Independent
Evaluator
appointed by the
ESM Board
of Governors

EFSF/ESM
Financial Assistance
Evaluation Report

Photo credits:
front cover (illustration), © AF-Studio/Getty Images; page 3, © European Central Bank

print

ISBN 978-92-95085-31-2

doi:10.2852/187211

DW-06-16-055-EN-C

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ISBN 978-92-95085-32-9

doi:10.2852/667170

DW-06-16-055-EN-N

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Evaluation of EFSF and ESM financial assistance | June 2017

Contents

Foreword ���������������������������������������������������������������������������������������������������������������������������������������������� 3
Executive summary ���������������������������������������������������������������������������������������������������������������������������� 5
Main findings ���������������������������������������������������������������������������������������������������������������������������� 5
Recommendations ������������������������������������������������������������������������������������������������������������������� 7
1.	Introduction ������������������������������������������������������������������������������������������������������������������������������������� 9
1.1.	 Purpose and scope of the evaluation ���������������������������������������������������������������������������� 9
1.2.	 Euro area crisis resolution strategy ���������������������������������������������������������������������������� 13
1.3.	 Establishment of the EFSF and ESM ��������������������������������������������������������������������������� 14
2.	Role of the EFSF and ESM ����������������������������������������������������������������������������������������������������������� 19
2.1.	 Euro area firewall and its systemic effects ����������������������������������������������������������������� 19
2.2.	 Country programmes ��������������������������������������������������������������������������������������������������� 20
2.3.	 Programme outcomes �������������������������������������������������������������������������������������������������� 23
3.	 Programme financing ������������������������������������������������������������������������������������������������������������������� 27
3.1.	 Timing of request ��������������������������������������������������������������������������������������������������������� 27
3.2.	 Choice of instrument ���������������������������������������������������������������������������������������������������� 32
3.3.	 Sizing of financial assistance ��������������������������������������������������������������������������������������� 35
3.4.	 Disbursement processes ��������������������������������������������������������������������������������������������� 41
3.5.	 Lending terms and contribution to budgetary savings ��������������������������������������������� 45
3.6.	 Financial sector repair �������������������������������������������������������������������������������������������������� 48
4.	 Programme exit and ensuring repayment capacity ����������������������������������������������������������������� 59
4.1.	 Planning the programme exit �������������������������������������������������������������������������������������� 59
4.2.	 Regaining market access ��������������������������������������������������������������������������������������������� 60
4.3.	 Ensuring repayment capacity after exit ���������������������������������������������������������������������� 65
5.	 Institutional framework ��������������������������������������������������������������������������������������������������������������� 69
5.1.	 Governance of EFSF and ESM programmes �������������������������������������������������������������� 69
5.2.	 ESM’s involvement in programme activities ������������������������������������������������������������� 71
6.	Conclusions ����������������������������������������������������������������������������������������������������������������������������������� 75
7.	Recommendations ������������������������������������������������������������������������������������������������������������������������ 79
Endnotes �������������������������������������������������������������������������������������������������������������������������������������������� 82
List of acronyms �������������������������������������������������������������������������������������������������������������������������������� 88
References ����������������������������������������������������������������������������������������������������������������������������������������� 89

1

Foreword

The EFSF and the ESM were established in the
aftermath of the financial crisis, in the years 2010
and 2012. Their purpose is to provide access to
financial assistance programmes for Member States
of the euro area in financial difficulties. By doing so,
these institutions create a firewall against instability
and uncertainty.
In September 2016, the Board of Governors of the
ESM under the chairmanship of Jeroen Dijsselbloem
appointed me as Independent Evaluator to assess
the relevance, effectiveness and efficiency of the
EFSF and the ESM.
This report presents the results of reflections
based on desk studies, surveys and interviews with
authorities in member countries and international
partner institutions, as well as input from other
evaluations and published literature. I would like to thank the dedicated evaluation team under
the leadership of Kari Korhonen, as well as Rolf Strauch as the project sponsor, and the external
advisors for their valuable input. I would also like to thank all those who contributed with responses,
comments and through frank discussions during the nine months of drafting this report.
It is the first time an evaluation of the two institutions has been undertaken. It covers the process
of programme financing from request to exit between the years 2010 and mid-2016.
This report aims to enhance transparency and help the euro area prepare for future challenges.
I hope the report will be useful for the Board of Governors and the ESM management as well as
the authorities in member countries and international partner institutions in their endeavour to
foster stability and prosperity in the euro area.
The recommendations are meant to serve as a guide for follow-up work, and to inspire the ESM
further in its position as forward-looking guardian of systemic stability and as a cornerstone of
the European financial architecture.
Gertrude Tumpel-Gugerell
Independent Evaluator

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Evaluation of EFSF and ESM financial assistance | June 2017

This report was written under the leadership of the Independent Evaluator Mag. Dr. Gertrude
Tumpel-Gugerell. The ESM drafting group was composed of John Goossen, Loukas Kaskarelis, Kari
Korhonen, Alexander Molzahn, Dora Siklos, and Vilém Valenta, with the support of the wider evaluation
team comprising Niyat Habtemariam, Dušan Kova evi ,, Oana Picincu, and Luís Rego. Vasco Campilho,
Rudolf Alvise Lennkh, Dirk Mevis, Philip Kluge, and Gregory Knipping contributed to parts of the project.
The quotations scattered throughout the report are drawn from the evaluation interviews, and used with
permission.
4

Executive summary

This report evaluates the relevance, effectiveness, and efficiency of EFSF
and ESM financial assistance in safeguarding the financial stability of the euro
area and its members. It primarily focuses on aspects that were not covered
in detail by other evaluations, such as financing and the ESM programme
governance framework. It is the first evaluation that covers all five euro area
programme countries: Ireland, Portugal, Spain, Cyprus, and the second Greek
programme up to its initial expiry in December 2014. These assistance programmes, totalling almost €300 billion, are among the largest in modern history. The evaluation does not assess the political aspects of the Eurogroup
negotiations or individual programme policies that were the specific responsibility of other institutions.
Main findings
Establishing the firewall and country programmes
The EFSF/ESM fulfilled their mandate of safeguarding financial stability in the euro area and its members, with support from other crisis
measures. The build-up of macroeconomic imbalances amid divergent economic policies, coupled with insufficient economic surveillance and banking
supervision, resulted in severe financial distress when the global financial crisis hit. Under these circumstances, the creation of a euro area firewall proved
necessary to complement international financial safety nets. The EFSF and
ESM successfully filled the sovereign financing gap in the euro area and significantly supported government debt sustainability in programme countries
by improving their borrowing conditions and smoothing repayment profiles.

Financial stability
mandate

Countries considerably improved their resilience, but macroeconomic
outcomes of the programmes were mixed. Programme strategies were
at times a source of tension among key stakeholders. Programmes included
measures that were not always crucial for addressing the causes of lost
market access. Short- and long-term objectives were not always commonly
understood and communicated, sometimes leading to optimistic expectations and subsequently to weakening ownership.

Programme
outcomes

Programme financing
EFSF/ESM programme financing supported smooth programme implementation, but some modalities could be improved in the future. For
different reasons and to varying degrees, the authorities did not succeed in
taking timely and comprehensive corrective actions. With the benefit of hindsight, programmes could have been requested earlier. Such delays are an
inherent feature of financial assistance to sovereigns, but they increased the
cost of rescue, weakened confidence and increased the risk of spillovers.

