme
reforms, Greece faces
key challenges to
secure sustainable
long-term growth.

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management. These institutional reforms, coupled with privatisations and improved
management of state assets, are critical to attracting both foreign and domestic
investment and strengthening future growth. Furthermore, Greece needs to support
banks’ efforts with a comprehensive NPL reduction strategy and improved legislative framework, which will help Greek banks’ ability to lend to the economy and
support the economic recovery.

The three ﬁnancial assistance programmes for Greece

FIRST PROGRAMME
agreed in 2010

I

2010

Initial programme amount: €110 billion
Total amount disbursed: €73 billion
Lenders: Euro area countries (except Slovakia) under Greek
Loan Facility (GLF) managed by the European Commission:
€52.9 billion; IMF: €20.1 billion
Grace period and maturity on GLF loans extended in 2012 to
10 and 30 years from 3 and 5 years, respectively
Interest rate: priced with Euribor 3-month with a margin
lowered to 50 basis points from 300 basis points for GLF;
IMF – around 3.96%

2011

2012

II

SECOND PROGRAMME
agreed in 2012

Initial programme amount: €164.5 billion

2013

Total amount disbursed: €153.8 billion

Key areas of legislated reforms: Pension system, healthcare
system, public ﬁnancial management, state budget, public
sector beneﬁts, labour market, closed professions

2014

Lenders: EFSF: €141.8 billion (including €48.2 billion
for bank recapitalisation, €34.6 billion for private
sector involvement and bond interest facilities), of
which €10.9 billion for bank recapitalisation was not
used by the HFSF and was returned to the EFSF;
IMF: €12 billion

THIRD PROGRAMME

2015

agreed in 2015

III

Total amount committed: up to €86 billion
Total amount disbursed: €61.9 billion

2016

Lenders: ESM: up to €86 billion (including up to €25 billion
for bank recapitalisation); IMF: €1.6 billion approved in
principal, but stand-by arrangement did not become
effective

2017

Maximum weighted average maturity: 32.5 years
Interest rate for cash disbursements: 1.45%
(31 December 2018)
Key areas of legislated reforms: VAT, income tax, pension
system, insolvency law, out-of-court debt workout, sales and
servicing of loans (NPLs), public revenue collection, product
markets, management of state assets, public administration, social protection

2018

Maximum weighted average maturity on EFSF loans
initially extended in 2012 to a maximum 32.5 years
from 17.5, ﬁnally extended to a maximum of 42.5
years in December 2018
Interest rate: Guarantee fee cancelled on EFSF
loans, some interest payments initially deferred by
10 years and then extended to 20 years, up to 2032,
and conditional waiver of step up interest rate
margin on certain loan instalments; IMF: between
2.85% and 3.78%
Key areas of legislated reforms: Labour market,
income tax, public administration, social protection,
health system, public ﬁnancial management,
business environment

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Spain

Spanish GDP grew by 2.6% in 2018, down from 3.0%
in 2017. Domestic demand remained resilient, supported by a strong labour market and favourable
financing conditions. Adverse global trade dynamics
resulted in a negative contribution from the external
sector. Spain recorded a current account surplus in
2018 for the sixth year in a row. However, the easing
of external trade and an oil price recovery halved the
current account surplus to 0.9% of GDP in 2018. The
international debtor position reached an 11-year low
at 77.1% of GDP. Inflation eased to 1.7% from 2.0% in
2017 driven by a lower contribution from both core
and non-core components.
Employment growth remained solid at an average of
2.7% in 2018. The unemployment rate fell to 14.5%
by year end, about half of its peak in mid-2013, but
still remained well above the euro area average. The
labour market recovery is not complete as unemployment remains high in some segments of the population, including youth.
The general government deficit dropped to 2.5% of
GDP from 3.1% in 2017. Expenditure constraints and
the cyclical upswing supported deficit reduction.
Looking forward, the rejection of the 2019 draft budgetary plan may limit a faster rebalancing of public
finances. The projected economic slowdown will also
reduce past cyclical support to the deficit correction
given a high structural deficit. Public debt remains
high but has been on a declining trend over recent
years, and stands at 97.1% of GDP in 2018.

Developments in Italy slightly affected Spain’s government bond market last year, but spillovers proved to
be temporary and contained. After peaking at about
1.7% in October, 10-year bond yields rallied to around
1.4% by year-end, and the spread versus Germany
ended the year broadly unchanged compared to end2017. Spain retained good market access and raised
€132 billion in medium- and long-term debt in 2018,
above its initial €126.3 billion target. On the other
hand, Spain reduced its net issuance to €34.3 billion
from €40 billion. All major rating agencies upgraded
Spain in 2018.
Spanish banks improved profitability and asset quality, helped by the recovery of the economy and the
real estate market. This allowed banks to sell a large
amount of non-performing assets during 2018.
Domestic profitability and NPL ratios improved, edging closer to the euro area average. When including
business abroad, Spanish banks have better NPL
and return on equity ratios than the euro area. The
decrease of the overall credit stock in Spain eased,
because credit to households increased in the 2018
third quarter for the first time since the crisis. Banks’
capital buffers are adequate, but capital ratios remain
below the euro area average.
Spain created a macro-prudential authority and
empowered Spanish financial supervisors with additional macro-prudential tools. The deadline to divest
Bankia has been extended until December 2021. The
merger of Bankia and Banco Mare Nostrum was completed in January 2018.
Under its Early Warning System, the ESM continued to assess positively Spain’s ability to honour
its ESM loan service repayments. In 2018, Spain
made an additional three voluntary repayments of
€8 ­billion in total, leaving the ESM outstanding loan at
€23.7 ­billion. Early repayments give a strong positive
signal to the market about the success of the Spanish
financial assistance programme and also reinforce
the position of the ESM, as a mature institution that
successfully supported countries during a crisis.
Given high public debt levels, a credible fiscal strategy
and stronger reform momentum are key to reducing
the vulnerability to adverse shocks going forward.

01

The economy continued growing in 2018, outpacing
euro area peers. However, there was some deceleration, stemming mostly from the external sector.
Robust domestic demand helped to counterbalance
the weak external environment. The general government deficit dropped below 3% mostly due to favourable cyclical conditions. As a result, Spain is expected
to exit this year the Excessive Deficit Procedure for the
first time since 2009. The Spanish treasury maintained
good market access in 2018 and spillovers from Italian developments were limited and temporary. Spanish banks improved profitability and asset quality. The
ratio of NPLs in Spain continued to decline towards the
euro area average.

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Cyprus
Cyprus regained an investment grade rating in 2018
thanks to strong economic growth, a prudent fiscal
policy, and a more resilient financial sector. The winding down of Cyprus Cooperative Bank (CCB) alleviated
a major risk to financial stability through the removal
of a large share of NPLs from outside the banking sector. This one-off operation, however, adversely affected
public finances in 2018 and banks still remain burdened
by a sizeable NPL stock. Sustained reform momentum
is key to mitigating the domestic and external risks
that could unravel efforts made over recent years.
The Cypriot economy posted another consecutive
year of strong growth. GDP grew close to 4% in 2018,
primarily driven by private consumption. Productivity
growth reached the pre-crisis level, reflecting efforts
to remove barriers in the service market. Economic
activity helped to reduce the unemployment rate to
close to 8%. Yet Cyprus’ economy remains exposed
to external risks, which may lead to a sharper-than-­
expected slowdown of GDP growth that could, for
example, reduce tax receipts and put a halt to the
downward trend of unemployment.
Excluding the CCB transaction and its one-off impact
on public finances, a combination of favourable economic conditions and prudent fiscal policy kept public
finances on the virtuous path. The Commission projects that the general government surplus should still
exceed 2.5% of GDP in the medium-term. The government’s support of the CCB partial sale temporarily
interrupted the reduction of public debt, which had
fallen below 100% of GDP at the end of 2017. The CCB
deal will also lead to increased financing needs in the
coming years. Cyprus currently faces no major risks
in meeting its loan service payments. The reform
momentum should, however, continue, particularly in
areas related to public administration law.

Cyprus’ banks made important progress, but the
sector remains vulnerable. NPL ratios in the banking
sector declined significantly but remain among the
highest in Europe. In 2018, several NPL portfolio sales
took place. Banks advanced in their restructurings but
suffer from low profitability and additional provisioning pressures. Furthermore, the government adopted
a three-pillar strategy to stabilise the sector and
reduce NPLs. A crucial pillar was the CCB’s orderly
market exit. A domestic competitor acquired parts
of CCB’s assets and liabilities, while another stateowned entity is gradually reducing the former CCB
NPL stock. The second pillar was the strengthening
of the legal framework for insolvency, foreclosures,
and asset disposals as well as the adopting of a securitisation law. The third pillar, an NPL subsidy scheme
with pre-defined eligibility criteria, supports borrowers
who face difficulties repaying loans backed by their
primary residence.
The strong economic performance and the accelerated clean-up of banks’ balance sheets led to several
rating upgrades. Cyprus now enjoys an investment
grade rating from three of the four major agencies,
and sovereign bond yields declined substantially during the year. Taking advantage of these developments,
Cyprus issued a 10-year bond at a yield of 2.4% in
September 2018. Going forward, the high private and
public debt levels will remain the major burden on the
country’s creditworthiness.
Despite Cyprus’ solid recovery in recent years, the
country needs to safeguard the robust fiscal performance to relieve the public debt burden. And while
the financial sector has made important progress,
the high level of NPLs remains a key vulnerability for
banks.

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Portugal

GDP growth moderated to 2.1% in 2018 from 2.8%
in 2017 due to weaker global and euro area growth.
Gross capital formation and private consumption
were the primary drivers of growth. Net exports’ positive contribution was interrupted in 2018; import
growth outweighed that of exports, given a weaker
contribution from tourism. Labour market developments were positive with unemployment stabilising
at 6.6% by the end of 2018. Growth is expected to
decelerate gradually between 2019 and 2021, caused
by a moderate slowdown of private consumption and
business investment. Trade disputes and Brexit could
also impact future economic developments.
The general government budget deficit reached 0.5%
of GDP in 2018, improving beyond the 0.7% target,
following revenue outperformance and contained
expenditure growth. Both current revenues and primary spending grew in line with the annual targets.
The public debt level declined further to 121.5% of
GDP in 2018 from 124.8% of GDP in 2017 in response
to improvements in the primary balance. Moreover,
fiscal performance and good market access allowed
Portugal to repay early and in full its IMF loan and
further smooth its debt maturity profile, taking advantage of the current low rates. Portugal has also committed to an early repayment of the EFSF loan by up
to €2 billion from 2020 to 2023 subject to market
conditions and the impact on debt sustainability as
assessed at the time.

In 2018, Moody’s was the last of the major rating
agencies to upgrade Portugal’s rating to investment
grade taking into account positive economic developments. The 10-year government bond yield returned
to the 1.5%-2% range in the second half of 2018, close
to the historical lows after the end of its programme,
following some temporary volatility in the first half
of the year. The spread to Germany has also been
broadly stable around 150 basis points.
Economic growth, higher real estate prices, and
heightened investor interest supported the banking
sector’s continued recovery in 2018. The sector’s profitability improved clearly in 2018 compared to previous years. The NPL ratio dropped significantly by 3.9
percentage points during 2018 to 9.4%. NPL sales
and cures have driven the fall in the NPL stock. The
total capital ratio remained constant at 15.2% of riskweighted assets, while the common equity tier 1 ratio
decreased slightly to 13.2%. The resolution fund is
liable for future losses of Novo Banco through a capital contingent mechanism until 2025. In 2018, Novo
Banco made use of it and received its first payments
from the resolution fund, which were partially funded
by a state loan.
The continued assessment of Portugal’s repayment
capacity suggests no short-term repayment risk of
the outstanding EFSF loan. Portugal’s high public
debt burden, however, remains an important vulnerability and its downward trajectory remains fragile due
to weaker growth, fiscal fatigue, and the ageing population. Prudent fiscal policies and structural reforms
should, therefore, be pursued to boost long-term
growth and increase resilience to shocks. The impact
of expansionary policies, such as the resumption of
civil servant promotions and the respective salary
increases or minimum wage increases, needs to be
carefully monitored. While on a consistent downward
trend, the still high level of NPLs in the banking sector
and weak profitability represent the main challenges
in the financial sector looking forward.

01

Portugal’s economy continued growing, with some
deceleration stemming mostly from the external sector. Domestic demand was the main driver of growth
supported by improvements in the labour market. By
the end of 2018, fiscal targets were met, supporting
reductions in high public debt. This downward debt
trajectory remains susceptible, however, to lower-than-­
expected growth dynamics and to a drag on public
finances from an ageing population. The health of the
banking system improved, but vulnerabilities remain,
such as NPLs above the euro area average and weak
profitability.

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Resilience of countries that benefited from financial
assistance
Spillovers, or contagion,
raised the cost of the
crisis for the euro area.

A key challenge in the euro area debt crisis was contagion: stress in one member
state affecting financial markets in another. Tensions spread as investors demanded
a higher risk premium to hold the government bonds of even those Member States
not directly affected by the initial shock. In other words, contagion increased the
costs of the crisis for the euro area.

During the crisis,
in extreme cases,
investors priced in
some risk of a country
exiting the euro area.

Given the characteristics of spillovers in a currency union, contagion may also have
been driven by markets’ perception of redenomination risk: the risk that a financial
asset is converted from one currency into another of lesser value. In the euro area,
this could be understood as investors’ perception of the risk that a member state
introduces a parallel currency or, in an extreme case, leaves the currency area. This
can have implications for other Member States and raise the risk of contagion, but
appropriate policies can mitigate this risk.

Since the crisis,
however, these fears,
and contagion, have
receded.

Former programme countries have become less affected by such external shocks,
demonstrating the results of the reforms carried out during the programmes.
Despite volatility in European sovereign debt markets in 2018, the spillovers to
­former ­programme countries were relatively limited compared to previous episodes
of market stress. Contagion, and investors’ perceptions of redenomination risk, have
been contained.

Contagion risk

We compare
2016–2018
to the start of the crisis
period, 2009–2011.

Over the long-term,
post-programme
countries’ bond spread
developments appear
to have aligned more
with the country having
steadier spreads.

One way to look at the extent of contagion is to assess the correlation of asset
prices. Methodologies range from simple correlations to more complex econo­
metric techniques.9 Here, we present the simple correlations across sovereign credit
spreads of selected countries, and two measures of redenomination risk. Due to
data limitations, we focus on three Member States that benefited from financial
assistance (Ireland, Spain, and Portugal) and relate them to two major euro area
economies that experienced some market volatility over the past two years (France
in 2017 and Italy in 2018). We compare two three-year windows: the crisis period
(2009–2011) and recent years (2016–2018).10
Based on this simple exercise, it appears that the sovereign credit spreads of the
three post-programme countries have become less vulnerable to external developments. Figure 20 depicts the one-on-one (pairwise) correlation of sovereign credit
spreads of each of the three post-programme countries to France and Italy, respectively,
as well as between each pair of the three post-programme countries. It shows that
the three countries’ spread levels, which reflect country-specific risk premia, demonstrated higher correlation with Italy than with France during the crisis period, but that
the correlation with Italy weakened in the recent three-year window.11 In other words,
the spreads of the three countries were more highly correlated with France than with
Italy in the recent period. This development can be interpreted as a sign of improved
resilience of the three post-programme countries to external developments (Figure 21).
See, for example, Martin Hillebrand et al., European government bond dynamics and stability policies,
ESM Working Paper 8, 2015. For recent overviews of other measures of contagion by market analysts
see, for example, Clemente De Lucia et al., Contagion: Italy and the role of fiscal similarity, Deutsche
Bank, 12 November 2018; and Matteo Crimella, Moderate Spillover from Italian Turmoil, Goldman Sachs,
1 June 2018.
10
We use 10-year government bond yields compared to Germany as a benchmark, in line with common
practice. We exclude 2012 from the crisis period sample, due to structural breaks such as the Greek
private sector involvement and the announcement of the ECB’s outright monetary transactions
instrument.
11
The correlation of sovereign credit spreads between Italy and Portugal over the entire 2016–2018
sample turned marginally negative due to Portugal’s return to investment grade rating in 2017.
9

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Figure 20
Correlation of 10-year sovereign credit spreads
1.0
0.8
0.6
0.4
0.2
0.0

2009-2011

PT - IE

ES - IE

ES - PT

IE

between
post-programme
countries

with Italy

01

with France

PT

ES

IE

ES

PT

-0.2

2016-2018

Notes: We use a relatively long three-year correlation window to ensure more stable results. Data for Ireland is up to
October 2011 in the first window.
Sources: ESM based on Bloomberg data

Figure 21
10-year sovereign credit spreads vs Germany
(in basis points)
400
350
300
250
200
150
100
50

Portugal

Dec 18

Spain

Jun 18

Italy

Dec 17

Jun 17

France

Dec 16

Dec 15

Jun 16

0

Ireland

Source: Bloomberg

Correlations between each pair of the three post-programme countries also declined
somewhat compared to the crisis period. This may signal that investors have
a greater focus on country-specific factors and differentiate more between these
countries. The short-term liquidity and volatility of these markets may still be correlated, but it appears that longer-term trends have become more idiosyncratic. This is
a welcome development, which can also help to reduce the risk of contagion.

Investors also appear
to be focusing more
on country-specific
factors.

Redenomination risk
The market perceptions of redenomination risk can be derived from financial instruments. De Santis (forthcoming)12 proposed a redenomination risk measure based
on the difference between credit default swaps (CDS) issued in US dollars and those
12

Roberto A. De Santis, Redenomination risk, Journal of Money, Credit and Banking, forthcoming.

Financial instruments
can provide insight into
investor perceptions of
the risk a country might
leave the euro area.

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in euros, the quanto-CDS. This difference reflects the insurance against the risk of
euro devaluation or the introduction of an alternative currency. Under normal circumstances this is close to zero, but it can increase in times of market stress. Market
perceptions of country-specific redenomination risk can be computed by taking the
country’s quanto-CDS spread relative to the German quanto-CDS, as the sovereign
bonds of Germany are rated AAA by credit rating agencies and hence likely considered relatively safe by investors.13 Yet we note that the use of CDS as an instrument
to derive redenomination risk has to be handled with care, given the limited liquidity
and transparency of the market.14

Another measure of redenomination risk also corroborates these findings. Gros
(2018)16 suggested that market perceptions of redenomination risk could also be
measured by comparing the spread between different CDS vintages: CDS contracts
issued under the 2003 International Swaps and Derivatives Association (ISDA) convention did not explicitly refer to redenomination as a credit event, but CDS contracts
based on the new 2014 documentation provide stronger protection against such
risk. Hence the difference between the two types of contract may point to investors’
concerns about redenomination risk.17
Figure 22
Quanto-CDS spread, 20-day moving average
(in basis points)

100
80
60
40
20

France

Italy

Spain

Portugal

Dec 18

Dec 16

0
Dec 14

Post-programme
countries have been
less affected by such
shocks recently.