Timely
intervention

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Evaluation of EFSF and ESM financial assistance | June 2017

Financing instruments
and disbursements

The financing envelopes were sufficient to implement the programme
strategies. The instruments chosen and disbursement processes were
appropriate. In some cases, however, unforeseen adjustments to financing
and policy strategy were needed to comply with the programme envelope.
While contingency buffers were discussed and included in all programmes,
they were not sufficiently explicit to create confidence in some cases. The
palette of instruments evolved during the crisis and although these were
discussed actively, only some instruments were used. The design of the
direct recapitalisation instrument made it very difficult to use in practice. The
EFSF/ESM developed the disbursement process to adjust to changing circumstances and showed flexibility in response to the timing of programme
reviews. Though disbursements were linked to compliance with conditionality, the criteria for compliance assessment were not always clear.

Lending terms

Established policies provided a basis for even-handed treatment of
programme countries. However, lending and repayment terms were
eased with a view to country-specific needs. The size and timing of these
measures differed across countries.

Financial sector
challenges

The financial sector recovered more quickly when comprehensive
strategies were designed and initiated upfront. The extent of the financial sector challenges was not always recognised in time. Early recapitalisations contributed to improvements in depositor and investor confidence.
However, upfront disbursements also weakened the institutions’ influence
on the timely implementation of subsequent measures. The multiple causes
of high non-performing loan ratios highlighted the need for comprehensive
strategies to address poor asset quality. These strategies included improving
the efficiency of insolvency frameworks, but also targeted measures such
as establishing “bad banks”, or enhancing banks’ internal work-out capacity.
Programme exit and repayment capacity

6

Programme duration
and exit strategies

The EFSF/ESM financial assistance programmes helped ensure market
access at sustainable rates in all but one country, but more time would
have been needed to finalise structural reforms. The standard three-year
programme period provided a window of opportunity for reforms, but public
and political support for reforms faded as countries gradually regained market access and not all problems were solved. Follow-up arrangements were
considered but a clean exit was preferred for political and market confidence
reasons. Countries developed exit strategies mainly based on a build-up of
cash buffers. Some programme countries exited without completing a final
review, which can be considered a programme governance flaw.

Repayment capacity

The ESM’s Early Warning System represents an appropriate tool to
monitor countries’ ability to repay, but its scope and enforcement
power is limited. It mainly relies on moral suasion and cooperation with
partner institutions. However, concerns over repayment capacity can only
be escalated on the basis of a liquidity assessment, not on long-term and
structural considerations. Although the tool was developed over time, its
scope is limited to programme countries, which does not allow it to capture
systemic risks.

Evaluation of EFSF and ESM financial assistance | June 2017

Institutional framework
The institutional framework governing the EFSF/ESM financial assistance worked reasonably well, but its complexity posed coordination
challenges and raised efficiency concerns. The joint nature of the programmes required a strong alignment of objectives among the partner institutions which posed challenges for all the institutions involved. Programme
governance faced a multiplicity of stakeholder interests that were sometimes
difficult to crystallise in a consistent strategy. Procedural arrangements and information sharing between partner institutions often relied on informal relationships. This was problematic in particular in relation to supervisory information.

Programme governance
and information sharing

This evaluation exercise was at times constrained by accessibility of
data and documents. The data on country programmes are not reported in
a fully harmonised manner, partly due to the evolving programme governance
framework. In several cases it was cumbersome to trace relevant background
documents.

Data access and
reporting

Recommendations
Recommendation 1.
The ESM should focus on programme credibility and support ownership.
The ESM should pre-empt delays in programme requests when problems
cannot be effectively solved at national level. The Board should require the
inclusion of clearly specified contingency buffers to reflect uncertainty. The
ESM should seek ways to support programme ownership, among others
through clear focus and realism, an appropriate communication strategy, and
maintaining political legitimacy.
Recommendation 2.
Programme design should have clear objectives and priorities.
The Board should give priority to macro-critical conditionality in programme
design. The Board should clarify the short- and long-term objectives in order
to develop more realistic expectations. Regaining market access is a key
objective of the programmes. The Board should consider strategies to help
maintain reform implementation in the post-programme period.
Recommendation 3.
The programmes should address financial sector issues upfront, but
associated disbursements should be phased, based on progress.
The Board should ensure that an explicit and comprehensive financial sector
specific strategy, including the management of non-performing loans, is put
in place from the start. The Board should require an upfront and continuous
review of the banking recapitalisation and restructuring needs and related
risks. The Board should link disbursements to progress on the comprehensive strategy.

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Evaluation of EFSF and ESM financial assistance | June 2017

Recommendation 4.
The Board should further refine and develop the ESM governance
framework.
To align stakeholder objectives, the Board should set a policy framework for
programme negotiations, design and review, as well as criteria for review of
compliance – within the limits of the ESM Treaty. Furthermore, the Board
should clarify the responsibilities of the programme partners ex ante to ensure
effective collaboration and management of risks. The ESM should establish
formal cooperation agreements including on information sharing. As a matter
of good governance, the policy framework should require a closing report
presented to the Board, even if some reviews were not concluded.
Recommendation 5.
The ESM should enhance programme transparency and evaluability.
The ESM should implement mandatory public reporting, including a database
for the dissemination of harmonised data on country programmes. The ESM
should evaluate the Early Warning System and the Greek programmes in due
course. The ESM should ensure the evaluability of EFSF/ESM activities by
developing its record and data keeping practices further and enhancing the
traceability of relevant documents.
Recommendation 6.
ESM Members may clarify the ESM’s role in euro area institutional
development.
Going forward, ESM Members may discuss a broader preventive mandate for
the financial stability of the euro area, including the ESM’s role.

8

1. Introduction

This is the first evaluation of the financial assistance provided by the
European Stability Mechanism (ESM) and the European Financial
Stability Facility (EFSF). It was launched in the context of broader efforts
to enhance transparency in euro area governance practices, and in recog­
nition that evaluations are a standard practice of international organisations.
Such evaluations improve the governance, transparency, and accountability of
institutions, and enable the organisation to learn from its experience.

This evaluation follows a number of audits, evaluations, and ex post
assessments of different aspects of the country programmes by other
institutions, none of which directly assessed EFSF and ESM activities.
The European Commission has conducted ex post evaluations of the adjustment programmes for Ireland, Portugal, and Spain. In addition, the European
Court of Auditors has audited European Commission practices in financial
assistance programmes. The International Monetary Fund (IMF) crisis programme reviews in 2011 and 2015 collected lessons on its activities. Most
recently, the IMF Independent Evaluation Office examined the IMF’s engagement in three euro area programme countries, Greece, Ireland, and Portugal.
1.1.	

Purpose and scope of the evaluation

In early 2016, the Chairperson of the ESM Board of Governors Jeroen
Dijsselbloem requested a thorough evaluation of EFSF and ESM
programmes to inform future decision-making. The Board of Governors,
which is the highest decision-making body of the ESM, comprising finance
ministers of euro area countries, approved the scope of this evaluation in
June 2016, and the precise Terms of Reference in October 2016.1

Chairperson Dijsselbloem, in cooperation with the ESM Managing
Director, Klaus Regling, appointed Gertrude Tumpel-Gugerell, the
former vice-governor of the Austrian National Bank and a former
member of the Executive Board of the European Central Bank (ECB),
as the independent evaluator.2 She has produced this report in cooperation with the ESM project sponsor, evaluation manager, and evaluation team.
In addition, external advisors, including a former deputy director of the IMF
Independent Evaluation Office and the director of the evaluation service of
the European Investment Bank, were appointed to support the ESM evaluation team. They advised the team, ensuring quality control and forestalling
potential concerns about conflicts of interest. Two external consultants were
also integrated into the evaluation team.
The report has been published following an ESM Board of Governors’ discussion. A draft report was subject to a consultation with the members of the
ESM Board of Directors and the partner institutions.

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Evaluation of EFSF and ESM financial assistance | June 2017

Mandate
“We're not used to formal
evaluations. But it is useful
to look back and learn
lessons for the future.”
—Evaluation interviewee

The purpose of the evaluation is to assess the relevance, effectiveness,
and efficiency of EFSF and ESM financial assistance in safeguarding the
financial stability of the euro area and its members. This report aims to
add to the existing body of evaluations and distil and disseminate findings and
lessons on different aspects of euro area programme operation. The mandate
is primarily to look into past programme activities to draw lessons for future
activities. The evaluation also aims to provide comfort to external stakeholders, including the general public, by providing transparency and validated information on the organisations’ activities. A critical and independent appraisal of
the programmes is an important objective for euro area Member States.3
Scope
The evaluation addresses financial assistance provided through five
programmes for five euro area member states, as well as the postprogramme period up to the end of June 2016. This includes the EFSF
programmes for Ireland and Portugal, and the ESM programmes for Spain and
Cyprus. The second Greek programme is also included up to its initial expiry
in December 2014. Events in 2015 led to the adoption of a follow-up programme with the ESM. This ESM financial assistance for Greece (third Greek
programme) is ongoing and therefore not subject to the evaluation. Box 1.1
sketches out the key elements of the country programmes.
The ESM Board of Governors posed a number of questions for each of the
evaluation criteria, which concerned either the entire programme period or
a specific phase (negotiation, execution, or post-programme monitoring). This
evaluation addresses the following evaluation questions:
Relevance (consistency with country needs, institutional mandates, European
policies, and global priorities):
• Did the EFSF/ESM comply with its mandate to safeguard the financial
stability of the euro area and its Member States by deploying its programmes? How did their roles evolve over time?
• Were the EFSF/ESM financial assistance activities consistent with the
prime objective?
• How were financing needs defined? Was the need for buffers considered
appropriately in the financing envelope?
• What were the major factors affecting successful implementation?
• Was the granted assistance instrument appropriate and the programme
period adequate?
Effectiveness (achievement of objectives):
• How can the ESM best support effective programme implementation,
including in the post-programme period?

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Evaluation of EFSF and ESM financial assistance | June 2017

• Were members treated even-handedly in light of the size of assistance
relative to each country’s financing needs, lending terms, or disbursement
practices?
• Did programmes target effectively the financing needs of a country and
account for the specific requirements of bank recapitalisation?
• Was the financing planning and disbursement strategy conducive to effective programme implementation?
• Were the financing terms sufficiently flexible in view of uncertainty? Were
programme contingencies assessed appropriately?
• Does the lending framework set out an appropriate creditor position,
including on proportionality and the ability to monitor and assert rights?
• How has the need for possible follow-up arrangements been assessed?
• How did borrowing costs and maturity structure support programme
achievement and programme sustainability?
Efficiency (how economically were funds, expertise, and time converted into
results):
• Did the information provided ensure the efficient conduct of assistance?
• Were resources adequate?
• Have activities (e.g. fund raising and disbursements) taken place in a timely
manner?
Collaboration (objectives and process of collaboration, methods of transparency for the membership base and the larger community, decision-making
methods):
• What was the nature of the relationships with the relevant local, European,
or international authorities and bodies, and what could be improved?
• How effective was the programme governance structure?
The evaluation does not cover the political aspects of the Eurogroup
negotiations or aspects of programme design that are the specific responsibility of other institutions. As regards the programme conditionality, the
evaluation does not assess individual past policies.4 The report draws several
lessons on general principles for programme design and mentions conditionality
when it serves as an explanatory factor. Yet, the financial sector was dedicated
a section in view of its large financing share. At the same time, the evaluation
team was constrained by a number of evaluability issues. These include limits on
data and document availability as well as access to some relevant interviewees.5
Therefore the team sometimes had to resort to workarounds and the use of proxies. Moreover, the overall governance framework of the EFSF/ESM was taken as
given. Investment activities and cost-efficiency of funding were left outside the
scope of this exercise. The report does not evaluate the internal and resource
efficiency of the two institutions, although some related aspects have been
addressed (efficiency of disbursements and role of country team coordinators).
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Evaluation of EFSF and ESM financial assistance | June 2017

Several evaluation questions could not be addressed, or not fully.
• Did ESM instruments and agreed policies work, and under what type of
country-specific circumstances to ensure lasting effects? Did benefits
prove sustainable?
It was considered too early to assess the lasting nature or sustainability of
the programme outcomes (impact evaluation). The evaluated programmes
were concluded relatively recently, with the last ending only in 2016. In
addition, data availability constraints would have hampered modelling for
such impact analysis.
• If the original implementation strategy was modified, were the compensating measures effective? Were there unintended effects?
Evaluation of compensating measures and unintended consequences
would have required an in-depth analysis of conditionality, which was not
feasible given the timeline of the exercise and the scope of EFSF/ESM
responsibilities. Instead it was decided to prioritise the financing aspects
of the financial assistance because that is the ESM’s core mandate.
• Did requests for financial assistance programmes and the assessment
by institutions comply with the requirements of the ESM Treaty and
Guidelines?
This question turned out to be less relevant because all requests were
made under the EFSF, where requests did not have to meet the same
criteria.
To answer these questions, the evaluation team prepared a series of desk studies.6 It conducted a survey of some internal staff and (former) members of the
Board of Governors and Directors. The team also carried out 79 semi-structured expert interviews involving 130 respondents from programme countries, partner institutions, and ESM governing bodies.7 Limitations included
the lack of availability of some individuals involved in programme design/
implementation but the large number of interviews and variety of expert
backgrounds mitigates the consequences of such missing individual views.
This report is structured in seven chapters, which have a number of anonymous quotes from the evaluation interviews throughout. It begins by
evaluating the relevance and effectiveness of the overall role of the ESM
(Chapter 2). Chapter 3 addresses various aspects of programme financing,
through six sections, closing on a sector-specific approach to financial sector repair. The report then moves on in Chapter 4 to members’ programme
exit strategies and the monitoring of repayment capacity. Chapter 5 evaluates
collaboration in programme governance and the involvement of the EFSF/
ESM in programmes. Chapter 6 draws conclusions and Chapter 7 presents
recommendations.
The report is accompanied by technical appendices that include the Terms of
Reference, and methodological notes including the evaluation’s intervention
logic and the vulnerability analysis. In addition, it presents the timeline of the
crisis.