Figure 22 depicts the quanto-CDS spreads for the five countries in our sample since
2009. It shows that the perception of redenomination risk by markets increased
more broadly during the euro area debt crisis, but that spillovers have dampened
in recent years. Consistent with these observations, a recent academic paper covering a broader sample also finds that redenomination-risk spillovers are muted for
most euro area member countries, and the number of those exposed to such risks
declined after 2012.15

Dec 12

Perceptions of
such risk declined
substantially after
2012.

Dec 10

|

Dec 08

3 4

Ireland

Note: The chart is based on daily data of 5-year CDS contracts.
Source: Thomson Reuters Datastream

Germany is the common benchmark for the euro area sovereign debt market, and the use of countries’
quanto-CDS relative to Germany rests on the idea that such a spread would be close to zero if the
market perceives the risk of a euro area break-up as negligible. For further details, see pp. 8 and 15 in
Roberto A. De Santis, A measure of redenomination risk, ECB Working Paper 1785, April 2015.
14
With respect to quanto adjustment, one has to be also aware that the majority of traded CDS contracts
are USD-denominated and the EUR-denominated contracts are less liquid.
15
Nicola Borri, Redenomination-risk spillover in the eurozone, Economics Letters 174 (2019), pp. 173–178.
16
Daniel Gros, Italian risk spreads: Fiscal versus redenomination risk, VoxEU.org, 29 August 2018.
17
The spread between the ISDA 2003 and 2014 CDS definitions are wider than the quanto-CDS spread,
because it captures not only redenomination risk but also provides stronger protection to sovereign
bond holders more broadly. Since the CDS 2003 definitions are perceived to be less effective in hedging
some risks, such as the redenomination risk, potential buying pressure is concentrated on the 2014
contracts, partly explaining the asymmetry in the relative price movements. Hence caution is warranted
when translating these numbers into proportions as to what extent redenomination risk specifically can
explain the widening of sovereign credit spreads.
13

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Figure 23
Spread between different CDS vintages, 20-day moving average
(in basis points)
120
100
80
60
40
20

Spain

Portugal

Dec 18

Jun 18

Dec 17

Jun 17

Dec 16

Jun 16

Dec 15

Jun 15
Italy

01

France

Dec 14

Jun 14

Dec 13

0

Ireland

Note: The chart is based on daily data of 5-year CDS contracts.
Source: Thomson Reuters Datastream & CMA Datavision via Haver Analytics

As shown in Figure 23, redenomination risk has been repriced around political
events. Although data for this measure have become available only in the last few
years, they nonetheless cover events such as the French elections in 2017, and the
government formation in Italy last year. In line with the pattern shown by simple
correlations and the quanto-CDS metric, it appears that the three post-programme
countries have been less affected by external shocks recently.

Other metrics and
research results
also support this
conclusion.

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Drivers of resilience

Spillovers across
markets have declined
since the crisis…

…because euro area
fundamentals are more
robust than before the
crisis…
…while low interest
rates and ECB
programmes may have
softened the impact of
external shocks.

Overall, spillovers across markets have been reduced since the crisis period, due to
European policy initiatives and Member States’ own efforts.

First, there are sound macroeconomic reasons for the more limited spillovers: euro
area fundamentals are now more robust than before and during the debt crisis years,
particularly in former programme countries. Domestic efforts supported by adjustment programmes reinforced Member States’ ability to weather external shocks.
Second, the strengthening of the euro area stability framework has been instrumental in reducing contagion risk. Markets considered the creation of the ESM and the
introduction of the ECB’s outright monetary transactions instrument, for example, as
key innovations to defuse tensions in sovereign debt markets.18 Other institutional
reforms, such as enhanced banking supervision and fiscal rules, also play a vital role
in ensuring the euro area’s stability.
Third, historically low interest rates and the presence of the central bank in government bond markets through the ECB’s public sector purchase programme (PSPP)
may also have dampened the impact of external shocks.

Work towards stronger
fundamentals and an
even more robust EMU
framework should
continue to cement
these achievements.

The combination of these factors helped to contain the market impact of policy
uncertainties in some Member States, and ensured that these remain idiosyncratic
rather than systemic. Furthermore, with contagion risk reduced, investors also
seem to have a greater focus on country-specific factors and differentiate accordingly. Nevertheless, contagion has decreased but not disappeared, and hence
there is no room for complacency: it is imperative to continue the work towards
stronger macroeconomic fundamentals and a more robust institutional framework
by deepening EMU.

18

See, for example, George Cole and Matteo Crimella, EMU Bonds Resilient to Italy Risks...But Watch
Growth, Goldman Sachs, 24 October 2018.

“Strengthening the global role of the euro
consolidates its global economic and trade influence
and reflects the euro area’s political, economic, and
financial significance. This is appropriate as our
work on completing Economic and Monetary Union
continues, including creating a deeper and more
stable European financial sector.”

PASCHAL DONOHOE
Minister of Finance and Public
Expenditure and Reform, Ireland,
ESM Governor

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ESM activities

Processing the financial transactions
of the ESM
The ESM engages in substantial financial operations daily. The Middle and Back Office division performs a vital
role in validating and processing these transactions.

The Middle Office embeds risk management and control procedures in its transaction processing. The Back
Office ensures that securities and financial instruments are bought or sold for the correct amount of money, at
the appropriate time, and with the right counterparty. It also transfers the money.

19

As at 31 December 2018.

02

The Middle and Back Office supports three teams: ALM and Lending, which monitors liquidity risk and manages the outstanding loans to programme countries; Funding and Investor Relations, which raises the money to
finance lending operations; and Investment and Treasury, which manages the paid-in capital of €80.5 billion,19 the
reserve fund, and the liquidity buffer.

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ALM and Lending

Coordination

The Middle Office helps to draft lending documents
for disbursement, verifies the accurate recording of
loan details in the system, and provides invoices for
all financial assistance programme countries. The
Back Office executes disbursements and subsequently monitors in- and outflows to and from programme countries.

The Coordination team drives change across the ESM
through project management and business analysis.
It leads the ESM’s strategic planning and contributes
to the continuous improvement of the organisational
planning cycle. It hosts the outsourcing committee
and oversees the implementation and further development of the outsourcing policy.

Funding and Investor Relations
Once Funding issues a security, the Middle Office validates the trade. Then the Back Office confirms that
the trade details match those of the purchasing institutions. Finally, the Back Office ensures that the trade
is correctly delivered.

Investment and Treasury
Once Investment initiates a trade, the Middle Office
validates it, ensuring details are correctly recorded,
and investment limits are respected. The Back Office
then instructs an external provider to settle the trade.
The Middle and Back Office each have separate
post-trading activities to make sure trades are correctly executed.
As part of the Middle Office, the portfolio performance
team supports Investment and Treasury, the investment management committee, and other functions
through performance measurement, appraisal, attribution, and maintenance of benchmark portfolios.
Together with Middle and Back Office, the Coordination team and the Commercial Legal and Procurement team constitute the department: Middle & Back
Office and Portfolio Performance, Coordination and
Commercial Legal and Procurement.

In 2018, the Coordination team organised the technical assistance mission to Greece and finalised the
definition of the ESM’s functional model, the first pillar
in the institution’s overall operating model. The functional model influences, in particular, sourcing decisions, IT strategy, and human resource management.
The Coordination team also led and/or contributed
to a number of internal projects including the introduction of new products, improved risk management
and portfolio performance, records management, and
operational improvements.

Commercial Legal and Procurement
The Commercial Legal and Procurement team supports the fulfilment of the ESM’s operational needs in
line with the strict standards of the ESM procurement
policy. Created at the start of 2018 with the merger of
two teams, the new unified team supported several
key procurement procedures and contracts, including for a Risk Management and Portfolio Analytics
Software and a critical upgrade to the ESM’s SWIFT
infrastructure. The team also introduced a planning
tool and an information portal, standardising and
automating various internal processes. In addition,
the team started using the Eurosystem Procurement
Coordination Office (EPCO), enabling the ESM to procure at better commercial terms due to economies
of scale.

2 0 1 8

A N N U A L

R E P O RT

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3 9

ALM and Lending activities
 The ALM team participated in the completion of
the interest rate risk reduction programme for
Greece and continued to improve the liquidity
management framework.

tion measures did not alter interest rates charged
to other beneficiary Members. The team reinforced
operational controls and the hedging programme is
now in a maintenance phase.

 The Lending team implemented the final year of
the three-year financial assistance programme to
Greece, which concluded in August 2018.

Because the ESM hedges interest rate risk for Greece
and made a second issuance in US dollars, the ALM
team also further improved the ESM’s liquidity management framework. In September 2018, the liquidity
management framework was amended to allow the
ESM to place available cash in its ECB account. The
ECB charges interest on this cash and the income
this generates is spread among euro area countries,
according to the capital key.

 Spain made three additional voluntary early loan
repayments in 2018.

Asset and Liability Management

In 2018, the ALM and Funding teams jointly completed a hedging programme under the interest rate
risk reduction measures for Greece. In this process,
the ESM took into account the last disbursements to
Greece under its financial assistance programme. For
more information on this topic, see ‘Greek programme
achievements’ and the Greek country section.
In line with the Eurogroup’s guidance, the team also
adapted the ESM’s financial framework so the reduc-

Lending
Conclusion of the ESM Greek programme
As of the end of August 2018, the ESM Greek programme
successfully concluded and the ESM had disbursed
€61.9 billion in financial assistance, 72% of the original
€86 billion committed under the August 2015 agreement
with Greece. As a consequence of the expiration of the
availability period on 20 August 2018, the remaining
€24.1 billion is no longer available for disbursement.
The ESM made three disbursements to Greece in 2018
totalling €21.7 billion, all in cash. Of these, €8.8 billion was
used for debt servicing, €1.5 billion was dedicated to net
arrears clearance, while the remaining €11.4 billion contributed to the building up of a cash buffer. The amounts
disbursed in 2018 must be repaid from 2034 to 2060.

“To strengthen the euro we need to strengthen the
eurozone. So before putting the cart before the
horse, we need to proceed at a quicker pace with
finishing the process of banking union, establishing
a mechanism to deal with regional inequalities, and
much more besides.”

EUCLID TSAKALOTOS
Minister of Finance, Greece,
ESM Governor

02

ALM’s role is to measure, monitor, and
manage the liquidity, currency, and
interest rate mismatches between
assets and liabilities that may arise
from the execution of the ESM and
EFSF mandate.

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Table 1
ESM disbursements to Greece
Disbursement

Disbursement
date

Loan amount (in € billion)
In kind

In cash

Cumulative

1st tranche, sub A, disbursement 1

20/08/2015

13

13

1st tranche, sub A, disbursement 2

24/11/2015

2

15

1st tranche, sub B, disbursement 1

01/12/2015

2.72

17.72

1st tranche, sub B, disbursement 2

08/12/2015

2.705

20.425

1st tranche, sub A, disbursement 3

23/12/2015

1

21.425

2nd tranche, disbursement 1

21/06/2016

7.5

28.925

2nd tranche, disbursement 2

26/10/2016

2.8

31.725

3rd tranche, disbursement 1

10/07/2017

7.7

39.425

3rd tranche, disbursement 2

30/10/2017

0.8

40.225

4th tranche, disbursement 1

28/03/2018

5.7

45.925

4th tranche, disbursement 2

15/06/2018

1

46.925

5th tranche

06/08/2018

15

61.925

56

61.925

Total
Source: ESM

5.425

2 0 1 8

A N N U A L

R E P O RT

The ESM, as reported in the ESM 2017 Annual
Report, received an early repayment of approximately
€2 ­billion from Greece in February 2017, after one
bank that had been recapitalised with contingent
convertible bonds returned those funds to Greece
in December 2016. This triggered an early repayment right for the ESM that it exercised in February
2017, reducing the loan outstanding to €59.9 billion
from €61.9 billion. In March 2018, the ESM Board of
Directors approved the amendment of the Financial
Assistance Facility Agreement with Greece, adding
the HCAP, a new fund established as part of the ESM
programme, into the lending structure.

Spain makes another three voluntary
prepayments

In the course of the year, the Lending team also contributed to finalising the design and preparing the
implementation of the medium-term debt measures
for Greece, which were endorsed by the Eurogroup in
June 2018.

Spain had previously voluntarily prepaid €2 billion in
November 2017, €1 billion in June 2017, €1 billion in
November 2016, €2.5 billion in July 2015, €1.5 billion in
March 2015, and €1.3 billion in July 2014. It also made
a scheduled repayment of €0.3 billion in July 2014.

|

4 1

In October 2018, Spain executed the ninth voluntary
early repayment of loans under its bank recapitalisation programme for €3 billion, following the ESM Board
of Directors’ approval. Earlier in the year, in ­February
and May 2018, Spain carried out the seventh and
eighth voluntary early repayments of €2 ­billion and
€3 billion, respectively. At the end of 2018, the total
outstanding amount of the ESM loan to Spain was
€23.72 billion, out of a total €41.3 billion disbursed
from an initial programme amount of €100 billion.

02

Table 2
Total budget savings for all programme countries
(in % of GDP)
2011

2012

2013

2014

2015

2016

2017

2018

Ireland

0.1

0.3

0.3

0.3

0.3

0.3

0.3

0.2

Greece

0.0

1.6

4.1

5.0

5.2

6.2

6.6

7.0

EFSF

0.0

1.6

3.7

4.3

4.4

4.7

5.0

5.0

Deferred interest

0.0

0.0

0.4

0.7

0.7

0.7

0.6

0.7

ESM

0.0

0.0

0.0

0.0

0.2

0.8

1.1

1.3

Spain

0.0

0.0

0.2

0.2

0.2

0.2

0.2

0.1

Cyprus

0.0

0.0

0.7

1.6

1.9

2.0

2.0

1.9

Portugal

0.1

0.4

0.6

0.7

0.7

0.7

0.7

0.7

Note: The ESM estimates these savings by comparing the effective interest rate payments on ESM and EFSF loans with the
interest payments these countries would have paid had they covered their financing needs in the market. First, we estimate the
direct budget savings per disbursement by comparing the ESM and EFSF rate to the 10-year bond yield, used as a proxy long-term
market rate. We apply a cap of 6.4% on market rates, which from experience of the crisis suggests significant market stress and
imminent loss of market access. Second, we calculate the indirect benefits. For each disbursement, the ESM calculates the gains
from the previous year’s reduced financing needs, making the same market rate assumptions as for direct budget savings.
Sources: ESM calculations based on ECB and Eurostat data

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Funding and Investor Relations
 The ESM’s Greek programme drew to a successful close in August 2018, ending all the rescue
funds’ active programmes entered into since
2012, but the EFSF and ESM will remain present in
debt markets for future decades rolling over debt
related to the rescue loans.

years to come, continuing the diversified funding
strategy, which includes:

 The ESM issued its second dollar bond, a 2-year,
building its strategic presence in the dollar market.

 Strategic presence in the dollar market

 New benchmark euro bonds across the yield curve
 Reopenings of existing bonds

 Regular bill programme
 The ESM further diversified its investor base in
2018, attracting 60 new investors to its issues.

 N-bond programme

The year 2018 was a milestone for the ESM with the
end of the programme for Greece in August. For the
first time in the ESM’s history, there are no new loan
disbursements to finance. Since the programme’s
conclusion, investors have often asked whether the
EFSF/ESM will continue the funding programme.

To fulfil its mission, the ESM must always be ready to
raise large amounts on the debt capital markets should
the necessity arise. It must therefore ensure it has a
significant market presence and continue its funding
strategy, which aims to provide opportunities for a variety of investors across a wide range of instruments.

The answer is, of course, ‘yes’. While the loan disbursements have stopped, the EFSF and ESM will need to
manage the rollover of their combined, approximately
€300 billion in existing debt. The bonds issued have
an average maturity of eight-to-nine years. In comparison, the outstanding average maturity of all EFSF
and ESM loans combined was about 23 years at end
2018. Because of the mismatch between bond and
loan maturities, until all the loans have been repaid,
the ESM and EFSF will have to roll over maturing
bonds – expected to run at a pace of some €30 billion
a year for the coming years. The EFSF and ESM will
therefore remain significant issuers of debt for many

Funding programme
In December 2017, the combined funding for the ESM
and EFSF was announced to be €51 billion for 2018.
 €23 billion for the ESM
 €28 billion for the EFSF
On 8 February 2018, the ESM Board of Directors
approved an early repayment by Spain of €5 billion.
Of this total, €2 billion was repaid on 23 February
and the remaining €3 billion in May. The ESM fund-

“For more than 300 million citizens, the euro is
the most tangible symbol of what we can achieve
when working together. Completing the banking and
capital markets unions and, in the longer term, a
European safe asset, will underpin confidence in our
common currency for the benefit of our citizens and
global financial stability.”

NADIA CALVIÑO
Minister for Economy and Business, Spain,
ESM Governor

2 0 1 8

ing target was consequently reduced to €18 billion
from €23 billion and the combined funding target
to €46 billion from €51 billion. Spain made a further
voluntary repayment of €3 billion in October, which
was digested by the ESM’s liquidity management
and did not impact the ESM funding programme.
To finance rollover needs, the combined funding for
the EFSF and ESM in 2019 will be €32.5 billion.
 €10 billion for ESM
 €22.5 billion for EFSF

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On the positive side, the end of net asset purchases
brought wider spreads for our bonds and Sovereign,
Supranational and Agency (SSA) bonds in general versus swaps and government bonds. From an investor
point of view, this is very good news. Especially those
investors like bank treasuries that tend to hedge their
investments with swaps, or those who are benchmarked versus government bonds, took advantage of
the attractive levels. As a consequence of the wider
spreads versus swaps, the yields of our bonds at the
short end became less negative. This allowed the
ESM to issue a 3-year bond in October, the first bond
it has issued in this maturity for over three years.

Market environment
The ECB announced the end of the net purchases for
the asset purchase programme in December 2018,
prompting considerable discussion with investors
about the potential consequences for the ESM.

Figure 24
ESM 2-year dollar bond issue breakdown,
by investor type

The ESM funding team raised the planned €18 billion
through the issuance of four new euro bonds, three
re-openings of existing euro bonds, and the launch
of the ESM’s second dollar bond. Bonds were spread
across the yield curve ranging from the 3-year bond in
October to the reopening in August of a 40-year bond
issued in 2016.
As part of the strategy to widen its investor base, the
ESM issued its first dollar bond in October 2017. The
following October, it launched a second dollar bond, a
2-year. Central banks purchased an exceptionally high
73% (Figure 24). The ESM successfully diversified its
investor base (Figure 25), attracting the participation
of seven new investors and 10 new subsidiaries of
existing investors.