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Evaluation of EFSF and ESM financial assistance | June 2017

1.2.	 Euro area crisis resolution strategy
Having built up macroeconomic and financial imbalances, the euro
area was hit hard by the global financial crisis of 2008-2010. The incomplete design of euro area economic governance at the time meant interactions between fiscal policy and wider macroeconomic imbalances had not
been fully provided for. In a deeply integrated currency area, the negative confidence effects of the crisis in some countries risked spilling over the whole
area, and members lacked some adjustment mechanisms owing to the fixed
exchange rate and common monetary policy.
The stability of the euro area was to a large extent premised on the
effective functioning of the Stability and Growth Pact (SGP), which
was intended to ensure the sound fiscal policies needed to sustain
market financing for the sovereigns. The rules of the SGP were intended
to guide countries to correct their fiscal policies through peer pressure and
the govern­ance processes. Public finances, however, failed to accumulate
sufficient room for manoeuvre prior to the crisis and ended up burdened with
gover­nments’ crisis-triggered countercyclical measures and bank recapitalisations. This resulted in the financial situation deteriorating as the crisis unravelled, to the extent that a number of countries either risked losing or actually
lost access to market financing at sustainable rates to cover budgetary shortfalls and refinance their maturing debt.
European authorities devised a strategy to fight the crisis on the basis
of five main pillars:
1. At national level, member states made considerable progress on fiscal
consolidation and structural reforms to reduce imbalances.
2. Monetary policy provided ample liquidity to financial institutions and
eventually created a supportive interest rate environment, including via
unconventional measures like long-term refinancing operations and asset
purchase programmes.
3. The economic and fiscal surveillance framework was overhauled. Various
policy initiatives were introduced aimed at ensuring fiscal discipline and
restoring confidence, which strengthened the preventive and corrective
fiscal governance. Transparency and coordination of budgetary processes
were tightened, and the monitoring of macroeconomic imbalances was
introduced. Euro area Member States further agreed to coordinate their
debt issuance plans. Finally, Eurostat’s powers vis-à-vis the national statistical authorities were strengthened.
4. The authorities introduced a common rule book for banks and took a number of institutional measures to enhance oversight and supervisory capacity, such as establishing the European Systemic Risk Board and European
supervisory agencies. Supervisory decisions were placed at supranational
level, superseding insufficient national supervisory practices. Later on, the
Banking Union with a common supervisor and resolution mechanism was
created to move the application of banking policies at the European level.

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Evaluation of EFSF and ESM financial assistance | June 2017

5. The euro area governments created crisis resolution mechanisms. After
installing the Greek Loan Facility, which targeted only this country, the
euro area established the EFSF, a temporary rescue fund, and ultimately
the ESM as a permanent body. When setting up the support mechanisms,
finance ministers emphasised that the firewalls alone did not substitute
for sound national policies.8
1.3.	 Establishment of the EFSF and ESM
First steps under the EFSF
Before the euro area firewall was set up in response to the global financial crisis, the European Union (EU) and its Member States made concerted efforts to support demand, investment, and liquidity across the
continent, which increased debt–to-GDP (gross domestic product) levels considerably. When Greece was shut out of financial markets, there was
no institutional solution at hand despite general efforts to ensure stability. The
Greek Loan Facility was based on bilateral loans from the euro area members.
The next step was to streamline financial stability support procedures by creating the European Financial Stability Facility.9 The goal
was to create a temporary structure to finance stability support that would
be lean and cost-efficient. The EFSF, a public limited liability company under
Luxembourg law, was incorporated less than one month after the European
Council took the decision to set it up in May 2010. Its existence was meant to
signal European commitment to the integrity of the euro area. The euro area
Member States and the EFSF established a Framework Agreement to govern
its €440 billion guarantee structure.10
Then member countries moved to increase the EFSF’s lending capacity. The EFSF’s effectiveness as a lender was dependent on maintaining the
highest possible credit rating – which it achieved through a guarantee-backed
lending capacity based on its highly rated guarantors. To achieve an effective
€440 billion capacity, the euro area Heads of State and Government agreed in
June 2011 to increase the maximum guarantee commitments to €780 billion,
thus achieving 100% coverage of each issuance by highly rated guarantors.
Members also increased the EFSF’s operational flexibility. The revised
agreement expanded the list of available instruments. As well as offering
loans to Member States, the EFSF was able to provide assistance tailored to
more specific situations (see Section 3.2). In March 2012, the EFSF moved
to a diversified funding strategy, based on short-term and long-term financing
pools, from back-to-back funding. This structure severed the link between
particular issuances and lending, and allowed the EFSF to take advantage
of the corresponding maturity diversification (see Section 3.5). This model
would later be replicated at the ESM.
Soon after the EFSF’s creation, it became clear that investors required
a more permanent entity to reassure them that the euro area was
indeed committed to the euro and would ensure financial stability. Euro
area leaders agreed on the principle of creating a permanent crisis resolution
mechanism to safeguard the euro area’s financial stability. Since the EFSF was
already up and running, it was asked to prepare a new permanent institution.

14

Evaluation of EFSF and ESM financial assistance | June 2017

Creation of the ESM
In October 2010, the European Council agreed on the need to establish
a “permanent crisis mechanism to safeguard the financial stability of
the euro area as a whole”.11 A first version of the ESM Treaty was signed in
July 2011 but the evolution of its features and of the wider euro area governance rules required a revision of the ESM Treaty before its ratification process
started. The final Treaty was signed on 2 February 2012 in Brussels, endowing
the ESM with a capital structure to limit the burden on Members' public debt.12
The ESM started operating with only a very small team. The ESM was
inaugurated as an international financial institution at a Board of Governors'
meeting on 8 October 2012. It gradually built up key operations such as funding, lending, investment, risk, legal, policy, and other corporate functions.
While growing rapidly to achieve the maturity required from an international
financial institution, the ESM remained a lean organisation, relying on the outsourcing of non-core functions.
Since its inception, the ESM has financed a financial sector programme
for Spain, approved but not used under the EFSF, and a financial assistance programme for Cyprus, approved in April 2013. In parallel, the ESM
undertook a technical assistance mission to Cyprus to improve the country’s capacity for debt issuance and management. The ESM also became
an active part of programme and post-programme monitoring with its Early
Warning System, which was enlarged to cover EFSF-funded programmes.
More recently, the ESM started a financial assistance programme for Greece,
which is still ongoing and therefore beyond the scope of this report.
The ESM is governed by euro area finance ministers who form the Board
of Governors and each nominate a member for the Board of Directors.
These bodies take formal decisions on financial assistance and institutional
issues. The ESM Treaty assigns certain policy tasks to peer institutions, and
formal decisions are often discussed in the Eurogroup, which is an informal
euro area formation of the Ecofin council of the EU finance ministers.