Figure 25
ESM 2-year dollar bond issue breakdown,
by geography

1%
26%

27%

21%

5%
10%

73%

16%
21%

Central banks/
Govt/SWFs
Banks
Source: ESM

Asia
UK & Switzerland
Americas

Fund managers
Pensions funds/
insurance
Source: ESM

Euro area
Middle East

02

Quantitative easing had reassured investors that the
ECB was ready to purchase bonds in the secondary
market. Investors such as asset managers and hedge
funds who like to regularly buy and sell bonds, had
been placing large orders for ESM bonds comfortable
in the knowledge that they could easily sell them on
the secondary market to the ECB. Yet, while the net
purchases of the PSPP may have drawn to a close,
the principal reinvestment needs are relatively high,
and the ECB will still be present as a buyer on the
secondary market. While the large ECB buy orders
seen during the active PSPP period may decrease, the
PSPP will, therefore, still continue to support the market in 2019, albeit to a lesser degree.

ESM bond issuance

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ESM bill issuance

Best supranational euro deal of the year

The ESM held regular 3- and 6-month bill auctions
in 2018, continuing the bill programme launched in
January 2013. The bill market is an important tool to
diversify the funding source and investor base. The
ESM therefore keeps a minimum presence to ensure
permanent access to this investor base. If liquidity
needs were to rise, the ESM could increase the bill
volume to limit oversupply on the bond curve.

In December 2018, the capital markets publication
Global Capital awarded the ESM with ‘Best Supranational Euro Deal of the Year’, recognising the
€4 ­billion 5-year bond issued in July. It addressed
investor demand at the shorter end of the yield
curve attracting over €9 billion in orders.

Since inception, the ESM has conducted 138 3- and
6-month bill auctions, raising more than €245 billion.

At the Global Capital Bond Awards in May 2018,
Siegfried Ruhl, the head of ESM Funding and Investor Relations, won two awards: Overall Most Impressive SSA Funding Official and Most Impressive
Supranational Funding Official.

2 0 1 8

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Investor relations
The investor relations team visited the rescue funds’ most important investors in 35 countries and 47 cities.

02

Source: ESM

13%
13%

53%

21%

North America

Canada
Montreal
Ottawa
Toronto
Mexico
Mexico City
United States
of America
New York
Washington DC

In 2018, the investor relations team went on 18 roadshows, and conducted 133 investor meetings, updating the rescue fund’s most important investors in 35 countries and 47 cities on
ESM activities and the funding programme. The ESM also organised four investor forums. The
Chairperson of the ESM Board of Governors attended two of these events, showing his strong
support for ESM marketing activities. During the year, 60 investors bought ESM or EFSF bonds
in the primary market for the first time.

Europe

Austria
Vienna
Azerbaijan
Baku
Bulgaria
Sofia
Croatia
Zagreb
Czech Republic
Prague
Denmark
Copenhagen
Finland
Helsinki
France
Lyon
Paris
Germany
Cologne
Düsseldorf
Hamburg
Hannover
Mainz
Munich

Africa

Hungary
Budapest
Italy
Milan
Luxembourg
Luxembourg
Norway
Oslo
Spain
Madrid
Sweden
Stockholm
Switzerland
Basel
Geneva
Zurich
United Kingdom
London

Algeria
Algiers
Botswana
Gaborone
Morocco
Rabat
Namibia
Windhoek
South Africa
Pretoria
Tunisia
Tunis

Asia

China, People’s
Republic of
Beijing
India
Mumbai
Indonesia
Bali
Jakarta
Japan
Tokyo
Kazakhstan
Almaty
Korea,
Republic of
Seoul
Singapore
Singapore
Sri Lanka
Colombo
Taiwan,
Province of China
Taipei

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Major rating agencies affirm ESM’s high rating position

Table 3
ESM ratings
Fitch

Moody’s

DBRS

Long-term
rating

Shortterm
rating

Rating
outlook

Long-term
rating

Shortterm
rating

Rating
outlook

Long-term
rating

Shortterm
rating

Rating
trend

AAA

F1+

Stable

Aa1

P-1

Positive

AAA

R-1 (high)

Stable

Note: DBRS ratings are unsolicited. DBRS has rated the ESM at AAA since it initiated the rating in April 2014. Fitch has rated the ESM at AAA since
inception in October 2012, and Moody’s at Aa1 since November 2012. In May 2018, Moody’s changed the ESM rating outlook to positive from stable.
Sources: The rating agencies named, compiled by the ESM

“Increasing the international role of the euro is a
matter of sovereignty and a decisive step for better
protecting European citizens and businesses. This
is why we need to strengthen our common currency
by completing the architecture of Economic and
Monetary Union and creating a eurozone budget.”

BRUNO LE MAIRE
Minister for the Economy and Finance, France,
ESM Governor

2 0 1 8

A N N U A L

R E P O RT

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Investment and Treasury
 ESM investment outperforms its long-term benchmarks since inception
 ESM is reimbursed for negative interest costs on
cash
 ESM enters into securities lending transactions
 ESM further integrates principles for socially
responsible investing

In 2018, the ESM’s paid-in capital recorded a return of
-0.18%. The negative performance is primarily attributable to the negative yield on the assets in which the
ESM invests, in particular the negative remuneration
on cash balances left with Eurosystem central banks.
However, the fall in German government bond yields,
by 11-to-18 basis points in the 5- to 10-year sector,
contributed to increase returns, as this pushed the
price of fixed-income assets higher.
To reduce the impact of negative yields on its investments, the ESM adjusts the structure of its portfolios
to optimise its return within the ESM’s risk framework.
The ESM kept its cash allocation around an average
balance of €58 billion throughout the year. By keeping part of the capital in cash, instead of investing it
in short maturity securities, the ESM can reduce the
negative yield contribution. German 2-year bonds, for
example, were trading between -0.50% and -0.65%
in 2018, below the Eurosystem deposit facility rate
(-0.40%).
The ESM did not significantly modify its interest rate
exposure over the year, to limit the risk of asset depreciation, in anticipation of a potential normalisation of
monetary policy. The ESM also continued to increase
its investments in covered bonds and in non-euro
denominated assets, hedged into euros, which both
offer higher returns than highly rated government
bonds (Figure 26).

The negative performance of the investment portfolios led the ESM to record a negative realised return of
€145 million for the year. However, this loss was more
than offset by the reimbursement of €216 million of
negative interest paid by the ESM on its cash deposits
at Eurosystem central banks in 2017. To ensure that
the negative interest environment would not erode
ESM’s long-term creditworthiness, which relies on its
paid-in and callable capital, France and Germany had
agreed, as a temporary solution, to return the negative interest paid by the ESM on its capital deposited
at their respective national central banks. As a result,
the accumulated return of the ESM’s capital, since
2012, is €1.074 billion, without taking into account the
interest reimbursement. The ESM is currently reviewing its investment guidelines to increase the ability to
invest over a longer horizon, which should, over time,
increase returns while maintaining the ESM’s highest
creditworthiness.
Since 2012 the ESM has outperformed its benchmarks
by 0.15% per year — without taking into account the
repayment of the negative interest rate charges. The
benchmarks consist of indices of AAA/AA rated euro
area government and supranational bonds, reflecting
the eligible asset classes of the ESM’s investment
guidelines. The duration of the benchmark is closely
aligned with the 0- to 1-year maturity bond index for
the short-term tranche, and the 1- to 3-year maturity
bond index for the medium/long-term tranche, in
line with the ESM’s risk appetite. In 2018, the annual
performance of the paid-in capital was in line with
the benchmark.

02

The Investment and Treasury team is entrusted with
investing the ESM’s paid-in capital, which stood at
€80.5 billion at the end of 2018. The paid-in capital will
total €80.8 billion in 2027, when the last instalments
from all ESM Members are received unless new members join the euro area.

The credit quality of the paid-in capital investments
remains at a very high level, in line with the ESM’s
investment guidelines, which are designed to prioritise capital preservation. The percentage of capital
held in cash at Eurosystem central banks or invested
in assets rated AA- or higher stood at 95%, almost
unchanged from 2017 (Figure 27). The universe of eligible issuers remained broadly stable, adding a small
number of covered bond issuers.

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Figure 26
Asset class distribution of investments
8.5%

Figure 27
Ratings distribution of investments

3.4%

2.3%
3.2%
1.9%

8.4%

0.3%

0.0%

6.1%

10.7%
17.2%
69%
69%

Sovereign
Sub-sovereign Governmentrelated agency

Eurosystem
Supranational
Covered bonds

Source: ESM

ESM progressively increases its use of
derivative instruments
The ESM, which deploys derivatives to manage or
hedge risks, has expanded its use of these instruments and increased the range of counterparties with
whom it can enter into derivatives contracts. This
provided the ESM with broader access to the market, which is critical to ensure that the ESM benefits
from competitive pricing. The ESM can now enter into
derivatives transactions with a dozen commercial
banks, with the credit exposure that may arise from
these operations fully collateralised. The ESM aims
to expand the group of counterparties with additional
institutions that meet the eligibility requirements, to
ensure best execution and increase diversification of
credit exposure.
This expanded capacity was mainly used to increase
the ESM’s investments in non-euro denominated
securities, which reached a €7.2 billion equivalent
at the end of 2018 from €5.3 billion a year earlier.
Cross-currency swaps enable the ESM to invest in
longer-dated non-euro denominated assets without the associated currency risk, thus improving the
ESM’s ability to diversify its exposure to a broad range
of high-quality issuers across geographic regions. As
of the end of 2018, the ESM holds assets denominated in six currencies (US dollar, British pound, Japanese yen, Swiss franc, Canadian dollar, and Swedish
krona) out of a total of nine that are eligible. The ESM
also increased the average maturity of its non-euro
investments to 3.9 years from 3.3 years at the end of
2017, benefiting from the higher yield differentials in
longer maturities. A large share of the investments,
€4.9 billion, is denominated in Japanese yen, offering

NCBs & BIS
A

AAA
AA-

AA+
A+

AA
A-

Source: ESM

an additional 50-to-60 basis point spread over the
German yield curve.
As interest rates fell, the ESM also increased the
use of swaps to manage the interest rate risk of the
paid-in capital in a cost efficient manner. By the end of
2018, the total notional amount of interest rate swaps
outstanding in connection with the investment of the
paid-in capital stood at €2.1 billion.

The ESM launches securities lending using
repo and reverse repo operations
In 2018, the ESM initiated its first repo and reverse
repo transactions, to benefit from the yield differential
between securities that are highly sought after, and
those that are not. These transactions involve lending out securities in the portfolio for a short period
of time against another, less-scarce security with
similar credit quality as collateral. The operations are
matched in amount and in maturity, and executed
with Eurex as a central clearing counterparty, to
ensure a high level of security. While the return varies
according to market conditions, in 2018 this activity
earned the ESM an additional 10 to 50 basis points
on securities lent out for periods between one and
four weeks. The volume of repo activity remains limited at this stage, as the stock of securities the ESM
owns with significantly higher value in the repo market is currently relatively low. As a secondary benefit,
repo transactions also help the ESM to raise liquidity quickly and in a cost-effective manner, should the
need arise in periods of market stress.

2 0 1 8

ESM as a sustainable and responsible investor
The ESM invests in securities and issuers that are
aligned with Environmental, Social, and ­Governance
principles. Entities, such as governments, ­
public
agencies, and supranationals with a significant
social and environmental contribution accounted for
69% of ESM invested capital, as of the end of 2018.

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Out of these investments, €475 million have a targeted purpose such as the financing of social housing
or environmental projects. The ESM aims to further
integrate responsible investment principles into the
management of its assets in the future, while ensuring that these investments remain in line with the
ESM’s objective to guarantee the ESM’s creditworthiness and liquidity.

For more on this topic, see ‘ESM: committed to public service, transparency, and accountability’.

INVESTMENT STRATEGY PROCESS
INVESTMENT STRATEGY

+

ESM regularly reviews its long-term strategy to ensure
smooth adjustment over time

Regularly adjusts
portfolio structure

02

Preserves
capital

>

ASSET ALLOCATION

>

+
Diversifies
assets

ESM diversifies its investments to ensure only modest
impact on any single issuer or security

Focuses on assets
with ample liquidity

MARKET IMPLEMENTATION

+
Calibrates
transactions
to reflect
market depth

>
Conducts
transactions across
various channels

ESM adjusts transaction size and trades with a
diversified group of eligible international counterparties

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Risk and Compliance
 Risk and Compliance maintained effective control
of market, credit, liquidity (for both market and
funding), operational, reputational, and legal risk.
 Risk and Compliance dynamically adapted the
risk and compliance framework to developing
business needs within the accepted level of risk
appetite.
 Risk and Compliance in 2018 assessed interest
rate and foreign currency risks arising from foreign
currency investments and US dollar issuances,
completed the short-term debt relief measures
for Greece, and reinforced the ESM information
security framework.
 Risk and Compliance participated in relevant
forums to share knowledge and best practice,
and also organised and hosted the 12th annual EU
Operational Risk Management Forum.
During the year, Risk and Compliance enhanced its
methodologies to monitor and manage the risks
of debt instruments, capital investments, and their
related derivative transactions. Its activity focused on
interest rate and foreign exchange risk from investments in foreign currencies and USD issuances. It
also worked on reducing the interest rate risk on the
Greek loans, fulfilling one of the objectives of the
short-term debt measures for Greece. For more information on these and related measures, see ‘Greek
programme achievements’.

The Risk and Compliance team updated the ESM’s
risk policies in response to recent initiatives and the
introduction of new tools. It established a new policy
for financial model validation and model risk management and updated the ESM’s funding liquidity risk policy and credit risk policy. It also finalised the annual
review of the ESM’s High Level Principles for Risk
Management and ESM Risk Policy.
In line with previous recommendations from the Basel
Committee on Banking Supervision, Risk and Compliance uses in-house models to monitor both credit risk
exposure from its investment activities and counterparty risk from its derivative and collateral management operations. In addition, Risk and Compliance
conducts an annual review and regular reporting to
the Internal Risk Committee and the Board Risk Committee.
The ESM Risk function expanded its monitoring
capacity of emerging risks arising from financial market trends and emerging geopolitical risks to assess
both their potential impact on the ESM and if ESM
risk appetite requires refining. The analysis looks at
how discrete risks (credit, liquidity, market, and operational) should be managed to ensure the ESM’s preparedness.
Integrity, confidentiality, and accessibility of information are critical for the ESM. Risk, together with the
information technology (IT) team, use best practices
in independent risk assessments and evaluations of
controls to ensure the appropriate mitigation of cybersecurity risks.

“Twenty years from its inception, the euro has
established itself as the most important international
currency next to the dollar. Progress towards
the completion of monetary union together with
coordinated action by the euro area members is
necessary to further strengthen the international role
of the euro.”

GIOVANNI TRIA
Minister of Economy and Finance, Italy,
ESM Governor

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A N N U A L

R E P O RT

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5 1

“Undoubtedly, the euro has become a symbol of
Europe in the world, in its 20 years of existence. It
is my firm belief that its international role could and
should be further strengthened as a safe and reliable
currency. This will also enhance the euro area’s
political, economic, and financial weight.”

HARRIS GEORGIADES
Minister of Finance, Cyprus,
ESM Governor

02

The ESM must be vigilant in protecting its critical
assets against inevitable cyber security risks. To safeguard the ESM, various methods, including multiple
layers of defence as well as detective and protective
controls, are applied. The ESM continuously trains
staff on information security and cyber risks associated with new technologies. The ESM tries to identify
all possible cyber risks to, and potential impacts on,
its most critical assets, deciding on the best approach
for each case.

Monitoring is a core objective of the Risk and Compliance function and each activity is assessed in relation to potential financial and non-financial risks, with
the use of key risk indicators and regular reporting to
both the Internal Risk Committee and the Board Risk
Committee.
Risk and Compliance at the ESM is built on a best
practice framework, consistent with the ESM Treaty
and the High Level Principles for Risk Management.
For detailed information, see our website.

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S TA B I L I T Y

M E C H A N I S M

THE THREE LINES OF DEFENCE MODEL

1ST LINE OF DEFENCE

Internal control framework

5 2

Operational management

Board of Directors/
Board Risk Committee

2ND LINE OF DEFENCE

Board of Auditors

3RD LINE OF DEFENCE

Risk Management and
Compliance

Managing Director
and Management Board

Internal audit

The ESM follows the ‘three lines of defence’ governance model, which sets out clearly drawn lines of
authority and appropriate segregation of powers and
duties for risk management.
The first line of defence consists of business functions and departments with direct responsibility for
the day-to-day management of risk. The second
line of defence is performed by an independent risk
management and compliance function, led by the
Chief Risk Officer, which oversees the risks assumed
by the business and ensures they are appropriately

managed and monitored. The third line of defence
consists of an independent internal audit function,
led by the Head of Internal Audit, responsible for providing the Board of Directors with assurance that risk
management controls are operating properly and efficiently. Both the Chief Risk Officer and Internal Auditor
report directly to the Managing Director, as well as to,
respectively, the Board Risk Committee and the Board
of Auditors, to ensure their independence.

2 0 1 8

Compliance – part of the second line of
defence

A N N U A L

R E P O RT

Risk awareness and networking
The ESM holds regular workshops and seminars on
specialised risk topics to improve performance and
keep staff abreast of developments and best practices. In 2018, Risk and Compliance focused on training staff on operational risk management, fraud prevention, and compliance matters.

The ESM regularly reviews and amends the compliance policies to reflect changes in business processes, external requirements, industry best practice,
or regulatory guidance where applicable.

From 25 May 2018, the General Data Protection Regulation (GDPR) replaced the EU Directive 95/46/EC
on data protection. Although the ESM is not directly
subject to the GDPR, it is in the process of updating
its personal data protection policy and is cooperating
with other international organisations to share experiences and best practices. The amended policy will

ESM RISK MANAGEMENT OBJECTIVES
Use lending capacity efficiently

01

06

02

Provide sufficient liquidity
for needs

OBJECTIVES

05

03

04
Be prepared for the unexpected

Avoid capital calls

02

As part of the ESM’s continued participation in a network of international financial institutions (IFIs), the
Risk and Compliance team hosted the 12th annual
EU Operational Risk Management Forum, bringing
together over 10 different IFIs in November 2018.
Institutions exchanged views and best practices on
model validation, cyber security risks, and change
management. In April, the team participated in the
Annual Central Bank Forum of risk managers in
­Mexico, during which it presented the ESM’s operational risk framework to participating central banks
and IFIs.

The compliance officer monitors activity and adherence to the Code of Conduct and other policies such
as those on information barriers and data protection,
sending reviews on a quarterly basis to the Internal
Risk Committee and the Board Risk Committee for
discussion and follow-up action.

Achieve performance goals

5 3

provide for more detailed rules on ESM personal data
processing and privacy. Staff training sessions will
follow the approval of the updated policy.