Box 1.1: Brief description of the country programmes covered by this
evaluation13
Ireland
A 10-year long real estate-driven credit boom overheated and culminated in the collapse of Irish real estate prices in 2007. To prevent banks
from collapsing, the government provided them support and guaranteed their
funding. Investors worried, however, that the losses at the banks were too big
for the government to fund. They started requiring higher returns, eventually
making it too expensive for Ireland to borrow money on financial markets.
In November 2010, Ireland asked the EU and the IMF for financial support. The following month, it became the second euro area country to enter
an assistance programme. Creditors provided total support of €67.5 billion,
which added to €17.5 billion in Irish own resources. The EFSF lent the Irish
sovereign €17.7 billion, with the rest supplied by the EU, individual EU Member
States, and the IMF.
15

Evaluation of EFSF and ESM financial assistance | June 2017

During its three-year assistance programme, Ireland fixed many of its
structural problems. Two major banks were closed down, while some of
the remaining banks received a capital boost. A bad bank (NAMA or National
Asset Management Agency) was set up to deal with problem loans and isolate them from the healthy banking business. The country reduced its fiscal
deficit, and successfully exited its EFSF programme in December 2013.
Portugal
Unlike some other programme countries, Portugal had suffered a long
period of weak economic growth before the crisis. Low interest rates
in combination with loose credit conditions created an illusion of prosperity.
This contributed to high debt levels for companies, households, and the government. Low productivity growth and significant wage increases weakened
competitiveness.
The country did not seize upon low financing costs to keep debt under
control. With large and persistent budget deficits, debt spiralled. When the
global crisis hit Europe in 2010, investors lost confidence and demanded everhigher returns on Portugal’s bonds. Early in 2011, it became too expensive
to borrow on financial markets, and banks became reliant on central bank
liquidity. In April 2011, Portugal requested assistance from the EFSF, the EU,
and the IMF. Its programme concentrated on fiscal stabilisation and structural
reforms. The financial sector was not a primary element.
The creditors made €78 billion available for Portugal over three years.
The EFSF, the EU, and the IMF each pledged a third of the total amount.
As for Ireland, EFSF financing was provided under economic policy conditionality and Portugal committed to a large number of measures to reform
its economy.
Portugal regained market access but the macroeconomic outcomes
were mixed. The programme started to bear fruit with the budget and current account deficits shrinking but growth resumed slower than originally
expected. The country exited the programme in May 2014.
Greece – 2nd programme
Greece was on an unsustainable path before the crisis. Once it joined the
euro area, Greece, like many euro area countries, was able to borrow money
at far lower rates than beforehand. It responded by boosting government
spending, but revenues remained weak because of poor tax compliance and
administration. Public debt soared quickly. The country lost competitiveness,
in part due to wages rising too fast and lagging product market reforms. The
result was a loss of market confidence in the sustainability of government
debt. The IMF and euro area Member States agreed on a first aid package of
about €110 billion in May 2010.
In 2012, financial assistance from the first programme was judged
to be insufficient. The EFSF provided the bulk of a second programme,
in which a total of €141.8 billion was disbursed, again with a contribution
from the IMF. Banks and other investors contributed by writing down part of
the value of their debt holdings, in the so-called Private Sector Involvement
(PSI) programme. In 2014, the Greek economy returned to growth,
16

Evaluation of EFSF and ESM financial assistance | June 2017

unemployment began to drop, and Greece temporarily regained its ability to
raise money from the markets.
As of late 2014, disagreement on the implementation of reforms arose,
and Greece eventually fell back into recession. The assistance programme
was extended twice in the first half of 2015 but finally expired in June 2015.
Nonetheless, fundamental problems remained and a third programme was
agreed in August 2015.
Spain
Spain’s problems first became visible in the housing market. In the
decade before the crisis, the economy grew much faster than the rest of
Europe, fuelled by easy credit and a construction boom. When the credit
crunch hit, real estate prices collapsed. Banks were left with huge losses, as
clients struggled to repay mortgages.
The country entered a recession with the budget deficit rising to 11%
of GDP in 2009 and banks losing their ability to borrow money or raise
capital. Savings banks were the weakest; without support many would
have collapsed. With the budget already stretched, the government had little
room to manoeuvre. While Spain never lost access to market financing, raising money became increasingly expensive. In a bid to calm uncertainty and
quickly address the banking issues, Spain requested assistance in June 2012.
The ESM’s financial assistance package was used for a sole purpose:
recapitalising the country’s banks. The ESM committed up to €100 billion in assistance. Here, the IMF acted as an advisor. Only €41.3 billion was
used. Funds were lent to the Spanish government who used them to support
the banks.
Spain modernised the banking sector, in particular the savings banks.
Ownership structures were reformed, and risk management practices were
improved. Spain exited its programme in December 2013 and gave a strong
signal that it had returned to normal by voluntarily starting to repay ESM loans
earlier than required. Programme conditionality focused on the banking sector. Spanish macroeconomic reform commitments were applied through the
European Semester, annual cycle of economic and fiscal policy coordination
within the EU.
Cyprus
In the 2000s, the Cypriot economy was booming, supported by a large
off-shore banking sector and by the prospect of the country joining the
euro. Wage rises dampened exports but money kept flowing into the banking sector. Once Cyprus joined the euro in 2008, it was able to borrow more
cheaply. The first signs of distress in the banking sector appeared in 2010.
The banks had grown too rapidly and markets started to take a negative view.
By mid-2011, Cyprus was no longer able to borrow money from investors.
In June 2012, Cyprus requested assistance from the ESM and the IMF.
An ESM assistance programme of €9 billion was agreed in March 2013. In
addition, the country agreed a programme of around €1 billion with the IMF.
17

Evaluation of EFSF and ESM financial assistance | June 2017

The total loan package was roughly half the size of Cypriot GDP. The loan
was provided directly to the sovereign. In return, Cyprus undertook to shrink
its banks, recapitalise them in part through the bail-in of depositors, tighten
its budget, and push through a wide range of measures to become more
competitive.
Cyprus modernised its economy during the programme. Banks were
restructured and recapitalised, and are now about half the size they were
before the crisis. Cyprus has also improved financial regulation and supervision. It rationalised fiscal policies, implemented a long list of reforms in areas
such as wage policies, the public administration, services, and updated its
legal framework.
The country gradually returned to the bond market. The ESM eventually
disbursed only €6.3 billion in loans out of a €9 billion envelope. Cyprus won
back the confidence of investors and exited its programme in March 2016.

18

2. Role of the EFSF and ESM

The euro area entered the economic crisis with an incomplete architecture
to address the financing stress of its members. Before the crisis, the idea
of a euro area government losing market access at sustainable rates seemed
remote, and financial markets failed to differentiate between euro area sovereigns. Euro area surveillance mechanisms and national banking supervision
proved to be insufficient to prevent the build-up of macroeconomic imbalances and financial sector vulnerabilities. A financial backstop and centralised
banking supervision were not set up.
This chapter assesses the EFSF/ESM’s overall role in European crisis resolution and in country programmes. It addresses whether there
was a need for establishing the euro area firewall and implementing country
programmes; the extent to which the EFSF/ESM’s objectives and activities
were in line with the euro area and country needs; and to what extent these
objectives were achieved.
2.1.	 Euro area firewall and its systemic effects
Given political and capacity constraints, international financial safety
nets available at the onset of the crisis were not sufficient to deal with
euro area crisis challenges. Historically, countries unable to tap markets to
service their external or government debt have recourse to a financial backstop. This role has traditionally been played by the IMF, but its lending capacity and internal rules made it very difficult to cover the financing needs of
euro area countries – if not impossible. Roughly two thirds of the financial
needs in the first Greek programme were covered by bilateral loans from
other euro area countries. However, a systemic solution became urgently
needed when more euro area countries started facing prohibitive borrowing
costs and needed assistance (Figure 2.1). The legal and financial framework

Figure 2.1
10-year government bond yields
(in %)
40
35
30
25
20
15
10
5

EL

16
Ja
n

15
Ju
l

4

15
n
Ja

Ju
l1

14
Ja
n

13
Ju
l

13
Ja
n

12
Ju
l

12
n
Ja

11
Ju
l

n

11

0

Ja

l1
Ju

PT

10

IE

Ja
n

9
Ju
l0

09

8

Ja
n

l0
Ju

Ja
n

08

0

ES

Notes: 10-year yield not available for Cyprus. See list of acronyms for country codes.
Source: Bloomberg
19

Evaluation of EFSF and ESM financial assistance | June 2017

for bilateral loans was very complex and did not allow timely mobilisation of
sufficient volumes of financial assistance. The bilateral loans also added to
the debt levels of creditor countries.
Establishing the EFSF and ESM were therefore key milestones in the
euro area response to the economic crisis. The need for a financial backstop mechanism was particularly urgent in the currency union that was based
on a no-bail-out premise, in the absence of a debt restructuring mechanism
and with an imminent threat of contagion. The vast majority of interview
respondents confirmed the critical need for a firewall to resolve the euro area
sovereign debt crisis, and as a key part of the euro area financial infrastructure
going forward.
The EFSF and ESM successfully filled the sovereign financing gap in
the euro area. With its lending capacity of €700 billion, the EFSF and ESM
represent the largest regional financial arrangement in the world, comparable
to the global lending capacity of the IMF.14 The combined EFSF/ESM lending
capacity safely and timely covered the financing needs of the programme
countries. At end-June 2016, the ESM’s unused lending capacity amounted
to €372 billion, which would be sufficient to provide financial assistance of
a size similar to previous programmes.
The EFSF and ESM made an important contribution to government
debt sustainability in programme countries. The EFSF’s strong guarantee structure and the ESM’s robust capital position allowed borrowing at very
favourable interest rates – that were passed on to the programme countries,
bringing them significant budgetary savings. EFSF/ESM financing was also
provided at perceptibly lower rates than the IMF loans, which made the financial assistance cheaper for the euro area countries compared to standard IMF
programmes (see Section 3.3). At the same time, EFSF/ESM financial assistance was provided at longer maturities than IMF loans and these maturities
were subsequently extended further for some countries, thus substantially
smoothing countries’ repayment profiles (see Section 4.2).
The existence of the firewall helped maintain financial stability in the
euro area and its member countries, but its contribution is difficult to
disentangle from other factors. Establishing the EFSF and the ESM had
a positive impact on confidence vis-à-vis countries benefiting from financial
assistance – and the euro area as a whole – but the contribution is hard to
quantify. The improvement in confidence was only gradual and compounded
by other policy actions, such as the unconventional monetary policy measures
or other amendments to the EU and euro area architecture, whose relative
importance is difficult to assess. Nonetheless, a vast majority of respondents
viewed the EFSF/ESM contribution as very important.
2.2.	 Country programmes
Programme countries experienced a considerable build-up of imbalances and other vulnerabilities prior to the economic crisis, which
were widely underestimated and insufficiently addressed. Imprudent
economic policies, weak economic surveillance and banking supervision, as
well as lack of market pressure allowed large internal and external imbalances
to accumulate in some euro area countries. The ESM’s sovereign vulnerability assessment (see Lennkh 2017) confirms, with hindsight, that Ireland and
20

Evaluation of EFSF and ESM financial assistance | June 2017

Spain faced a rapid increase in vulnerability in 2008-2010, whereas Portugal,
Greece and Cyprus were subject to heightened vulnerability for an extended
period of time (Figure 2.2). The adverse developments did not go unnoticed
with warnings from international and some national institutions. However, the
magnitude of the problem was not sufficiently recognised by national policy
makers, nor was there appropriate pressure from the international institutions
or markets to trigger decisive and timely corrective action. These finding are
confirmed by economic data, as well as majority of interview respondents
and previous studies.15

Figure 2.2
Evolution of sovereign vulnerability
IE

PT

4.0

4.0

3.5

3.5

3.0

2.8

2.9
2.7

2.5

2.7

2.7

2.5

2.5
2.1

2.0

2.0

2.0

2.5

2.2

1.8

2.0

1.5
1.0

3.0

2005

2008

2010

2012

2014

2016

1.0

EL

ES
4.0

3.5

3.5

3.0

3.0
2.2

2.2

2.2

2.0

2.2

1.7

2005

2005

2.6

2.7

2008

1.7

1.7

1.9

1.9

2.0

1.7
1.6

1.6

1.5

2008

2010

2012

1.7

1.8

1.8

2.1

2.0

2014

2016

1.0

2005

2008

Rest of euro area

3.5

3.5

3.0

3.0
2.1

2.3

2.4

2.3
1.9

2.0

2.1

2.0 1.8

1.9
1.7

2012

2014

2016

1.9

1.9

1.9
1.8

2.0

2.1

2.1

1.5

4.0

2.5

2010

2.4

4.0

2.7

2.8

2.8

2.7

2.5

2010

2.4

2.3

2012

2.4

2.5

2014

2.5

2.5

2016

2.7

2.7

2.0

1.7

1.5
1.0

1.7

1.9

2.7

CY

2.5

2.2
1.9

2.5
2.0

1.5
1.0

2.1

1.5

4.0

2.5

2.0

1.5
2005

2008

2010

2012

2014

Score
Vulnerability

2016

1.0

2005

2008

1.0 to 2.0

2.0 to 2.5

2.5 to 3.0

3.0 to 4.0

High

Elevated

Moderate

Low

2010

2012

2014

2016

Note: The overall score is a weighted average of around 50 vulnerability indicators covering six vulnerability dimensions: (i) government borrowing needs,
conditions, and debt structure; (ii) economic strength; (iii) fiscal position; (iv) financial sector health and other contingent liabilities; (v) institutional parameters
and (vi) private leverage, credit, and real estate cycles. The weights are based on correlation and principal component analysis and expert judgement. Individual
indicators are standardised using scores 1 (most vulnerable) to 4 (most resilient) with thresholds based on literature where available and quartiles of historical
distribution of a pool of OECD and EU countries otherwise. No judgement is applied to final scores. See Lennkh (2017). Vertical lines indicate starts of the
programme interventions. For Greece, the solid vertical line represents the second programme, while the two dashed lines represent the first and third
programmes, which were not evaluated.
Source: ESM calculations

21

Evaluation of EFSF and ESM financial assistance | June 2017

The progressive deterioration of the economy and waning market confidence made requesting financial assistance practically unavoidable.
The weak starting position of the programme countries entering the crisis
resulted in a rapid worsening of their economic and financial situations.
The initial domestic policy response, albeit in some cases relatively strong
by normal standards, proved insufficient given the unforeseen magnitude
of the challenges. This put countries under severe fiscal stress that effectively prevented them from accessing financial markets and ultimately left
the authorities with no other option than to request financial assistance. This
conclusion was broadly supported by all respondents.

Last pre-intervention year

CY

ES

EL

PT

IE

CY

ES

EL

PT

IE

Figure 2.3
Sources of sovereign vulnerabilities

Rest of
euro area

Programme objectives broadly corresponded to country needs. The
triggers for the crisis varied across programme countries but each country
faced daunting challenges. In Ireland, Cyprus and Spain the main source of
instability was a fragile and oversized banking sector. Greece and Portugal
mainly suffered from the accumulation of macroeconomic imbalances and
a loss of competitiveness. The heat map in Figure 2.3 illustrates, with hindsight, the main sources of vulnerability in each country before the start of
the programme. While varying in magnitude, ranking and a primary source,
all programme countries were confronted with a precarious fiscal situation,
financial sector risks, and structural issues. All programmes address these
three main challenges, albeit with different priorities. The interviews with key
stakeholders show a broad consensus that the initial diagnosis was broadly
adequate in identifying the main problem areas.