The Compliance function supports the business, in
line with the ESM Compliance Charter, by addressing risks in connection with personal ethical conduct,
such as potential conflicts of interest over private
investments, anti-money laundering, corruption prevention, privacy requirements and the ESM’s market
conduct, including the maintenance of information
barriers.

Ensure minimum
borrowing costs

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S TA B I L I T Y

M E C H A N I S M

FOUR-STEP MANAGEMENT PROCESS

01 RISK IDENTIFICATION
Identification of all material risk exposures, both financial (credit, market, and liquidity risk) and
non-financial (operational, reputational, legal, compliance, and political).

02 RISK ASSESSMENT AND MEASUREMENT
Assessment of identified risk exposures to determine their materiality, based on a combination of
quantitative tools and expert judgement.		

03 RISK MONITORING AND CONTROL
On-going monitoring and control of material risk exposures, including limit frameworks, key risk
indicators, reporting, and escalation.

04 RISK MANAGEMENT
Process of determining and executing appropriate actions to actively manage risk exposures, such as
mitigation, transfer, reduction, or acceptance of the risk.

“The international role of the euro is primarily based
on market-driven factors and reflects the credibility
of the euro area. It is in our interest to strengthen
the economic resilience of Economic and Monetary
Union against economic shocks, to develop capital
markets, and to reduce vulnerability to external
factors.”

JĀNIS REIRS
Minister of Finance, Latvia,
ESM Governor

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8

A N N U A L

R E P O RT

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5 5

Focus on the Risk and Control Self-Assessment
(RCSA) process

Analyse internal
controls

Consolidate RCSA +
internal controls
risk analysis

Operational risk
conducts
internal review

Share RCSA
with divisons,
for review, approval

Share draft TRSA
with management

Internal
Risk Committee
approves TRSA

In 2018, the ESM reinforced its RCSA practice by reviewing the link between its Operational Risk framework and international standards set by the Basel committee. As
a result, the ESM now incorporates the second level of Basel operational risk categories, which has improved the ESM’s ability to monitor, control, and assess the
risk of pricing errors, settlement failures, or unauthorised access to systems. This
work forms the basis for an enterprise-level assessment of the ESM’s risk exposure.
Risk also mapped the library of ESM controls – the Internal Control Framework and
related process flows – to the RCSA providing a more granular view of the potential
risks for each division. The outcome of each division’s RCSA is the basis for the Top
Risk Self-Assessment (TRSA) report, in which the Risk team provides the Management Board and the Board Risk Committee an enterprise view of major risks (e.g.
cybersecurity, capital preservation).
The RCSA includes post-action mitigation plans, providing a forecast of the exposure and a base of comparison for follow-up and monitoring. This activity enabled
the creation of a risk library that standardises the management of operational risk
elements, such as RCSA risks, controls, key risk indicators, incidents as well as
action plans.

02

Prepare
TRSA report

The Risk and Control Self-Assessment (RCSA) is designed to identify and evaluate
risks and associated controls. Its regular practice aids in integrating risk management practices and culture into staff’s daily activities. The RCSA, introduced in 2015,
is therefore an integral part of the overall operational risk framework at the ESM.

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S TA B I L I T Y

M E C H A N I S M

ESM: committed to public service,
transparency, and accountability
As an intergovernmental institution with a public mandate, the ESM is committed to the highest standards
of public service. ESM staff are dedicated to fulfilling their work in this spirit. This translates into internal practices, policies, and values in use when ESM
staff carry out the institution’s mission. This is also
reflected in the ESM’s commitment to Environmental,
Social, and Governance practices, as well as ongoing
efforts to enhance the institution’s accountability and
transparency.

Environment, social, governance practices
Environment: The ESM is committed to protecting the environment and thus follows a prudent
approach to environmental matters. The ESM Code
of Conduct calls for ESM staff to operate in a way
that limits the carbon footprint and maximises the
re-use of material.
As such, the ESM continuously implements measures to improve its internal environmental impact and
reduce the use of natural resources and energy as
well as the generation of emissions and waste. Once
again in 2018, the ESM obtained a certificate from the
Luxembourg government on the sound treatment of
energy sources and the recycling of waste. The ESM
also encourages its staff to use public transport or
other energy efficient modes of transport and be environmentally conscious.

Social: With its internal policies and procedures, the
ESM endeavours to ensure that its activities are conducted in line with the highest standards of integrity.
The ESM considers its members of staff to be its most
valuable asset and actively supports their wellbeing
by promoting a healthy work-life balance through flexible working arrangements. The ESM fosters diverse
ideas and a diverse working environment by providing
equal opportunity to all its staff.
The ESM also adheres to environmental and social
principles when investing its €80.5 billion in paid-in
capital. For more information on the ESM as a sustainable and responsible, see the Investment and
Treasury section.
Governance: The ESM has a robust governance
framework in place, which ensures strong accountability and transparency vis-à-vis both the ESM shareholders and other stakeholders.

Transparency and accountability
Accountability and transparency are embedded in
the ESM’s governance as its Board of Governors
comprises finance ministers representing the democratically elected governments of the ESM Members. National parliamentary procedures, sometimes
required by ESM Members before approving ESM
decisions, make the ESM also indirectly accountable
to parliaments.

“The euro is a relatively young currency; nevertheless
it is the second most important currency in the world.
This shows its potential. More confidence in the euro
area economy would lead to a stronger international
role of the euro. The Economic and Monetary Union
deepening initiatives, especially the completion of the
banking union and capital markets union as well as
strengthening the role of the ESM in the Economic and
Monetary Union architecture, which, we are intensively
working on, would also contribute to this objective.”

VILIUS ŠAPOKA
Minister of Finance, Lithuania,
ESM Governor

2 0 1 8

A N N U A L

R E P O RT

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02

The independent Board of Auditors has a full public
audit mandate and provides extensive audit oversight.
The Board of Auditors’ annual report to the Board of
Governors, together with the ESM management comments in response to the report, are made available to
the national parliaments and supreme audit institutions
of the ESM Members, the European Parliament, and
the European Court of Auditors. The report, together
with ESM management comments, is available to the
public on the ESM website.
To enhance the transparency and evaluability of its
financial assistance programmes, in 2018 the ESM
set up a programme database, which provides data on
programme disbursements, lending, conditionality, and
forecasting. The new database, which will go live to the
public in 2019, is in response to the June 2017 Board
of Governors mandate to address some of the recommendations from the first evaluation of EFSF and ESM
financial assistance, which was led by the High-Level
Independent Evaluator Gertrude Tumpel-Gugerell.
To enhance familiarity with the ESM’s work across the
EU and elsewhere in the world, the ESM’s Managing
Director, and other management board and staff members spoke at various conferences, seminars, and academic gatherings in 2018. ESM researchers explore
mandate-related topics in publically available series,

working papers, and discussion papers. The ESM welcomed 15 international visitor and student groups and
continued its ongoing dialogue with the media.
The ESM Managing Director also regularly attended
the European Parliament’s Economic and Monetary
Affairs Committee and made appearances at national
parliaments.

Evaluation of financial
assistance programmes
In the second half of 2018, the ESM started preparatory work for a second evaluation in response to the
June 2017 Board of Governors’ commitment to “an
evaluation of the Greek programmes after completion”
and the end of the ESM programme for Greece on 20
August 2018. On 18 February 2019, the Chairperson of
the Board of Governors appointed Joaquín Almunia,
former European Commission Vice-President, as the
High-Level Independent Evaluator. The evaluation’s
objective will be to enhance the relevance and effectiveness of ESM’s programme-related activities, and
support informed future policy decision-making. The
conclusions and recommendations of this second
evaluation will be presented to the ESM Board of Governors at its Annual Meeting in June 2020.

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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

“Thanks to the unprecedented reform efforts we
have collectively embarked upon following the crisis,
the euro is today firmly set on a solid footing. Its
role on the international stage will unquestionably
strengthen from here on, as confidence in our
common currency further gains ground.”

PIERRE GRAMEGNA
Minister of Finance, Luxembourg,
ESM Governor

2 0 1 8

03

A N N U A L

R E P O RT

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5 9

Institutional framework
and organisation

The ESM financial assistance toolkit
The ESM has a number of financial assistance instruments at its disposal to fulfil its mission, though it has
used only two to-date. The ESM deploys these funds in exchange for reforms to address the causes that led to
requests for ESM financial stability support.

ESM loans

Conditional upon: the implementation of macroeconomic reform programmes, negotiated by the European Commission in liaison with the ECB and, where
possible, the IMF.
Used: in Ireland and Portugal (EFSF), in Greece (EFSF
and ESM), and in Cyprus (ESM).

Goal: to assist an ESM Member by addressing those
cases where the financial sector is primarily at the
root of a crisis.
Conditional upon: reforms to financial supervision,
corporate governance of banks, and applicable
law and regulations on bank recapitalisation,
restructuring, and resolution.
Used: in Spain (ESM).

03

Goal: to assist ESM Members in significant need of
financing, and which have lost access to capital markets, either because they cannot find lenders or because the financing costs are so high it would undermine the sustainability of public finances.

Loans for indirect
bank recapitalisation

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S TA B I L I T Y

M E C H A N I S M

Precautionary
credit line
Goal: to prevent crises from emerging or developing,
by helping countries whose economic conditions are
still sound to maintain market access by strengthening the credibility of their macroeconomic performance.
The December 2018 Euro Summit decided to enhance
the effectiveness of precautionary instruments. For
more information on the summit decisions, see
‘December 2018 Euro Summit marks new chapter for
the ESM’.

Primary
market purchases
Goal: to support an ESM Member’s bond auction, the
ESM may buy debt securities at market prices in the
primary market, in other words directly from the issuing ESM Members.
Conditional upon: no conditionality beyond the underlying programme, as this tool complements a regular
loan instrument or a precautionary programme.
Used: no.

There are two types of credit lines:
A precautionary conditioned credit line is available to an
ESM Member whose economic and financial situation
is fundamentally sound and meets the eligibility criteria.
An enhanced conditions credit line is available to an
ESM Member that does not comply with some of the
eligibility criteria required for accessing a precautionary
conditioned credit line but whose economic and financial situation remains sound.
Used: no.

Direct Recapitalisation
Instrument (DRI)

Secondary
market purchases
Goal: to support the sound functioning of the government debt market when a lack of liquidity threatens the financial stability of an ESM Member whose
economic and financial situation is otherwise fundamentally sound. This instrument can be used within
or outside a macroeconomic adjustment programme.

Goal: to help remove a serious risk of contagion
from the financial sector to the sovereign. The ­total
amount available for this instrument is limited to
€60 billion and can only be used for systemically
­important financial institutions, as defined in the
­relevant EU ­legislation.

Conditional upon: specific policy conditions apply for
countries not under a programme.

Conditional upon: measures to address the sources
of difficulties in the financial sector and the general
economic situation of the country. Eligible financial
institutions are those that, for example, are unable
to attract sufficient capital from the private sector
and for which existing burden-sharing arrangements
on bank recapitalisation, restructuring, and resolution, in particular the bail-in requirements according
to ­Article 27 of the Single Resolution Mechanism
­regulation, are insufficient.

Used: no.

Used: no.
At the December 2018 Euro Summit, leaders also decided that the ESM will provide a credit line to be drawn
upon if needed by the SRF, a tool which will become
a new instrument in the ESM’s toolkit. When the ESM
assumes the common backstop provider role, the DRI
will be cancelled. For more information on this new
mandate, see ‘December 2018 Euro Summit marks
new chapter for the ESM’.

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R E P O RT

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6 1

Governance
ESM shareholders

ised capital based on the ESM Members’ 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.20

The ESM shareholders are the 19 euro area member
states that are also referred to as ESM Members.
Each Member has contributed to the ESM’s author-

ESM contribution key (in %)
26.9496

Germany
20.2381

France

17.7839

Italy
11.8174

Spain
5.6756

Netherlands

3.4519

Belgium

2.7962

Austria

2.7632

Portugal

2.4910

Finland

1.7844

Ireland

1.5806

Slovakia

0.8184

Slovenia

0.4679

Lithuania

0.4063

Latvia

0.2746

Luxembourg

0.2486

Cyprus

0.1948

Estonia

0.1847

Malta

0.0726
0

03

Greece

(in €'000)

Subscribed capital — Total 704,798,700
Paid-in capital — Total 80,548,400

5

10

15

20

Euro area member states
Other EU Member States
25

30

Note: As of 30 April 2019.
Source: ESM
*The accession of new ESM Members is factored into the capital key, reducing the existing ESM Members’ contribution keys. Individual nominal capital
subscriptions and paid-in capital amounts remain unchanged for the existing ESM Members. 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 benefiting 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, Slovenia’s temporary correction period
expired on 1 January 2019, and Slovenia deposited the remaining paid-in capital contribution. Malta, Slovakia, Estonia, Latvia, and Lithuania are currently
benefiting from temporary corrections, the last of which terminates at the end of 2026.

20

As at 30 April 2019.

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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

Governance structure

BOARD OF
GOVERNORS
BOARD OF
AUDITORS

MANAGING
DIRECTOR

BOARD OF
DIRECTORS
BOARD RISK
COMMITTEE
BUDGET REVIEW AND
COMPENSATION
COMMITTEE

MANAGEMENT
BOARD

FINANCE
COMMITTEE
INCIDENT
MANAGEMENT
TEAM
INVESTMENT
MANAGEMENT
TEAM

INTERNAL RISK
COMMITTEE
BANKING
COMMITTEE

INTERNAL
COMMITTEES

CORPORATE PROJECTS
COMMITTEE

The Board of Governors meets at least once a year and whenever the affairs of the ESM so require. The Board of Directors also meets whenever the affairs
of the ESM so require (nine times in 2018), while the Board Risk Committee and the Budget Review and Compensation Committee meet regularly each
quarter and additionally when required.

For more information on our governance structure, visit our website.

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Board of Governors
Annual Meeting of the Board of Governors

~
On 21 June 2018, the Board of Governors held its sixth annual meeting at the ESM premises in Luxembourg.

In addition, the Chairperson of the Board of Auditors
addressed the Governors with regard to the Board of
Auditors’ annual report to the Board of Governors as well

as the Board of Auditors’ report in respect of the ESM
2017 financial statements. Furthermore, the external
auditor presented its report in respect of the audit of the
ESM 2017 financial statements.
On the occasion, the Board of Governors also approved
the ESM 2017 Annual Report as drawn up by the ESM
Managing Director.

“The strengthening of the international role of the
euro brings benefits for citizens and businesses
alike, whilst contributing to the resilience of the
international financial system especially against
exchange rate shocks.”

EDWARD SCICLUNA
Minister of Finance, Malta,
ESM Governor

03

In his presentation to the Board of Governors, the Managing Director highlighted the key achievements of the
ESM during the past year, including its funding operations, investment and lending activities, and institutional
developments.

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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

Members of the Board of Governors

Portugal

Belgium

Germany

Estonia

Ireland

Mário Centeno

Euclid Tsakalotos

Chairperson of the Board of Governors since
13 January 2018,
Minister of Finance,
Governor since 26 November 2015

Minister of Finance,
Governor since 6 July 2015

Greece

Alexander De Croo

Nadia Calviño

Deputy Prime Minister, Minister of Finance
and Development Cooperation,
Governor since 11 December 2018
replacing Johan Van Overtveldt,
Governor since 15 December 2014

Minister for Economy and Business,
Governor since 7 June 2018
replacing Román Escolano,
Governor since 7 March 2018
replacing Luis de Guindos,
Governor since 27 September 2012

Spain

Olaf Scholz

Bruno Le Maire

Federal Minister of Finance,
Governor since 14 March 2018
replacing Peter Altmaier,
Governor since 24 October 2017

Minister of Economy and Finance,
Governor since 25 May 2017

France

Martin Helme

Giovanni Tria

Minister of Finance,
Governor since 29 April 2019
replacing Toomas Tõniste,
Governor since 12 June 2017

Minister of Economy and Finance,
Governor since 1 June 2018
replacing Pier Carlo Padoan,
Governor since 24 February 2014

Italy

Paschal Donohoe

Harris Georgiades

Minister of Finance and Public Expenditure
and Reform,
Governor since 15 June 2017

Minister of Finance,
Governor since 3 April 2013

Cyprus

2 0 1 8

Latvia

R E P O RT

Jānis Reirs

Hartwig Löger

Minister of Finance,
Governor since 19 February 2019
replacing Dana Reizniece-Ozola,
Governor since 22 March 2016

Federal Minister of Finance,
Governor since 26 January 2018
replacing Hans-Jörg Schelling, Governor
since 1 September 2014

Austria

Vilius Šapoka

Andrej Bertoncelj

Minister of Finance,
Governor since 13 December 2016

Minister of Finance,
Governor since 13 September 2018
replacing Mateja Vraničar Erman,
Governor since 21 September 2016

Lithuania

Slovenia

Ladislav Kamenický

Minister of Finance,
Governor since 4 December 2013

Minister of Finance, Governor since
7 May 2019
replacing Peter Kažimír, Governor since
27 September 2012

Slovakia

Edward Scicluna

Petteri Orpo

Minister of Finance,
Governor since 13 March 2013

Minister of Finance,
Governor since 29 June 2016

Malta

Finland

Wopke Hoekstra
Minister of Finance,
Governor since 26 October 2017

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6 5

03

Pierre Gramegna

Luxembourg

Netherlands

A N N U A L

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S TA B I L I T Y

M E C H A N I S M

Shareholder engagement
The ESM strives to maintain strong and effective
shareholder relations. Effective shareholder engagement is key to the ESM fulfilling its mandate while
remaining fully accountable to its Members.
In 2018, the ESM organised its fifth annual shareholders day, which once again brought together representatives from all 19 ESM Members, who work in
their respective ministries of finance on ESM-related
matters, as well as representatives from the European Commission and the Eurogroup Working Group

Secretariat. The majority of participants came to the
ESM for the first time and the event provided them
an opportunity to gain insight into a wide range of
ESM activities, from internal corporate operations to
responding to market challenges and the setting of
priorities.
To discuss relevant matters, the ESM also participated in various forums where its shareholders are
represented, such as the Eurogroup, the Eurogroup
Working Group, the Task Force on Coordinated Action,
and other relevant technical working groups.

“A stronger international role for the euro will
underpin Europe’s commitment to an open,
multilateral, and rules-based global economy.
Increased use of the euro across the globe will
enable European citizens and businesses to benefit
from free and smooth trade and cheap and reliable
access to finance.”