Latest available data

2010

2010

2011

2012

2012

Overall vulnerability score

2.0

1.9

1.6

1.9

1.8

2.7

2.0

1.8

2.1

2.1

2.7

1 Government borrowing needs,
conditions and debt structure

1.6

2.2

1.9

1.9

2.2

2.9

1.7

1.5

2.1

2.0

2.7

2 Economic strength

2.7

1.9

1.6

2.0

1.8

3.3

2.3

2.0

2.5

2.0

2.6

3 Fiscal position

1.8

1.1

1.2

1.7

1.3

3.1

2.1

2.4

1.8

2.6

2.8

4 Financial sector and other
contingent liabilities

1.3

2.0

1.7

1.7

1.3

2.2

2.0

1.8

2.3

2.3

2.9

5 Institutional parameters

3.1

2.0

1.0

2.3

2.2

3.5

2.4

1.3

2.2

2.2

2.7

6 Private leverage, credit & real estate

1.5

2.1

2.1

1.7

1.5

1.2

2.1

2.1

1.9

2.1

2.3

Score
Vulnerability

2016

1.0 to 2.0

2.0 to 2.5

2.5 to 3.0

3.0 to 4.0

High

Elevated

Moderate

Low

2016

Notes: Last pre-intervention year for Greece refers to the second programme. The overall score is a weighted average of around 50 vulnerability indicators
covering six vulnerability dimensions: (i) government borrowing needs, conditions, and debt structure; (ii) economic strength; (iii) fiscal position; (iv) financial
sector health and other contingent liabilities; (v) institutional parameters and (vi) private leverage, credit, and real estate cycles. The weights are based on
correlation and principal component analysis and expert judgement. Individual scores are standardised using scores 1 (most vulnerable) to 4 (most resilient) with
thresholds based on literature where available and quartiles of historical distribution of a pool of OECD and EU countries otherwise. No judgement is applied to
final scores. In the case of Ireland, data anomalies related to multinational companies’ activities may improve 2016 scores for indicators such as economic
strength or fiscal ratios, but on the other hand they may have an adverse impact on the score for private leverage, credit, and real estate. See Lennkh (2017).
Source: ESM calculations

Views on prioritisation, sequencing, and the scope and detail of the
underlying policies differed. Most respondents agreed that macro-critical
structural reforms should be given clear priority. Some said that programmes
created a window of opportunity for reforms and that especially structural
22

Evaluation of EFSF and ESM financial assistance | June 2017

reforms should have played a more prominent role. However, others said that
the programme conditionality was too detailed, lacked focus, and required
complex decision making. Ultimately, this undermined ownership and made
the programmes more difficult to implement. There appears to be a broad
consensus, however, that the breadth, depth, and level of detail of programme
conditionality should be driven by country-specific circumstances. The strategy needs to be ambitious, but realistic and credible, while ensuring that the
burden is spread across society in a fair way. Ownership of the programme
by national authorities is a key element of success.
Programme ambitions to achieve short- and long-term policy objectives
were not always commonly understood or sufficiently communicated.
There seems to be a prevailing perception among European stakeholders
and the general public that by the end of the programmes, countries should
have returned to sound economic and financial conditions. Some respondents
viewed the programmes as short-term crisis management to regain market
access, whereas restoring fully a sound underlying economic position is typically
a long-lasting effort that stretches beyond the programme horizon. This sometimes represented a difference between the IMF and European approaches.
In the view of some respondents, clarifying the ambition might have helped
setting appropriate conditionality and avoiding unrealistic expectations on programme achievements. In their view, immediate crisis management should be
driven by clearly defined targets designed to safeguard financial stability and
regain market access. At the same time, they stressed that it is important that
the reform momentum is maintained after the programme expires.

“You cannot solve all the
problems in five years
that were created in three
to four decades.”
—Evaluation interviewee

Designing programmes in a monetary union required attaching high
importance to systemic considerations. Being part of the euro area meant
programmes for these countries required considerations that were different
from those of most standard IMF programmes. There was a very high risk, or
perceived risk, of contagion, particularly during the first years of the crisis until
2012. Programme countries did not have an independent monetary authority
that could fine-tune monetary policy to specific country needs. The exchange
rate adjustment channel was not available and nominal adjustment had to
be pursued through internal devaluation. Financing current account deficits
did not represent a binding constraint. Certain policy options were not on
the table as they were not in line with EU law, such as state aid rules or the
no-bail-out clause. All this required an approach that was novel for all institutions involved in the programmes. At the same time, the need to safeguard
financial stability of the currency union as a whole implied difficult trade-offs
regarding optimal policies for individual programme countries.
2.3.	 Programme outcomes
The programme countries overall display considerable achievements, but
reform efforts must continue to ensure their financial stability. Four out of
five programmes were successful in restoring, or in the case of Spain stabilising, market access. The vulnerability indicators show perceptible improvements in most economic areas since the start of the programmes (Figure 2.3).
Looking at the three main targeted areas, fiscal, financial and structural parameters improved considerably in all countries with the exception of the financial
sectors in Portugal16 and Greece and the fiscal position in Spain, which was
not subject to specific programme conditionality. However, the vulnerability
assessment shows that further reforms in some areas are still needed. Greece
is the only country that required a follow-up arrangement, due to a mix of factors involving larger initial macroeconomic imbalances, deeper-seated structural
problems, a less stable political situation, and lower implementation capacity
23

Evaluation of EFSF and ESM financial assistance | June 2017

(described in more detail in the dedicated evaluation reports of other institutions). Nonetheless, Greece exhibits considerable improvements, in particular
in the areas of the fiscal position and economic fundamentals.
The macroeconomic effects of the programmes were mixed. Although it
is impossible to definitively assess programme performance without a reliable counterfactual scenario, comparing initial macroeconomic assumptions
with the outcomes gives some indication. Portugal’s economic outlook was

Figure 2.4
Evolution of real GDP growth assumptions
(in %)
IE

PT

8
7
6
5
4
3
2
1
0
-1
-2

3
2
1
0
-1
-2
-3
t-1
2010

t
2011

t+1
2012

t+2
2013

t+3
2014

t+4
2015

t+5
2016

-4

t
t+1
t+2
2011 2012 2013

t+3
t+4
2014 2015

t+5
2016

Mar-12 - R3

Jan-13 - R6

Jun-11 - R0

Apr-12 - R3

Dec-12 - R6

Oct-13 - R9

Jun-14 - PR1

Sep-16 - PR5

Nov-13 - R8 + R9

Dec-14 - PR1

Sep-16 - PR4

ES

4

4
3
2
1
0
-1
-2
-3
-4

2
0
-2
-4
-6
t-3
2009

t-2
t-1
t
t+1
t+2
t+3
t+4
2010 2011 2012 2013 2014 2015 2016

t-4
t-3
t-2
t-1
2009 2010 2011 2012

t
2013

t+1
t+2
2014 2015

Mar-12 - R0

Dec-12 - R1

Nov-12 - R1

Jul-13 - R3

May-13 - R2

Apr-14 - R4

May-16 - PR5

Nov-16 - latest

CY
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9

t-1
2010

Feb-11 - R0

EL

-8

t-2
2009

t+3
2016

May-14 - PR1

Rest of euro area
3
2
1
0

t-3
2010

t-2
2011

t-1
2012

t
2013

t+1
2014

t+2
2015

t+3
2016

-1
2010

2011

May-13 - R0

Mar-14 - R3

Nov-10

Dec-14 - R5

Oct-15 - R7

Nov-13

2012

2013
Nov-11
Feb-17

2014

2015

2016

Nov-12

Notes: R0 refers to the initial programme. R1, R2 etc. refer to first, second etc. reviews. PR denotes post-programme reviews. Date refers to the publication
date of the programme review.
Sources: For programme countries, programme documents and review reports (dates refer to publication); for the rest of the euro area, the European
Commission economic forecast
24