WOPKE HOEKSTRA
Minister of Finance, The Netherlands,
ESM Governor

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Board of Directors
Members of the Board of Directors

CHAIR OF THE MEETINGS
OF THE BOARD OF DIRECTORS

Nicholas O’Brien

Klaus Regling
ESM Managing Director

Ireland

Steven Costers

George Chouliarakis

Counselor General, Ministry of Finance,
appointed on 1 May 2015

Alternate Minister of Finance,
Ministry of Finance,
appointed on 4 February 2015

Estonia

03

Belgium

Germany

Assistant Secretary General,
Department of Finance,
appointed on 3 July 2014
Member of the Budget Review and
Compensation Committee since
30 September 2014, reappointed until
8 October 2019

Greece

Jörg Kukies

Carlos San Basilio

State Secretary, Federal Ministry of Finance,
appointed on 9 April 2018
replacing Thomas Steffen,
originally appointed on 24 September 2012
Member of the Budget Review and
Compensation Committee since 14 May 2018,
appointed until 8 October 2020

Secretary General for Treasury and
International Financing,
Ministry of Economy and Business,
appointed on 19 June 2018
replacing Fernando Navarrete,
appointed on 11 April 2018
Member of the Budget Review and
Compensation Committee since 13 July
2018, appointed until 8 October 2020

Spain

Märten Ross

Odile Renaud Basso

Deputy Secretary General for Financial Policy
and External Relations, Ministry of Finance,
appointed on 21 October 2013

Director General of the Treasury,
Ministry of Finance and Public Accounts,
appointed on 30 June 2016
Member of the Board Risk Committee
since 10 February 2017,
reappointed until 8 October 2020

France

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S TA B I L I T Y

Italy

M E C H A N I S M

Alessandro Rivera

Alfred Camilleri

Director General of the Treasury,
Ministry of Economy and Finance,
appointed on 27 July 2018
replacing Gelsomina Vigliotti, appointed on
15 May 2018,
replacing Vincenzo La Via, originally appointed on 8 October 2012
Member of the Board Risk Committee since
20 September 2018,
appointed until 8 October 2021

Permanent Secretary, Ministry of Finance,
appointed on 8 October 2012
Member of the Budget Review and
Compensation Committee since 9 October 2012,
reappointed until 8 October 2019
Chairperson of the Budget Review and
Compensation Committee since 24 April 2014,
reappointed until 8 October 2019

George Panteli

Christiaan Rebergen

Director of the Economic Research and
European Union Affairs Directorate,
Ministry of Finance,
appointed on 29 April 2013

Treasurer-General, Ministry of Finance,
appointed on 6 June 2018
replacing Michel Heijdra,
appointed on 1 February 2018
replacing Hans Vijlbrief, originally appointed
on 27 September 2012

Cyprus

Netherlands

Līga KĮaviņa

Harald Waiglein

Deputy State Secretary, Ministry of Finance,
appointed on 30 January 2015

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 2019
Chairperson of the Board Risk Committee
since 8 June 2018

Latvia

Austria

Miglė Tuskienė

Ricardo Mourinho Félix

Vice-Minister, Ministry of Finance,
appointed on 4 March 2015

Deputy Finance Minister and Secretary
of State for Finance, Ministry of Finance,
appointed on 7 December 2015
Member of the Board Risk Committee since
7 April 2016, reappointed until 8 October 2019

Lithuania

Luxembourg

Malta

Portugal

Isabelle Goubin

Katja Lautar

Director of the Treasury,
Ministry of Finance,
appointed on 19 March 2014
Member of the Budget Review and
Compensation Committee since
24 April 2014, reappointed until
8 October 2021

Head of Department for General Government
Analysis and Coordination of Economic
Policies, Ministry of Finance,
appointed on 19 February 2019
replacing Gorazd Renčelj,
originally appointed on 10 February 2017

Slovenia

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Peter Paluš

Slovakia

Head of Financial Unit at Permanent
Representation of Slovakia to the European
Union, appointed on 22 February 2017
Member of the Board Risk Committee
since 8 February 2018,
appointed until 8 October 2020

Tuomas Saarenheimo
Permanent Under-Secretary,
Ministry of Finance,
appointed on 12 September 2013

Finland

03

“The euro has become the second most important
reserve currency in the world. We should promote its
status as a strong currency since this will contribute
to the economic well-being of the euro area
countries. The ESM has a role to play in this respect
by guaranteeing financial stability.”

HARTWIG LÖGER
Federal Minister of Finance, Austria,
ESM Governor

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M E C H A N I S M

Board of Auditors
The Board of Auditors is an independent oversight
body of the ESM. It inspects the ESM accounts and
verifies that the operational accounts and the balance
sheet are in order. It also audits the regularity, compliance, performance, and risk management of the ESM
in accordance with international auditing standards
and monitors the ESM internal and external audit processes and their results.
The Board of Auditors is composed of five members
appointed by the Board of Governors in line with
­Article 24 of the By-Laws. New members of the Board
of Auditors are appointed for a non-renewable term of
three years. In October 2018, the Board of Governors
appointed Irena Petruškevičienė and Noel Camilleri
to the Board of Auditors, replacing Jean Guill and
Andrew Harkness whose terms had come to an
end. Furthermore, the Board of Governors appointed
­Tommaso Fabi in April 2019 to replace Günter Borgel,
whose term had also come to an end.
In 2018, the Board of Auditors held 10 meetings at the
ESM premises. During these meetings, ESM management and senior staff updated the Board of Auditors
on recent ESM activities, the decisions of the ESM
governing bodies, and other relevant issues and developments. The Board of Auditors met regularly with the
internal audit function, and monitored and reviewed
the work and independence of the external auditors.
In addition, the Chairperson and Vice Chairperson of
the Board of Auditors met once with the ESM Board of

Directors. Furthermore, the Chairperson of the Board
of Auditors met with the Chairperson of the Board of
Governors and attended the Annual Meeting of the
Board of Governors to discuss the work and conclusions of the Board of Auditors.
During the year, the Board of Auditors also carried out
an independent audit of ESM consultancy expenses
with the support of subject matter experts from the
French Court of Auditors and of the internal control
framework with the support of subject matter experts
from the European Court of Auditors. In fulfilling its
role, the Board of Auditors also reviewed the ESM
2018 Financial Statements and the working papers of
the external auditor.
In addition to its annual report in respect of the ESM
financial statements included in the ESM annual
report, the Board of Auditors also draws up an annual
report to the Board of Governors which summarises its audit work and its recommendations for the
respective year.
The Board of Auditors’ annual report, together with
the ESM management comments in response to the
report, are made available to the national parliaments,
the supreme audit institutions of the ESM Members,
the European Parliament, and the European Court of
Auditors. The public can access these documents on
the ESM website.

“The euro plays an important cohesive role in
Europe. Its internationalisation will further enhance
its contribution to stability and growth.”

ANDREJ BERTONCELJ
Minister of Finance, Slovenia,
ESM Governor

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7 1

Members of the Board of Auditors

Kevin Cardiff
Chairperson since 21 February 2017
Member since 17 December 2016
Appointed upon nomination by the European Court of Auditors.

François-Roger Cazala
Vice Chairperson since 21 February 2017
Member since 8 October 2016
Appointed upon nomination by the French Supreme Audit Institution.

Noel Camilleri
Member since 8 October 2018
Appointed upon nomination by the Supreme Audit Institution of Malta.

Irena Petruškevičienė
Member since 8 October 2018
Appointed upon proposal of the Chairperson of the Board of Governors.

Member since 1 April 2019
Appointed upon proposal of the Chairperson of the Board of Governors.

Note: In line with Article 24 of the By-Laws, two members are appointed upon proposal of the Chairperson
of the Board of Governors, two members upon nomination by the supreme audit institutions of the ESM
Members based on a system of rotation, and one member by the European Court of Auditors.

03

Tommaso Fabi

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Internal control framework
The ESM internal control framework is embedded in ESMv daily operations and reflects the nature, complexity,
and risks inherent in ESM activities. The ESM internal controls are underpinned by the three lines of defence governance model established by the Board of Directors and are aligned with the principles of the Basel Committee’s
Framework for Internal Control Systems in Banking Organisations.21
21

Framework for Internal Control Systems in Banking Organisations, Basel Committee on Banking Supervision, Basel, September 1998.

ENTITY-LEVEL CONTROLS
Include management oversight and control culture, risk recognition and assessment,
reliable information systems, 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.

INFORMATION TECHNOLOGY (IT) CONTROLS
Include IT general controls over the IT environment, computer operations, access
to programs and data, program development, change management and automated
transaction processing controls.

“The European Union is a global player. To strengthen
our position in the rapidly changing environment,
the euro needs to stay sound and well respected. To
achieve this we need to complete the architecture
of Economic and Monetary Union, push on with
structural reforms, and invest into sustainable
growth.”.

LADISLAV KAMENICKÝ
Minister of Finance, Slovakia,
ESM Governor

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7 3

“Strengthening the international role of the euro
should be considered more of a positive spillover
effect of strengthening Economic and Monetary
Union than a goal in itself. While there are benefits
from increasing trading in euro among euro area
actors, companies need to be able to freely choose
the currency they do business in.”

PETTERI ORPO
Minister of Finance, Finland,
ESM Governor

The Board of Directors, directly and through the Board
Risk Committee, is periodically updated on the state
of ESM’s internal controls.

The external auditor gains a sufficient understanding of
ESM internal controls to provide reasonable assurance
of the accuracy of the ESM’s financial statements.
There are inherent limitations to the effectiveness of
any system of internal controls, including the possibility of human error or circumvention of overriding
controls. Therefore, even an effective internal control
framework can provide only reasonable assurance.

03

The Managing Director, under the direction of the
Board of Directors, is responsible for the ongoing
maintenance of the ESM internal control framework.
Assisted by the Management Board, the Managing
Director sets a strong tone from the top and oversees
internal controls across all areas of the ESM. Each
year, the Managing Director issues a management
report on the state of internal controls to the Board
of Directors (via the Board Risk Committee) and the
Board of Auditors.

Internal audit provides an independent assurance
on the established internal controls and procedures
as part of the regular audit cycle. Internal audit independently reviews the entity-level controls on an
annual basis.

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ESM organisational structure

Managing Director
K. Regling

Head of
Communications/
Chief Spokesperson
W. Proissl

General Counsel
D. Eatough

Head of
Internal Audit
L. Lucas

Head of Legal
J. Aerts

Chief Risk Officer/
Head of Risk and
Compliance
C. Pacciani

Head of HR and
Organisation
S. De Beule-Roloff

Secretary General
K. Anev Janse

Deputy MD and
Chief Finance Officer
C. Frankel

Chief Economist
R. Strauch

Chief Corporate
Officer
F. Blondeel

Head of Funding and
Investor Relations
S. Ruhl

Head of Investment
and Treasury
S. Levy

Head of Economic and
Market Analysis
J. Rojas

Head of Middle and 
Back Office and
Portfolio Performance
M. Hickey

Head of IT and 
Operations
D. Wallace

Head of Finance
and Control
T. Pies

Head of Strategy and
Institutional Relations
N. Giammarioli

Commercial
Legal and
Procurement

Head of Banking
N. Mascher

Coordination

Head of ALM and
Lending
P.-H. Floquet

Head of Corporate
Governance and
Internal Policies
F. Zinoecker

Member of the Management Board
Secondary reporting line

Visit our website for more information on our organisational structure and a description of the activities of the various departments.

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As part of the ESM’s continued maturing process, the ESM, led by its extended leadership team, updated its
mission statement in early 2019.

The ESM’s mission is to enable the countries
of the euro area to avoid and overcome
financial crises and to maintain long-term
financial stability and prosperity.

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7 5

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A N N U A L

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7 7

Financial report

Balance sheet
At year-end, the total ESM balance sheet was €807.1
billion. Compared to 31 December 2017, the balance
sheet increased by €10.1 billion, mainly due to new loan
disbursements in 2018. The ESM disbursed €21.7 billion in loans to Greece and received early repayments
from Spain of €8 billion.
To provide financial assistance to the beneficiary Member States, the ESM relies on its funding activity. In 2018,
the total liability in respect of debts evidenced by certificates increased by €9.2 billion to €98.4 billion (€89.2 billion in 2017), reflecting the increase in lending activity.

a May 2018 decision by the Council of the European
Union to impose a fine on Austria.1
The Profit before extraordinary items, which corresponds to the net income generated by ESM operations,2 decreased by €7.3 million, to €42.3 million in
2018 from €49.6 million in 2017. Higher administrative
expenses and the continued effect of the negative interest environment mainly drove this decrease, which was
in part offset by a higher result on financial operations.

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 2018, this reserve was €140.2 million,
compared to €99.1 million as of 31 December 2017.
The increase in the Fair value reserve mainly reflects the
appreciation of the investment’s values on the market
compared to the previous year, largely due to changes
in interest rates.

Operating costs, including depreciation of fixed assets,
were €67.5 million compared to €61.3 million in 2017.
The increase is mainly driven by additional staff cost
as well as IT and advisory services. The ESM provides
administrative services to the EFSF and therefore
charges it service fees of €32.6 million (€30.9 million in
2017), which are recognised as Other operating income.
The ESM continues to focus on budgetary discipline
and effective cost control.

Profit and loss account

Outlook for 2019

The ESM recorded a net income of €284.7 million for
the financial year 2018, compared to €68.6 million
in 2017.

Following the end of the programme for Greece in 2018,
no further loan disbursements are foreseen in 2019.
The ESM has actively diversified its investments and
continues to look for additional measures to mitigate
the impact of the negative yield environment, in line with
its guidelines and its mandate. Nevertheless, the persistence of this environment will continue to affect the net
income from ESM operations in 2019.

The €216.1 million increase is mainly due to the amount
received from Germany and France, compensating the
ESM for a part of the negative interest charged on the
cash held at their national central banks in 2017. These
payments, which represent €128.9 million and €86.7
million, respectively, were recorded as part of Extraordinary income together with €26.8 million that the ESM
will receive from the European Commission, following

1

2

This fine imposed on Austria is a sanction pursuant to Article 8(1)
Regulation (EU) No. 1173/2011. Such sanctions are collected by
the European Commission and are assigned to the ESM.
The net income of the ESM is mainly driven by the interest margin
on its lending activity and the return on the investment of its paidin capital. The ESM Pricing Policy defines the different elements
of the total cost of a loan.

04

As of 31 December 2018, the total €80.5 billion of paid-in
capital is invested in debt securities or held in cash.

The interest income on debt securities held in the
paid-in capital portfolio increased by €17.0 million
due to more investments at higher yield compared to
the cash remuneration rate. The Net profit of financial
operations increased by €17.1 million to €44.3 million in
2018 from €27.2 million in 2017.

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E U R O P E A N

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M E C H A N I S M

Balance sheet
As at 31 December 2018 (in €‘000)
Notes

31.12.2018

31.12.2017

4

65,245,717

74,288,120

5

1,291,715
1,291,715

369,174
369,174

6
7

89,894,688

76,194,688

8,327,012
17,255,918
25,582,930
36
7,207
624,250,300
65,440
777,929
807,115,962

10,971,804
9,918,880
20,890,684
36
4,664
624,250,300
175,120
820,833
796,993,619

277,202

32,600

98,393,959
98,393,959
9,503
1,147,623
99,828,287

89,201,083
89,201,083
8,488
789,576
90,031,747

704,798,700
140,174
2,064,053
284,748
707,287,675

704,798,700
99,119
1,995,465
68,588
706,961,872

807,115,962

796,993,619

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
Debt securities including fixed-income securities
(a) issued by public bodies
(b) issued by other borrowers
Intangible assets
Tangible assets
Subscribed capital unpaid
Subscribed capital called but not paid
Prepayments and accrued income
Total assets

8
9
2.15/15
2.15/15
10

LIABILITIES
Amounts owed to credit institutions
Debts evidenced by certificates
(a) debt securities in issue
Other liabilities
Accruals and deferred income
Total liabilities

11
12

13
14/27

SHAREHOLDERS’ EQUITY
Subscribed capital
Fair value reserve
Reserve fund
Profit for the financial year
Total shareholders’ equity
Total equity and liabilities

2.15/15
7
2.7.1/16

The accompanying notes form an integral part of these financial statements.

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7 9

Off-balance sheet
As at 31 December 2018 (in €‘000)
Notes

31.12.2018

31.12.2017

-

45,774,339
45,774,339

62,372,500
(62,372,500)
11,267,278
(11,343,989)
484,896
(476,996)
-

36,512,000
(36,512,000)
–
5,788,261
(5,730,986)
–
2,305,628
(2,048,620)
–
1,363
(1,216)

OFF-BALANCE SHEET
Commitments
(a) undisbursed loans to euro area Member States

25

Other items
(a) notional value of interest rate swaps
- receivable
- payable
(b) notional value of cross-currency asset swaps
- receivable
- payable
(c) notional value of foreign exchange swaps
- receivable
- payable
(d) notional value of foreign exchange forwards
- receivable
- payable

3.6/26

04

The accompanying notes form an integral part of these financial statements.

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M E C H A N I S M

Profit and loss account
For the financial year ending 31 December 2018 (in €‘000)

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
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

Notes

17
18
26

19

18
26

20
21/27
22

23

Value adjustments in respect of intangible and tangible
assets
Profit before extraordinary items
Extraordinary income
Profit for the financial year

24/27

2018

2017

1,688
1,189,777
76,784
102,783
259,200
1,630,232

304
938,764
59,759
95,744
71,339
1,165,910

(301,295)
(2,450)
(779,038)
(7,880)
(508,420)
(1,599,083)
(19)
34,277
44,333

(273,744)
(329)
(677,873)
(7,937)
(159,942)
(1,119,825)
(26)
37,709
27,174

(32,431)
(23,419)
(9,012)
(7,924)
(33,768)
(66,199)

(31,166)
(22,841)
(8,325)
(7,074)
(29,019)
(60,185)

(1,258)

(1,099)

42,283

49,658

242,465

18,930

284,748

68,588

The accompanying notes form an integral part of these financial statements.

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8 1

Statement of changes in equity
For the financial year ending 31 December 2018 (in €‘000)
Subscribed
capital
704,798,700

Fair value
reserve
183,194

-

-

-

568,764

(568,764)

-

-

-

568,764

(568,764)

-

-

-

(84,075)

-

-

68,588
-

68,588
(84,075)

At 31 December 2017

704,798,700

99,119

1,995,465

-

68,588

706,961,872

At 1 January 2018

Subscribed
capital
704,798,700

Fair value
reserve
99,119

-

-

-

68,588

(68,588)

-

-

-

68,588

(68,588)

-

-

-

41,055

-

-

284,748
-

284,748
41,055

704,798,700

140,174

2,064,053

-

284,748

707,287,675

At 1 January 2017
Allocation of the profit of
2016
Allocation of profit brought
forward to the reserve fund
Profit for the financial year
Change in fair value reserve

Allocation of the profit of
2017
Allocation of profit brought
forward to the reserve fund
Profit for the financial year
Change in fair value reserve
At 31 December 2018

Profit brought Profit for the
forward financial year
1,426,701
568,764

Reserve fund

Profit brought Profit for the
forward financial year
1,995,465
68,588

Reserve fund

Total
706,977,359

Total
706,961,872

04

The accompanying notes form an integral part of these financial statements.

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M E C H A N I S M

Statement of cash flows
For the financial year ending 31 December 2018 (in €’000)

Cash flows from operating activities:
Profit for the financial year

2018

2017

284,748

68,588

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
Up-front service fee received
Interest paid
Net cash flow provided by operating activities

1,258

1,099

(3,801)
1,015
(1,286,894)
190,185
1,010,025
1,139,613
108,500
(760,478)
684,171

(1,563)
(3,580)
(1,066,941)
(274,121)
923,222
971,712
51,500
(647,877)
22,039

Cash flows from investing activities
Change in debt securities including fixed-income securities
Change in loans and advances to credit institutions
Net loans disbursed during the year
Changes in amounts owed to credit institutions
Net cash flow provided/used in investing activities

(4,651,191)
(922,541)
(13,700,000)
244,602
(19,029,130)

9,488,288
(367,660)
(3,461,738)
32,600
5,691,490

Cash flows from financing activities
Payment of capital
Changes in debt securities in issue
Net cash flow provided by financing activities

109,680
9,192,876
9,302,556

109,680
3,542,115
3,651,795

Net increase/decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year

(9,042,403)
74,288,120

9,365,324
64,922,796

Cash and cash equivalents at the end of the financial year

65,245,717

74,288,120

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 ratification of the ESM Treaty by the then 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 2018 to 31 December 2018, while comparative
figures cover the period from 1 January 2017 to 31 December 2017.
On a proposal from the Managing Director, the Board of Directors adopted the financial statements on 26 March
2019 and authorised their submission to the Board of Governors for approval at their 13 June 2019 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:

 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 a new instrument, the Direct Recapitalisation of Institutions.

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.

04

 grant financial assistance in the form of loans to an ESM Member in the framework of a macroeconomic
adjustment programme;

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 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
relevant funding instrument until its maturity. The commitment fee will be 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. The specific elements are detailed in the ESM
Pricing Policy.
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 countries, 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 billion. The loans
were provided to Spain’s bank recapitalisation fund, Fondo de Restructuración Ordenado 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 government. 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.

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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
repayment 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 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 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 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 billion and €3
billion, which were 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 billion, which was approved by the ESM Board of Directors
on 20 September 2018.
By 31 December 2018, 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 2018 is €23.7 billion (refer to 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.

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 billion on 13 May 2013, and transferred the second in the
amount of €1 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 2018 is €6.3 billion (refer to note 6).

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The agreement on the macroeconomic adjustment programme led euro area members to decide on a financial
assistance package of up to €10 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 billion. Cyprus exited successfully from its ESM programme on 31 March 2016.

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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 euro area ministers of finance 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 finally approved a new programme on 19 August 2015. The ESM Boards of Governors and Directors approved also the financial assistance
facility agreement (FFA) with Greece. The ESM was authorised to provide Greece with up to €86 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 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 billion in cash to
Greece. This was the first disbursement under the first sub-tranche, of €16 billion, to be used for budget financing
and debt servicing needs. The second sub-tranche, of €10 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 billion in cash to Greece as
the second disbursement under the €16 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 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 billion to Greece as the third and
final disbursement under the €16 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 when market
rates start rising. The third scheme, which entailed issuing long-term bonds that closely matched the maturity of
the Greek loans, was replaced by additional swap arrangements.

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On 20 February 2017, the ESM received a loan repayment of €2 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 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 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 billion. That sum will
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 follows 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 billion programme volume was not utilised and automatically cancelled.
The outstanding nominal amount of loans granted to Greece as at 31 December 2018 is €59.9 billion (refer to note 6).

2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.

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 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 management3 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 2.3.
3

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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2.1. Basis of presentation

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2.2. Basis of measurement
The accompanying financial statements are prepared on a historical cost basis, except for the loans and
advances to euro area Member States and the debts evidenced by certificates which are measured at amortised
cost, and the paid-in capital and reserve fund investments which are measured at fair value with gains and losses
recognised in the fair value reserve.

2.3. 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 beneficiary Member States at each reporting date, to assess whether
a value adjustment is required (see also Note 2.8.). Such assessment requires judgement by the management
and the ESM governing bodies, consistent with the ESM’s mandate as a permanent crisis resolution mechanism
that aims at supporting beneficiary Member States’ return to public financial stability.
No value adjustment was required as at 31 December 2018 and 2017, thus none has been recorded.

2.4. 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.

2.5. Derivative financial instruments
The ESM uses derivatives instruments for risk management purposes only. Cross-currency asset swaps and
foreign exchange swaps and forwards are used to hedge the currency risk into euro4 (refer to Note 3.3.2), and
interest rate swaps to manage the interest rate risk exposure (refer Note 3.3.1).
All derivatives transactions are booked at notional as off-balance sheet items at the date of the transaction.

4

As per Article 2 (5) of the ESM Guidelines on the Investment Policy, any currency risk shall be hedged into euro to ensure a limited remaining
foreign exchange risk for the ESM.

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2.5.1. Foreign exchange swaps and forwards
For the management of the paid-in capital portfolio activities, the ESM enters into foreign exchange swap and forwards in order to hedge back in euro the cash flow’s currency risk of a non-euro denominated investment with a
residual maturity of less than 2 years. Ongoing forward and spot exchange transactions are converted at the spot
rates of exchange prevailing at reporting 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.

2.5.2. Cross-currency asset swaps and interest rate swaps
The ESM enters into cross-currency asset swaps in order to cover floating or fixed rates in different currencies in
its paid-in capital portfolio as well as issuances in USD. In a cross-currency asset 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’.
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 viceversa. Interest received and paid under interest rate swaps are 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 is recognised under the
caption ‘Interest receivable and similar income’ or ‘Interest payable and similar charges’ in the profit and loss
account.

The cash collateral received or posted is reported under ‘Amounts owed to credit institutions’ or ‘Loans and
advances to credit institutions’.

2.6. 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.

2.7. Debt securities including fixed-income securities
The ESM has established the following portfolios for the management of its financial assets:

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All interest rate swaps and cross-currency asset swaps 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).

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2.7.1. 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 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 macro-economic 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 are invested in accordance with the ESM Investment Guidelines approved
by the Board of Directors. The main objectives of such investments is to ensure that the maximum lending volume is always readily available, and to absorb potential losses.
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 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 only (refer to Note
3.6.2).
The paid-in capital and the reserve fund investments are managed in the same portfolio. As the Investment
Guidelines specify, the paid-in capital is divided in Short-term tranche and the Medium and long-term tranche. The
assets of the reserve fund are invested in full in the short-term tranche:
Short-term tranche
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, with a high level of confidence.
Medium- and long-term tranche
The main objective of the medium- and long-term tranche is to ensure the ESM’s financial strength. This
tranche is managed to enhance the return of the paid-in capital and is subject to the constraints specified in
the Investment Guidelines. This tranche is also mainly invested in liquid instruments.
The paid-in capital and the reserve fund investments 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.

2.7.2. 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 ensure 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 2.7.1.

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2.7.3. Determination of fair value
For financial instruments traded in active markets, the determination of fair values for financial assets and financial liabilities is based on quoted market prices or dealer price quotations.
A financial instrument is considered to be trading in an active market if quoted prices are readily and 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 active markets, 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.

2.8. 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 amortised cost.
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.
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 (refer to Note 2.3)
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
and carried at the amounts of the cash advanced 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 (refer to Note 5).

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.

2.10. 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 building rent period;
 furniture and office equipment: five years;
 IT equipment: three years.

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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.

2.11. 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 (refer to Note 2.5).

2.12. 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. 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 recognised 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 (refer to Note 11).

2.13. 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.

2.14. 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.

2.15. Subscribed capital
On 31 December 2018, 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’.

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2.16. 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 also includes the spot revaluation and spread amortisation of
ongoing derivative transactions (refer to Note 2.5).

2.17. 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.

2.18. 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.
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.

2.19. Compensation payments from ESM Members

2.20. 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.

04

Payments received from a Member State as compensation for expenses or losses (refer to Note 27) 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 capital preservation 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.

9 4

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S TA B I L I T Y

M E C H A N I S M

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 Principles for Risk Management, the targeted risk appetite should preserve
the ESM’s funding capacity, ensure the highest creditworthiness, and avoid unexpected capital calls. The Risk
Policy describes 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 curtail 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 does not provide incentives for speculative exposures on its investment portfolio.
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 & Compliance. Risk & Compliance 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 Risk Policy.
The Chief Risk Officer is the head of the Risk & Compliance team and 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 Risk Policy approved by
the Board of Directors. The IRC assists the Board of Directors 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.

3.2. Credit risk
Credit risk is defined as the potential for loss arising from the inability of a counterparty, issuer, insurer or other
obligor to fulfil its contractual obligations for full value when due. Counterparty risk is considered a particular
form of credit risk and derives from lending and support operations to beneficiary Member States, investment
of paid-in capital, placement of possible excess liquidity, and hedging operations. Issuer risk is also a particular
form of credit risk and derives from investment in securities of the paid-in capital 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 FFA, the credit risk in the ESM’s lending exposure is accepted. 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.

2 0 1 8

A N N U A L

R E P O RT

(in €‘000)

Exposure
31.12.2018

Exposure
31.12.2017

Cash in hand, balances with central banks and post office banks
Loans and advances to credit institutions
Debt securities including fixed-income securities

65,245,717
1,291,715
25,582,930

74,288,120
369,174
20,890,684

On balance sheet credit risk exposure
Exposure at default on derivatives(1)
Credit risk exposure

92,120,362
1,582,340
93,702,702

95,547,978
1,162,930
96,710,908

1

|

9 5

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.

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
long-term rating equivalents) are presented. If issuance ratings are unavailable, the issuers 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.
Credit rating(1)

Clean carrying value
31.12.2018

Cash in hand, balances with central banks and post office banks

not rated(2)
AA

65,243,078
2,639

Loans and advances to credit institutions

not rated(3)
AA
AAA+
A

263,462
1,603
227,480
108,140
691,030

Debt securities including fixed-income securities

not rated
AAA
AA+
AA
AAA+
A

14,233,063
1,504,603
2,622,472
1,916,056
283,318
5,023,418
92,120,362

Total

Based on the lowest rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale used by Fitch.
“Not rated” means balances placed with Eurosystem central banks, which are not rated.
(3)
“Not rated” means balances (Reverse Repos) placed with Eurex Clearing, which is not rated.
(1)

(2)

04

(in €’000)

9 6

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S TA B I L I T Y

M E C H A N I S M

(in €’000)

Credit rating(1)

Clean carrying value
31.12.2017

Cash in hand, balances with central banks and post office banks

not rated(2)
AA

74,285,731
2,389

Loans and advances to credit institutions

not rated(2)
AA
AAA+
A

101,514
62,120
55,600
149,940

Debt securities including fixed-income securities

not rated
AAA
AA+
AA
AAA+
A

12,129,744
1,246,238
1,566,053
1,244,951
177,703
4,525,995
95,547,978

Total
(1)
(2)

Based on the lowest rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale used by Fitch.
“Not rated” means balances placed with Eurosystem central banks, which are not rated.

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 require. 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 limit 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.

2 0 1 8

A N N U A L

R E P O RT

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9 7

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 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.
Structural interest rate risk is defined as 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 arising from refinancing risk are passed through to beneficiary Member States under financial
assistance, as defined by the ESM Pricing Policy.
Non-structural interest rate risk is the risk of loss due to an adverse change in the overall level of interest rates
affecting the value of the investment portfolio. Non-structural interest rate risk is monitored and controlled on
a daily basis through risk indicators and stress tests. Duration bands, cumulated and partial sensitivities, 1 day
Value at Risk 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/
Long Term 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 1 year VaR 99% should be lower than 3% of the market value of the tranche.

 For the Short-Term Tranche, the capital shall be preserved at a one-year horizon, for a high level of confidence.
 For the Medium/Long-Term Tranche, the capital shall be preserved at a three-year horizon for a high level of
confidence.
To assess capital preservation with a ‘high level of confidence’, a vast array of scenarios of interest rate movements are used to forecast the market value of the STT and the MLTT 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 IMC.

04

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 STT (including the Reserve Fund) and MLTT investment portfolios 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:

9 8

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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

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 – CSA - standards).
The interest rate risk on the ESM investment portfolio is managed prudently to support the ESM’s financial stability mandate, which requires the ESM to maintain financial soundness including in period of market stress.

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.
The potential source of currency risk is the non-euro investments made in the investment portfolios and funding
activities.
In 2018, the ESM had investment activities in foreign currency assets, mainly Swedish krona, Japanese yen and
US dollars. In compliance with the Article 2 (5) of the ESM Investment Guidelines, any currency risk is hedged into
euros to ensure a limited remaining foreign exchange risk for the ESM (refer to Note 3.6).
The ESM also has 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 24 October 2017, the ESM priced its inaugural US dollar issue, raising $3 billion. On 16 October 2018, the ESM raised $3 billion by issuing a new 2-year
bond, its second deal in the dollar market. The ESM does not run currency risk through these transactions, as it
has hedged the proceeds back into euros (refer to Note 3.6.1.2).
As it is the case for Interest Rate Swaps, 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 – CSA – standards).

2 0 1 8

31 December 2018
(in €‘000)

Total

-

-

65,245,717

-

-

-

1,291,715

-

-

-

-

89,894,688

18,765,766

4,968,264

1,366,833

183,994

298,073

25,582,930

722,022

5,624

49,288

995

-

777,929

Total financial assets

175,919,908

4,973,888

1,416,121

184,989

LIABILITIES
Amounts owed to credit institutions
Debt securities in issue
Other liabilities
Accruals and deferred income

277,202
93,168,174
9,503
970,757

113,256

5,225,785
60,095

3,515

-

277,202
98,393,959
9,503
1,147,623

Total financial liabilities

94,425,636

113,256

5,285,880

3,515

-

99,828,287

Shareholders’ equity(1)
Total shareholders’ equity(2)

82,971,935
82,971,935

-

-

-

-

82,971,935

Off-balance sheet derivatives

1,372,710

(4,843,353)

3,871,878

(180,403)

-

220,832

Net of financial position

(104,953)

17,279

2,119

1,071

298,073

213,589

(1)
(2)

Japanese
Yen (JPY)

US Dollar
Swedish
(USD) Krone (SEK)

65,245,717

-

-

1,291,715

-

89,894,688

R E P O RT

Other
currencies

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

Euro (EUR)

A N N U A L

|

9 9

298,073 182,792,979

Excluding subscribed capital unpaid and subscribed capital called but not paid
Shareholder equity has no defined maturity

04

1 0 0

|

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

31 December 2017
(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

Other
currencies

Total

-

-

74,288,120

-

-

-

369,174

-

-

-

-

76,194,688

15,981,269

4,536,847

181,947

190,621

-

20,890,684

801,314

7,921

10,562

1,036

-

820,833

Total financial assets

167,634,565

4,544,768

192,509

191,657

LIABILITIES
Amounts owed to credit institutions
Debt securities in issue
Other liabilities
Accruals and deferred income

32,600
86,711,327
8,488
677,335

82,069

2,489,756
25,180

4,992

-

32,600
89,201,083
8,488
789,576

Total financial liabilities

87,429,750

82,069

2,514,936

4,992

-

90,031,747

Shareholders’ equity(1)
Total shareholders’ equity(2)

82,536,452
82,536,452

-

-

-

-

82,536,452
82,536,452

Off-balance sheet derivatives

2,639,552

(4,454,205)

2,317,018

(187,936)

-

314,429

Net of financial position

307,915

8,494

(5,409)

(1,271)

-

309,729

(1)
(2)

Euro (EUR)

Japanese
Yen (JPY)

US Dollar
Swedish
(USD) Krone (SEK)

74,288,120

-

-

369,174

-

76,194,688

- 172,563,499

Excluding subscribed capital unpaid and subscribed capital called but not paid
Shareholder equity has no defined maturity.

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 on a daily basis 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 high stress). Funding liquidity risk is managed
by maintaining a permanent market access to a wide investor base with different funding instruments, multiple
credit lines and investing capital in high-credit-quality liquid assets that can be used to raise cash to meet obligations as they fall due. 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 2018, the
ESM’s liquidity buffer stood at €8.4 billion (2017: €13.1 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.
The tables below analyse the ESM’s financial assets and liabilities and the shareholders’ equity by maturity on the
basis of the period remaining between the balance sheet date and the contractual maturity date.

2 0 1 8

31 December 2018
(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 fixed-income
securities
Prepayments and accrued income

Less than From 3 months
3 months
to 1 year

A N N U A L

R E P O RT

From 1 to
5 years

More than
5 years

Total

65,245,717

-

-

-

65,245,717

1,291,715

-

-

-

1,291,715

-

-

-

89,894,688

89,894,688

433,795

834,702

15,611,898

8,702,535

25,582,930

95,838

567,510

-

114,581

777,929

Total financial assets

67,067,065

1,402,212

15,611,898

98,711,804

182,792,979

LIABILITIES
Amounts owed to credit institutions
Debt securities in issue
Other liabilities
Accruals and deferred income

277,202
11,897,405
9,503
325,499

9,012,566
445,425

32,216,672
158,941

45,267,316
217,758

277,202
98,393,959
9,503
1,147,623

Total financial liabilities

12,509,609

9,457,991

32,375,613

45,485,074

99,828,287

-

-

-

82,971,935
82,971,935

82,971,935
82,971,935

Net of financial position

54,557,456

(8,055,779)

(16,763,715)

(29,745,205)

(7,243)

31 December 2017
(in €‘000)

Less than From 3 months
3 months
to 1 year

From 1 to
5 years

More than
5 years

Total

Shareholders’ equity(1)
Total shareholders’ equity(2)

74,288,120

-

-

-

74,288,120

369,174

-

-

-

369,174

-

-

-

76,194,688

76,194,688

64,902

1,542,344

16,039,694

3,243,744

20,890,684

77,758

592,843

42,048

108,184

820,833

Total financial assets

74,799,954

2,135,187

16,081,742

79,546,616

172,563,499

LIABILITIES
Amounts owed to credit institutions
Debt securities in issue
Other liabilities
Accruals and deferred income

32,600
8,982,989
8,488
256,026

15,917,806
319,934

26,510,038
149,157

37,790,250
64,459

32,600
89,201,083
8,488
789,576

Total financial liabilities

9,280,103

16,237,740

26,659,195

37,854,709

90,031,747

-

-

-

82,536,452
82,536,452

82,536,452
82,536,452

65,519,851

(14,102,553)

(10,577,453)

(40,844,545)

(4,700)

Shareholders’ equity(1)
Total shareholders’ equity(2)
Net of financial position

Excluding subscribed capital unpaid and subscribed capital called but not paid
(2)
The shareholder’s equity has no defined maturity
(1)

1 0 1

04

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

|

1 0 2

|

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

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;
 counterparts, products, and business practices;
 fraud;
 business continuity and systems failures;
 employment practices and workplace safety; and
 damage to physical assets.
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 2018.
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 the Risk & Compliance Department 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). The Risk & Compliance Department monitors these risks and
reports on them to the Internal Risk Committee and to the Board Risk Committee.

3.6. Derivatives
The ESM uses derivative instruments as described in Note 2.5 for risk management purposes only 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 cash flow hedge the currency risk related to
short-term non-euro denominated investments. Since 2017, the ESM also entered into interest rate swaps to
manage globally the Investment portfolio’s interest rate exposure and to decrease the interest rate volatility on
the Greek debt. Longer term cross-currency asset swaps were contracted as well to cash flow hedge longer term
non-euro denominated investments and to hedge in euro the issuances in USD.
On 31 December 2018, the derivative instruments had a maximum maturity up to 30 years (2017: maximum
maturity up to 30 years) and were concluded with euro area central banks, international financial institutions and
commercial banks.

3.6.1. Funding derivatives
The derivatives used in the context of funding are:
 Interest rate swaps;
 Cross-currency asset swaps.

2 0 1 8

A N N U A L

R E P O RT

|

1 0 3

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 swap 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 when market rates start rising.
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 (receivable)
Positive fair value (i.e. net discounted value)
Negative fair value (i.e. net discounted value)

31.12.2018
60,000,000
284,496
(1,139,657)

31.12.2017
36,311,000
69,074
(254,001)

3.6.1.2. Cross-currency asset swaps
Cross-currency asset swaps are derivative contracts under which it is agreed by two counterparties 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 and continuing in 2018, the ESM broadened its investor base and spread
its funding liquidity risk across the euro and dollar markets (refer to 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 (receivable)
Positive fair value (i.e. net discounted value)
Negative fair value (i.e. net discounted value)

The derivatives used in the context of investment activity are:
 Interest rate swaps;
 Cross-currency asset swaps;
 Foreign exchange (FX) swaps and forwards.

31.12.2017
2,501,459
(69,361)

04

3.6.2. Investment derivatives

31.12.2018
5,240,175
88,315
-

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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.
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 (receivable)
Positive fair value (i.e. net discounted value)
Negative fair value (i.e. net discounted value)

31.12.2018
2,372,500
4,056
(33,685)

31.12.2017
201,000
263
(189)

3.6.2.2. Foreign exchange (FX) swaps and forwards
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. A foreign exchange forward is essentially a hedging tool that involves the purchase or sale of a currency on a future date at a predetermined exchange
rate without any upfront payment.
Starting from 2015, the ESM has invested limited amounts in short-term (with a maximum maturity of 2 years)
assets denominated in a foreign currency.
The following tables shows the foreign exchange swaps and forwards according to their notional amount and
fair value. The notional amounts are disclosed off balance sheet.
Foreign exchange swaps
(in €’000)
Notional amount (receivable)
Positive fair value (i.e. net discounted value)
Negative fair value (i.e. net discounted value)

31.12.2018
484,896
8,039
-

31.12.2017
2,305,628
262,957
(2,354)

Foreign exchange forwards
(in €’000)
Notional amount (receivable)
Positive fair value (i.e. net discounted value)

31.12.2018
-

31.12.2017
1,363
151

3.6.2.3. Cross-currency asset swaps
Cross-currency asset swaps are derivatives contracts under which it is agreed by two counterparties 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.
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.

2 0 1 8

Cross-currency asset swaps
(in €’000)
Notional amount (receivable)
Positive fair value (i.e. net discounted value)
Negative fair value (i.e. net discounted value)

31.12.2018
6,027,103
8,942
(326,163)

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31.12.2017
3,286,802
54,231
(18,278)

3.6.3. Credit risk on derivatives
Credit risk exposure for derivatives lies in the 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 at 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. Third,
when using derivatives, the ESM is exposed to replacement risk. This is the loss the ESM would face if it would
have 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 derivative transactions 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 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

 Collateralisation
Exposures towards commercial banks (exceeding limited thresholds) are fully collateralized 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 preventive measures, as applicable, to mitigate the
impact on the ESM’s business operations.

04

The minimum rating of a counterparty at the outset of a trade is at least 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 uses 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.

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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)
Total cash in hand, balances with central banks and post office banks

31.12.2018
65,243,078
2,639
65,245,717

31.12.2017
74,285,731
2,389
74,288,120

In 2017, the ESM opened two new current accounts at the European Central Bank.
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)
(2)

The cash balance with euro area central banks is comprised of paid-in capital, the reserve fund and the liquidity
buffer investment.

5. Loans and advances to credit institutions
The following table shows the breakdown of the other loans and advances to credit institutions:
(in €’000)
Money market deposits with other banks
Cash collateral provided
Reverse repos
Other deposits
Total loans and advances to credit institutions

31.12.2018
1,026,650
263,462
1,603
1,291,715

31.12.2017
100,000
267,660
1,514
369,174

Other deposits consist entirely of the lease guarantee deposit in relation to the ESM rental agreement. The cash
collateral provided for, relates entirely to derivatives transactions. The reverse repurchase agreements (`reverse
repo`) are transactions traded 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 (refer to Note 27).
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 2018

5
9
11
25

23,721,460
6,300,000
59,873,228
89,894,688

23,721,460
6,300,000
59,873,228
89,894,688

No. of
loans

Nominal amount

Clean carrying value as at
31 December 2017

5
9
8
22

31,721,460
6,300,000
38,173,228
76,194,688

31,721,460
6,300,000
38,173,228
76,194,688

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The following table shows the movements of the loans to euro area Member States during 2017 and 2018:
(in €’000)
1 January 2017 balance
New disbursements
- to Greece
Early repayments
- from Spain
- from Greece
Premiums/discounts amortization
31 December 2017 balance

72,732,950
8,500,000
8,500,000
(5,029,200)
(3,000,000)
(2,029,200)
(9,062)
76,194,688

(in €’000)
1 January 2018 balance
New disbursements
- to Greece
Early repayments
- from Spain
Premiums/discounts amortization
31 December 2018 balance

76,194,688
21,700,000
21,700,000
(8,000,000)
(8,000,000)
89,894,688

7. Debt securities including fixed-income securities
The following table shows the details of the paid-in-capital portfolio debt securities valuation:
(in €’000)
31.12.2018
31.12.2017

Clean amortised cost
25,442,756
20,791,565

Unrealised gains
140,174
99,119

Clean fair
(carrying) value
25,582,930
20,890,684

Nominal amount
25,155,501
20,402,049

On 31 December 2018, the clean amortised cost of the debt securities was €25.4 billion (31 December 2017: €20.8 billion), against a clean fair value of €25.6 billion (31 December 2017: €20.9 billion). The difference represents the unrealised result and is recognised directly in the equity within the fair value reserve.

On 31 December 2018, the debt securities including fixed income securities of the paid-in capital portfolio include
investments in money market securities that are not listed on regulated markets with a total clean fair value of
€89.2 million (nil as of 31 December 2017). Their fair values are determined using valuation techniques, as disclosed in Note 2.7.3. All other securities are 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 cover central banks,
central governments, regional governments, local governments, supranational institutions and governmental
agencies. On 31 December 2018, debt securities issued by public bodies amounted to €8.3 billion. (31 December 2017: €11.0 billion), while debt securities issued by other borrowers amounted to €17.3 billion (31 December 2017: €9.9 billion).
Starting from 2015, the ESM has invested part of the paid-in capital portfolio in short-term assets denominated
in a foreign currency (refer to Note 3.3.2). Starting in 2017, the ESM has invested in non-euro denominated securities with longer maturities.

04

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 Risk & Compliance Department defines a limit structure to mitigate the maximum exposure per issuer.

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8. Intangible assets
The following table shows the movements of intangible assets during 2018:
(in €’000)
Historical cost
1 January 2018 balance
Additions
31 December 2018 balance

Software

Total intangible assets

168
27
195

168
27
195

Accumulated amortisation
1 January 2018 balance
Amortisation
31 December 2018 balance

(132)
(27)
(159)

(132)
(27)
(159)

Net book value
31 December 2018 balance
31 December 2017 balance

36
36

36
36

9. Tangible assets
The following table shows the movements of tangible assets during 2018:
(in €’000)
Historical cost
1 January 2018 balance
Additions
Disposals
31 December 2018 balance

Fixtures and fittings

Furniture and office equipment

Total tangible assets

6,628
3,159
9,787

1,960
615
2,575

8,588
3,774
12,362

Accumulated depreciation
1 January 2018 balance
Depreciation
Of the disposed assets
31 December 2018 balance

(2,312)
(994)
(3,306)

(1,612)
(237)
(1,849)

(3,924)
(1,231)
(5,155)

Net book value
31 December 2018 balance
31 December 2017 balance

6,481
4,316

726
348

7,207
4,664

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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
Amounts charged to the EFSF for administrative services (Note 20/27)
Commitment fee receivable
Prepayments
Amounts from sanctions to Member States(1)
Other(2)
Total prepayments and accrued income
(1)
(2)

31.12.2018

31.12.2017

78,620
431,006
92
9,789
75
115,372
26,820
116,155
777,929

78,988
283,441
8
10,025
10,845
845
18,930
417,751
820,833

The ESM received the payments of certain sanctions paid by its Member States (refer to Note 24).
“Other” represents the spot revaluation, spread amortisation and accrued income of ongoing derivative transactions (refer to Note 2.11).

11. Amounts owed to credit institutions
On 31 December 2018, the €277.2 million of amounts owed to credit institutions were composed of cash collateral received for the derivatives €14.2 million (31 December 2017: €32.6 million) and repurchase agreement
(“repo”) €263 million (31 December 2017: €nil).

04

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12. Debts evidenced by certificates
The following table discloses the details of debt securities in issue outstanding on 31 December 2018, 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
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)
EU000A1U9811
EU000A1U9829
EU000A1U9829(2)
EU000A1U9894
EU000A1U9894(2)
EU000A1U9902
EU000A1U9910
EU000A1U9910(2)
EU000A1U9928
EU000A1U9928(2)
EU000A1U9936
EU000A1U9936(2)
EU000A1U9944
EU000A1U9944(2)
EU000A1U9951
EU000A1U9951(2)
EU000A1U9951(2)
EU000A1U9969
EU000A1U9969(2)
EU000A1U9977
ESMNBOND0001(3)
ESMNBOND0002(3)
ESMNBOND0003(3)
ESMNBOND0004(3)
ESMNBOND0005(3)
ESMNBOND0006(3)
ESMNBOND0007(3)
ESMNBOND0008(3)
ESMNBOND0009(3)
ESMNBOND0010(3)
ESMNBOND0011(3)
EU000A1U9985
EU000A1U9985(2)
ESMNBOND0012(3)
ESMNBOND0013(3)
ESMNBOND0014(3)
EU000A1Z99A1
EU000A1Z99A1(2)

Nominal
amount
(in €’000)
3,000,000
990,750
6,000,000
3,000,000
2,000,000
3,000,000
999,850
3,000,000
4,000,000
992,750
1,500,000
1,000,000
1,000,000
1,000,000
3,000,000
2,500,000
3,000,000
961,100
989,750
3,000,000
1,000,000
2,500,000
80,000
30,000
25,000
25,000
25,000
30,000
40,000
150,000
50,000
50,000
50,000
3,000,000
996,500
50,000
40,000
25,000
3,500,000
1,500,000

Issue date
20/11/2013
27/06/2014
04/03/2014
14/05/2014
28/07/2015
23/09/2015
29/09/2016
20/10/2015
03/11/2015
11/03/2016
17/11/2015
31/03/2016
01/12/2015
01/03/2016
02/03/2016
19/07/2016
22/04/2016
28/07/2016
11/11/2016
03/05/2016
18/10/2016
19/07/2016
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
18/10/2016
16/11/2017
19/10/2016
19/10/2016
27/10/2016
01/02/2017
14/06/2017

Maturity date
20/11/2023
20/11/2023
04/03/2021
15/10/2019
15/10/2019
23/09/2025
23/09/2025
20/10/2045
03/11/2020
03/11/2020
17/11/2036
17/11/2036
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
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
18/10/2022
18/10/2022
19/10/2054
19/10/2056
27/10/2056
02/11/2046
02/11/2046

Coupon
2.125%
2.125%
1.375%
0.875%
0.875%
1.000%
1.000%
1.750%
0.100%
0.100%
1.625%
1.625%
1.850%
1.850%
0.500%
0.500%
0.125%
0.125%
0.125%
1.125%
1.125%
0.875%
1.572%
1.360%
1.559%
1.559%
1.316%
1.220%
1.156%
1.150%
1.025%
1.064%
1.030%
0.000%
0.000%
1.145%
1.125%
1.086%
1.800%
1.800%

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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
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
Total

ISIN code
EU000A1Z99B9
ESMNBOND0015(3)
ESMNBOND0016(3)
ESMNBOND0017(3)
XS1704649158(4)
ESMNBOND0018(3)
ESMNBOND0019(3)
ESMNBOND0020(3)
ESMNBOND0021(3)
EU000A1U9985(2)
EU000A1Z99D5
EU000A1Z99B9(2)
EU000A1Z99E3
EU000A1U9936
EU000A1Z99F0
EU000A1Z99G8
XS1896646137(4)
EU000A1Z98Y3(1)
EU000A1Z9808(1)
EU000A1Z9824(1)
EU000A1Z9832(1)
EU000A1Z9840(1)
EU000A1Z9857(1)
EU000A1Z9865(1)
EU000A1Z9873(1)

Nominal
amount
(in €’000)
3,000,000
110,000
40,000
100,000
2,620,087
60,000
25,000
50,000
50,000
998,550
2,000,000
1,500,000
4,000,000
750,000
3,250,000
3,000,000
2,620,087
1,922,350
1,999,250
1,970,200
1,999,750
1,998,400
1,998,300
1,998,900
1,999,500
98,161,074

Issue date
14/03/2017
14/03/2017
31/03/2017
21/04/2017
31/10/2017
27/11/2017
11/12/2017
12/12/2017
19/12/2017
23/02/2018
23/05/2018
19/06/2018
31/07/2018
05/09/2018
05/09/2018
16/10/2018
23/10/2018
19/07/2018
23/08/2018
20/09/2018
04/10/2018
18/10/2018
08/11/2018
22/11/2018
06/12/2018

Maturity date
15/03/2027
14/03/2047
30/03/2057
21/04/2047
03/11/2022
27/11/2057
11/12/2057
12/12/2057
19/12/2057
18/10/2022
23/05/2033
15/03/2027
31/07/2023
01/12/2055
05/09/2028
17/01/2022
23/10/2020
24/01/2019
21/02/2019
21/03/2019
10/01/2019
18/04/2019
07/02/2019
23/05/2019
07/03/2019

Coupon
0.750%
1.800%
1.850%
1.573%
2.125%
1.591%
1.530%
1.505%
1.442%
0.000%
1.200%
0.750%
0.100%
1.850%
0.750%
0.000%
3.000%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

Zero-coupon bond
Tap issue
N-bond with technical ISIN: the ESM issued its first N-bond (Namensschuldverschreibungen) 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 with 2017.
(1)
(2)
(3)

04

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The following table discloses the details of debt securities in issue outstanding on 31 December 2017, 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

ISIN code
EU000A1U9803
EU000A1U9803(2)
EU000A1U98Z1
EU000A1U9811
EU000A1U9829
EU000A1U9829(2)
EU000A1U9886
EU000A1U9894

Nominal amount
(in €’000)
3,000,000
990,750
7,000,000
6,000,000
3,000,000
2,000,000
6,000,000
3,000,000

Issue date
11/20/2013
6/27/2014
10/15/2013
3/4/2014
5/14/2014
7/28/2015
9/15/2015
9/23/2015

Maturity date
11/20/2023
11/20/2023
10/15/2018
3/4/2021
10/15/2019
10/15/2019
12/17/2018
9/23/2025

Coupon
2.125%
2.125%
1.250%
1.375%
0.875%
0.875%
0.050%
1.000%

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

EU000A1U9894(2)
EU000A1U9902
EU000A1U9910
EU000A1U9910(2)
EU000A1U9928
EU000A1U9928(2)
EU000A1U9936
EU000A1U9936(2)
EU000A1U9944
EU000A1U9944(2)
EU000A1U9951
EU000A1U9951(2)
EU000A1U9951(2)
EU000A1U9969
EU000A1U9969(2)
EU000A1U9977
ESMNBOND0001(3)
ESMNBOND0002(3)
ESMNBOND0003(3)
ESMNBOND0004(3)
ESMNBOND0005(3)
ESMNBOND0006(3)
ESMNBOND0007(3)
ESMNBOND0008(3)
ESMNBOND0009(3)
ESMNBOND0010(3)
ESMNBOND0011(3)
EU000A1U9985
EU000A1U9985(2)
ESMNBOND0012(3)
ESMNBOND0013(3)
ESMNBOND0014(3)
EU000A1Z99A1
EU000A1Z99A1(2)
EU000A1Z99B9

999,850
3,000,000
4,000,000
992,750
1,500,000
1,000,000
1,000,000
1,000,000
3,000,000
2,500,000
3,000,000
961,100
989,750
3,000,000
1,000,000
2,500,000
80,000
30,000
25,000
25,000
25,000
30,000
40,000
150,000
50,000
50,000
50,000
3,000,000
996,500
50,000
40,000
25,000
3,500,000
1,500,000
3,000,000

9/29/2016
10/20/2015
11/3/2015
3/11/2016
11/17/2015
3/31/2016
12/1/2015
3/1/2016
3/2/2016
7/19/2016
4/22/2016
7/28/2016
11/11/2016
5/3/2016
10/18/2016
7/19/2016
1/22/2016
2/10/2016
3/9/2016
3/9/2016
3/31/2016
4/11/2016
8/3/2016
8/9/2016
8/19/2016
8/19/2016
9/19/2016
10/18/2016
11/16/2017
10/19/2016
10/19/2016
10/27/2016
2/1/2017
6/14/2017
3/14/2017

9/23/2025
10/20/2045
11/3/2020
11/3/2020
11/17/2036
11/17/2036
12/1/2055
12/1/2055
3/2/2026
3/2/2026
4/22/2024
4/22/2024
4/22/2024
5/3/2032
5/3/2032
7/18/2042
1/22/2041
2/11/2041
3/9/2056
3/9/2056
3/22/2046
4/11/2046
8/3/2056
8/9/2056
8/19/2053
8/18/2056
9/19/2051
10/18/2022
10/18/2022
10/19/2054
10/19/2056
10/27/2056
11/2/2046
11/2/2046
3/15/2027

1.000%
1.750%
0.100%
0.100%
1.625%
1.625%
1.850%
1.850%
0.500%
0.500%
0.125%
0.125%
0.125%
1.125%
1.125%
0.875%
1.572%
1.360%
1.559%
1.559%
1.316%
1.220%
1.156%
1.150%
1.025%
1.064%
1.030%
0.000%
0.000%
1.145%
1.125%
1.086%
1.800%
1.800%
0.750%

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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
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Short-term Funding
Total

ISIN code
ESMNBOND0015(3)
ESMNBOND0016(3)
ESMNBOND0017(3)
XS1704649158(4)
ESMNBOND0018(3)
ESMNBOND0019(3)
ESMNBOND0020(3)
ESMNBOND0021(3)
EU000A1Z9790(1)
EU000A1Z98B1(1)
EU000A1Z98D7(1)
EU000A1Z98E5(1)
EU000A1Z98F2(1)
EU000A1Z98G0(1)
EU000A1Z98H8(1)
EU000A1Z98J4(1)

Nominal amount
(in €’000)
110,000
40,000
100,000
2,501,459
60,000
25,000
50,000
50,000
1,500,000
1,484,400
1,499,950
1,496,600
1,423,600
1,496,700
1,493,450
1,497,800
88,929,659

Issue date
3/14/2017
3/31/2017
4/21/2017
10/31/2017
11/27/2017
12/11/2017
12/12/2017
12/19/2017

Maturity date
3/14/2047
3/30/2057
4/21/2047
11/3/2022
11/27/2057
12/11/2057
12/12/2057
12/19/2057

Coupon
1.800%
1.850%
1.573%
2.125%
1.591%
1.530%
1.505%
1.442%

7/20/2017
8/24/2017
9/21/2017
10/5/2017
10/19/2017
11/9/2017
11/23/2017
12/7/2017

1/25/2018
2/22/2018
3/22/2018
1/11/2018
4/19/2018
2/8/2018
5/24/2018
3/8/2018

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A

Zero-coupon bond
Tap issue
(3)
N-bond with technical ISIN: the ESM issued its first N-bond (Namensschuldverschreibungen) 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 with 2017
(1)
(2)

The following table shows the movements of the debt securities in issue in 2017 and 2018:
85,658,968
51,736,229
(48,083,455)
(110,659)
89,201,083

(in €’000)
1 January 2018 balance
Issuances during the year
Maturities during the year
Exchange adjustments
Premiums/discounts amortization
31 December 2018 balance

89,201,083
63,821,416
(54,631,850)
118,056
(114,746)
98,393,959

All debt securities in issue at 31 December 2017 and 31 December 2018 are issued under English law as the
governing law, except the N-bonds which are issued under German law.

04

(in €’000)
1 January 2017 balance
Issuance during the period
Maturities during the year
Premiums/discounts amortisation
31 December 2017 balance

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13. Other liabilities
On 31 December 2018, the other liabilities were composed of suppliers’ invoices and staff cost related payables
which were not yet settled, amounting to €9.5 million (31 December 2017: €8.5 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
Other(1)
Total accruals and deferred income
(1)

31.12.2018
24,100
306
282,193
262,179
578,845
1,147,623

31.12.2017
25,776
244
251,670
224,203
287,683
789,576

“Other” represents the spot revaluation and spread amortisation of ongoing derivative transactions (refer to Note 2.15 and 2.5).

As explained in Note 2.3, 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 2017

Subscribed capital
704,798,700

Subscribed, uncalled capital
(624,250,300)

Subscribed, called capital
80,548,400

Subscription to the authorised capital

-

-

-

Authorised capital calls

-

-

-

704,798,700

(624,250,300)

80,548,400

Subscribed capital
704,798,700

Subscribed, uncalled capital
(624,250,300)

Subscribed,
called capital
80,548,400

-

-

-

31 December 2017

(in €’000)
1 January 2018
Subscription to the authorised capital
Authorised capital calls
31 December 2018

-

-

-

704,798,700

(624,250,300)

80,548,400

On 31 December 2018, 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 as per the Annex 1 of the ESM Treaty.
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 made 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 2018 Lithuania had made the first four instalments for the payment of paid-in shares in the amount of €261.8 million.
On 31 December 2018, the authorised capital was €704.8 billion (31 December 2017: €704.8 billion), divided into
7,047,987 shares (31 December 2017: 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 2017: €624.3 billion)
is callable. On 31 December 2018, the called subscribed capital amounted to €80.5 billion (31 December 2017:
€80.5 billion), of which €80.5 billion (31 December 2017: €80.4 billion) is paid.

2 0 1 8

ESM Members
31 December 2018
Kingdom of Belgium
Federal Republic of Germany
Republic of Estonia
Ireland
Hellenic Republic
Kingdom of Spain
French Republic
Italian Republic
Republic of Cyprus
Republic of Latvia
Republic of Lithuania
Grand Duchy of Luxembourg
Malta
Kingdom of the Netherlands
Republic of Austria
Portuguese Republic
Republic of Slovenia
Slovak Republic
Republic of Finland
Total

ESM Key (%)
3.4534
26.9616
0.1847
1.5814
2.7975
11.8227
20.2471
17.7917
0.1949
0.2746
0.4063
0.2487
0.0726
5.6781
2.7644
2.4921
0.4247
0.8184
1.7852
100.00

Number of
shares
243,397
1,900,248
13,020
111,454
197,169
833,259
1,427,013
1,253,959
13,734
19,353
28,634
17,528
5,117
400,190
194,838
175,644
29,932
57,680
125,818
7,047,987

Subscribed capital
(in €’000)
24,339,700
190,024,800
1,302,000
11,145,400
19,716,900
83,325,900
142,701,300
125,395,900
1,373,400
1,935,300
2,863,400
1,752,800
511,700
40,019,000
19,483,800
17,564,400
2,993,200
5,768,000
12,581,800
704,798,700

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Subscribed capital
called and paid
(in €’000)
2,781,680
21,717,120
148,800
1,273,760
2,253,360
9,522,960
16,308,720
14,330,960
156,960
176,960
196,320
200,320
58,480
4,573,600
2,226,720
2,007,360
342,080
659,200
1,437,920
80,482,960

On 31 December 2018, the subscribed capital called but not paid amounted to €0.1 billion and was related to
Lithuania (31 December 2017: €0.2 billion related to Latvia and Lithuania).
There are three different instances when a capital call can be made, in accordance with Article 9 of the ESM
Treaty.
i.

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.

ii. A capital call under Article 9(2) of the ESM Treaty to replenish paid-in capital could happen for two reasons:

 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.

iii. 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 call 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.

04

 to cover a shortfall due to a non-payment by a beneficiary country and,

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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 15 June 2018, the Board of Governors decided at their annual general meeting to appropriate the net result of
2017 amounting to €68.6 million to the reserve fund. As a result the outstanding balance of the reserve fund as
at 31 December 2018 is €2,064 million (2017: €1,995 million).

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)
Amortisation loan premium
Amortisation up-front service fee
Commitment fee
Total interest and similar income

2018
1,119,179

2017
877,608

-

(9,062)

70,523

59,373

75

10,845

1,189,777

938,764

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
Total European Union

2018
32,728
6,433
5,318
44,479

2017
22,734
8,359
5,034
36,127

Other non-EU issuers
Other supranational organisations
Total outside the European Union

16,657
7,768
24,425

12,089
3,606
15,695

Total interest and similar income

68,904

51,822

19. Interest payable and similar charges on cash and cash equivalents
On 31 December 2018, the interest payable and similar charges on cash and cash equivalents represent negative
interest paid on the balances with central banks and amounts to €301.3 million (2017: €273.7 million). Since February 2017, the ESM is being charged a negative interest rate (-0.40% per annum) on the cash held at Eurosystem
central banks. The relevant ESM Members agreed to compensate the ESM, under certain conditions, for a part of
the negative interest charged by their national central banks (refer to Note 27).

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 from 1 January 2013. Under the 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 2018, the ESM charged the EFSF €32.6 million (2017: €30.9 million), from which €9.8 million had yet to be paid on the balance sheet date (refer to Note 10).

In 2017, the cumulated internal tax on salaries retained from staff members amounting to €5.0 million for the
years 2013 to 2016 and €1.7 million for 2017 has been transferred to “Other operating income”. 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
Net foreign exchange result
Total net result on financial operations

2018
44,320

2017
27,032

13

142

44,333

27,174

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 are carried at fair value and unrealised gains
and losses are recorded in the equity within the fair value reserve.

04

In 2018, the internal tax on salaries retained from staff members amounts to €1.7 million (2017: €1.7 million).

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22. Staff costs
Staff costs are detailed as follows:
(in €’000)
Salaries(1) and allowances
Social security costs
Pension costs
Total staff costs

2018
23,419
1,088
7,924
32,431

2017
22,841
1,251
7,074
31,166

Of which €1.7 million (2017: €1.6 million) relates to the ESM Management Board members, including €0.36 million (2017: €0.36 million) to the ESM
Managing Director.
(1)

The ESM employed 179 persons on 31 December 2018 (174 on 31 December 2017).
In addition to its own employees, the ESM has expenses for employees seconded from other International Financial Institutions, as well as interim and temporary staff hired from external agencies. The related costs amount
to €1.3 million for the 2018 financial year (2017: €1.2 million) and are accounted for as ‘Other administrative
expenses’ (refer to Note 23).

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)

2018
9,820

2017
8,456

Advisory services

7,948

4,815

Rental and related services

3,903

3,429

Treasury related services

1,542

1,298

Interim and secondment fees (Note 22)

1,304

1,219

Rating agencies fees

418

385

Legal services

639

1,269

IT services

3,661

2,742

Other services

4,533

5,406

Total other administrative expenses

33,768

29,019

24. Extraordinary income
The extraordinary income, totaling €242.5 million, is mainly composed of the amounts received from the Federal
Republic of Germany and the French Republic, to compensate the ESM for a part of the negative interest charged
on the cash held at their national central banks during 2017. These represent €128.9 million and €86.7 million
respectively.
In accordance with the article 24(2) of the ESM Treaty, the ESM receives the proceeds of the financial sanctions
paid by ESM Members. These are imposed under the multilateral surveillance procedure, under the excessive
deficit procedure and under the macroeconomic imbalances procedures established under the Treaty on the
Functioning of the European Union. The ESM also receives the financial sanctions imposed by the Court of Justice pursuant to Article 8(2) of the Treaty on Stability, Coordination and Governance (TSCG) on euro area Member
States. These proceeds are recorded as extraordinary income and put aside in the reserve fund.
Accordingly, the ESM shall receive an amount of €26.8 million following a decision in May 2018 from the Council
of the European Union imposing a fine on Austria.

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In 2017, the extraordinary income of €18.93 million was related to an amount that the ESM received from the
European Commission, following a final sentence of the Court of Justice in December 20175, which confirmed
the Council implementing decision imposing a fine on Spain.
The financial sanctions imposed on Austria by Council implementing decision (EU) 2018/818 on 28 May 2018
and on Spain by Council implementing decision (EU) 2015/1289 on 13 July 2015 are sanctions pursuant to
Article 8(1) Regulation (EU) No. 1173/2011. Such sanctions are collected by the European Commission and are
assigned to the ESM.6

25. Off-balance commitments
The off-balance sheet commitments represent the undisbursed part of the financial assistance programme to
Greece and amounts to nil after Greece officially concluded its three-year ESM financial assistance programme
with a successful exit during 2018 (2017: €45.8 billion).

26. Derivatives
The ESM uses derivatives for risk management purposes only, as described in Note 2.5. 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.
All derivatives transactions are booked at notional value as off-balance sheet items at the date of the transaction.
On 31 December 2018, the derivative financial instruments had a maximum maturity up to 30 years (2017: maximum maturity up to 30 years) and were concluded with euro area central banks, international financial institutions or commercial banks.
The following table discloses the details of result on derivative contracts during the year ending on 31 December 2018.
Interest payable and
similar charges
(446,803)

Net result
(310,741)

82,166

(54,745)

27,421

34,589

(1,525)

33,064

Spread on foreign exchange swaps

7,259

(6,229)

1,030

Spread on foreign exchange forwards

(876)

882

6

259,200

(508,420)

(249,220)

Total
(1)

5
6

The net result from the IRS executed to reduce Greece’s interest rate risk is passed through to Greece. (Refer to Note 3.6.1.1).

ECLI:EU:C:2017:982
Cf. Article 10 of Regulation 1173/2011.

04

Interest receivable
and similar income
136,062

(in €’000)
Interest result on interest rate swaps(1)
Interest result on cross-currency asset
swaps
Up-front payments on cross-currency asset
swaps

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The following table discloses the details of result on derivative contracts during the year ending on 31 December
2017:
(in €’000)
Interest result on interest rate swaps(1)
Interest result on cross-currency asset
swaps
Up-front payments on cross-currency
asset swaps
Spread on foreign exchange swaps
Spread on foreign currency forwards
Total
(1)

Interest receivable
and similar income
42,814

Interest payable and similar
charges
(141,797)

Net result
(98,983)

11,819

(11,114)

705

10,137

(36)

10,101

5,881

(6,548)

(667)

688

(447)

241

71,339

(159,942)

(88,603)

The net result from the IRS executed to reduce Greece’s interest rate risk is passed through to Greece. (Refer to Note 3.6.1.1).

The realised part included in ‘Interest receivable and similar income’ amounts to €188.7 million (2017: €25.1 million), while for ‘Interest payable and similar charges’ this represents €401.0 million (2017: €22.4 million).

27. 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.

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.
In 2018, the ESM received payments from France and Germany to compensate for the negative interest charged
on the cash balances held with their respective national central banks (refer to Note 24). In January 2018, €86.7
million was received from France and in August 2018 €128.9 million was received from Germany. In 2017, both
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 parliament approval. Both ESM Members made
similar transfers in January and February 2019, subsequent to year end (refer to Note 29).

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 macro-economic 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

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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 organisations have entered into a service
level agreement. In line with the terms of this agreement, the ESM charged the EFSF €32.6 million for the financial
year 2018 (2017: €30.9 million), from which €9.8 million had not yet been paid at balance sheet date (refer to Note
10). The ESM recognised these amounts as other operating income in the profit and loss account.

Transactions with the Chairperson of the ESM Board of Governors
In October 2017, the ESM appointed Jeroen Dijsselbloem as strategic advisor to the ESM Managing Director. Mr
Dijsselbloem held this position as an external service provider until the end of his term as Eurogroup President on
13 January 2018. During this period, he remained Chairperson of the ESM Board of Governors. Mr Dijsselbloem
was remunerated during this time in line with the ESM’s standard contracts for external service providers until
the end of his term on 13 January 2018.

28. Audit fee
The total fees accrued in 2018 by the ESM to Ernst&Young, Société Anonyme are presented as follows:
(in €’000)
Audit fees
Audit related fees
Total Audit fees

2018
249
131
380

2017
249
205
454

In 2018 and 2017, the external auditors provided the ESM with audit-related services in relation with the US-dollar
denominated bond issuance.

29. Events after the reporting period

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On 2 January 2019 and on 4 February 2019, the ESM received €100 million from the French Republic and €135.4
million from the Federal Republic of Germany, following a political commitment to compensate the ESM for negative interest paid on the cash balances held with their respective national central banks, as explained in Note 27.
These amounts will be recorded as extraordinary income in 2019 (refer to Note 2.19).

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External auditor’s report on the
2018 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 European Stability Mechanism (the “Entity” or “ESM”),
which comprise the balance sheet as at 31 December 2018, 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.

Key audit matters
Key audit matters are those matters that, in our professional judgment, 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 at 31 December 2018, the loans and advances to
euro area Member States amounted to EUR 89.9 billion and related 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. For the

05

In our opinion, the accompanying financial statements give a true and fair view of the financial position of the Entity as at 31 December 2018, 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”).

are further described in the « Responsibilities of the
“réviseur d’entreprises agréé” for the audit of the
financial statements » section of our report. We are
also independent of the Entity in accordance with the
International Ethics Standards Board for Accountants’ Code of Ethics for Professional 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.

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year ending 31 December 2018, no impairment has
been recorded by ESM on these outstanding loans.
We considered this as a key audit matter as ESM
applies complex judgments 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 judgments to estimate the
impairment against speciﬁc loans and advances.
Refer to the 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 includes:
 the testing of the entity level controls over the
process, including the review and approval of the
assumptions made by the Management;
 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 judgments
made by the Management 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.

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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 “réviseur 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 judgment 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.
 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.

 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

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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.
 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, related safeguards.
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
We have been appointed as “réviseur d’entreprises
agréé” by the Board of Governors on 15 June 2017 and
the duration of our uninterrupted engagement, including previous renewals and reappointments, is 2 years.
We confirm that the audit opinion is consistent with the
additional report to the audit committee or equivalent.
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, March 26, 2019

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 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the
Board of Directors.

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Report of the Board of Auditors
on the 2018 financial statements

Luxembourg, 26 March 2019
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 Governors.1
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 2018.
The Board of Auditors notes that based on its own work and considering the work of the external auditor, to the
best of its judgment, no material matters have come to its attention that would prevent it from recommending
that the Board of Governors approve the ESM financial statements for the year ended 31 December 2018.
On behalf of the Board of Auditors
Kevin Cardiff
Chairperson

06

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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 2018 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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Acronyms and abbreviations
ALM

Asset and Liability Management

HCAP

Hellenic Corporation of Assets and
Participations

BoA

Board of Auditors

BoD

Board of Directors

HFSF

Hellenic Financial Stability Fund

BoG

Board of Governors

IFI

International financial institution

CCB

Cyprus Cooperative Bank

IMF

International Monetary Fund

CDS

Credit default swap

ISDA

International Swaps and Derivatives
Association

CPI

Consumer price inflation

NPL

Non-performing loan

ECB

European Central Bank

PSPP

Public Sector Purchase Programme

EFSF

European Financial Stability Facility

RCSA

Risk and Control Self-Assessment

EMU

Economic and Monetary Union

SRB

Single Resolution Board

ESM

European Stability Mechanism

SRF

Single Resolution Fund

GDP

Gross domestic product

SSA

Sovereign, Supranational and Agency

GDPR

General Data Protection Regulation

TRSA

Top Risk Self-Assessment

GLF

Greek Loan Facility

EURO AREA

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

United States

EUROPEAN STABILITY MECHANISM
6a Circuit de la Foire Internationale
L-1347 LUXEMBOURG
Tel: (+352) 260 962 0
info@esm.europa.lu
www.esm.europa.eu

Print

ISBN 978-92-95085-59-6

ISSN 2314-9493

doi:10.2852/53320

DW-AA-19-001-EN-C

PDF

ISBN 978-92-95085-58-9

ISSN 2443-8138

doi:10.2852/427922

DW-AA-19-001-EN-N