Evaluation of EFSF and ESM financial assistance | June 2017

revised downward several times, which had a negative impact on expectations and underlines the need for prudent and conservative estimates. Initial
assumptions for Greece’s second programme were too optimistic, but since
the first programme review the outlook has not changed substantially. The programmes for Ireland, Spain and Cyprus exhibit no major forecast bias. These
programmes somewhat over-performed in relation to the initial assumptions.17
Figure 2.4 illustrates these findings on an example of real GDP growth. During
this period the economic outlook of the rest of the euro area was also subject
to substantial downward revisions until 2013. Negative surprises in Portugal
and Greece – which entered programmes in 2010-2012 – were therefore not
solely due to domestic factors. In contrast, the programmes for Spain and
Cyprus – which started in 2012-2013 – benefited from a more stable macroeconomic scenario and a recovery in the euro area as a whole.
Looking at the recent macroeconomic outcomes, programme countries
are mostly maintaining solid growth but high unemployment remains an
issue. Economic growth in the programme countries has exceeded the rest
of the euro area since 2014. In 2016 it was higher by an average of 1.4 percentage points. The growth performance is very good in Ireland, Spain and
Cyprus. Economic growth in Portugal is broadly in line with the euro area
average, whereas Greece’s recovery was interrupted in 2015 and only started
gaining momentum in 2016. In contrast, labour market improvement has been
only gradual, and unemployment rates remained above pre-crisis levels in
June 2016 in all countries. In particular very high youth unemployment represents a serious problem (Figure 2.5). While programme countries significantly reduced fiscal deficits and put government debt ratios on a downward
path, high debt levels still represent a source of vulnerability for most of them.

Figure 2.5
Selected macroeconomic indicators
Unemployment rate
(in %)

Government gross debt
(in % of GDP)

30

20
15
10
5

20

05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16

0

20

25

05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16

200
180
160
140
120
100
80
60
40
20
0

Government balance
(in % of GDP)

Government structural balance
(in % of GDP)

5
0
-5
-10
-15
-20
-25
-30
-35

IE

PT

EL

ES

20
16

20
15

20
14

13
20

20
12

20
11

20
10

20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16

6
4
2
0
-2
-4
-6
-8
-10
-12

CY

Source: Eurostat
25

3. Programme financing

This chapter focuses in more detail on financing aspects of the EFSF/ESM
programmes. It addresses whether the programmes were requested in
a timely manner and whether the selected financing instrument was appropriate. It discusses the adequacy of the financing envelope and contingency
buffers. It also evaluates the efficiency of the disbursement process, as well
as the even-handedness of the lending terms. Finally, it assesses the effectiveness of the financial sector repair, as it represented an important share of
the financial assistance.
3.1.	 Timing of request
Official requests for assistance came with considerable delay. Since
countries must initiate requests for a financial assistance programme,
such delays had financial and political consequences for the government. This section analyses the implications of the delayed timing of requests,
and specifically the economic costs to the programme. We first look at the
time that elapsed between when debates about the need for a programme
began and when it was actually requested. Then we analyse the reasons for
the delays, and the financial costs of waiting. More specifically, we examine
the financing costs of public debt, capital outflows, losses of bank capital
and increases in non-performing loans. Overall, the time that passed before
the countries officially launched their requests was rather costly for them
because financing needs were large, market pressures intensified, and the
economic situation worsened.
Delays in requests for assistance
Our findings indicate that debates on possible programmes started
well before the countries – Ireland, Portugal, Spain, and Cyprus – submitted their official requests. The timing question is less relevant for
Greece as this evaluation covers its second programme, meaning it was
already under European and IMF assistance. Table 3.1 shows that, according to respondents who were speaking with the benefit of hindsight, some
countries could have asked for assistance over a year earlier.18 Discussions
with the IMF started earlier, in the context of its continuous surveillance, in
some instances 18 months before contacting the European counterparts –
although this is perhaps understandable given that Europe’s crisis resolution
mechanism did not exist in 2009 and the features of the euro area’s safety net
continued to evolve over 2010-2012.19
In the aftermath of the global financial crisis, speculation on the potential eruption of sovereign troubles centred on countries with highly
leveraged financial sectors and elevated levels of public debt and fiscal
deficits. From the start of 2010, Greece could no longer sell bonds and its
domestic banks were buying bills for collateral to raise central bank liquidity
and for risk management purposes. The risk of contagion was widely cited
as one of the main reasons for approving a large support package to Greece.

27

Evaluation of EFSF and ESM financial assistance | June 2017

Table 3.1: Timing of request
Lender Country

Relevant early
dates suggested
by respondents

Formal request

Financial assistance
facility agreement
entered into

EFSF

Ireland

April-May 2009

21 Nov 2010

22 Dec 2010

EFSF

Portugal

October 2010

7 Apr 2011

27 May 2011

EFSF

Greece

8 Feb 2012

15 Mar 2012

ESM

Spain

Late 2010

25 Jun 2012

24 Jul 2012

ESM

Cyprus

Second half 2011

25 Jun 2012

8 May 2013

Source: Interviews conducted by the ESM evaluation team

Five months after Greece was granted its first assistance package in
May 2010, Portuguese and Spanish authorities had clear indications
that they, too, might need to request assistance.
• By November 2010 (according to press reports), the Portuguese Minister
of Finance himself had raised concerns about the need of a programme.
This suggests that Portugal could have acted at least seven months earlier.
Portugal’s bond market access dried up five months later, in April 2011,
when it presented its official request for assistance, but it kept issuing bills
throughout the crisis.20
• The Spanish situation is different as it never completely lost market access
during the crisis, although it was severely challenged by banking problems.
Spain maintained access to both bills and bond markets, although with
shorter maturities and for smaller amounts, and – with rare exceptions –
by tapping existing bond series. But Spain was frequently mentioned in
the press in conjunction with the Portuguese situation, 18 months before
the official request.
• As early as June 2011, there were media reports about a second support
programme for Greece. The Greek EFSF programme should be seen in
a different context given that it was already subject to an ongoing programme under the Greek Loan Facility, and had been offered IMF support
since May 2010. The EFSF arrangement was triggered by political crises
and the proposed (but cancelled) referendum in November 2011, as well
as the need to complement sovereign debt restructuring involving the private sector (PSI).
• Most respondents interviewed in Cyprus thought that the government
should have applied for assistance earlier. While the Cypriot situation
developed more slowly, respondents said that efforts to obtain external
assistance were mobilised early in the second half of 2011 – in the midst
of a political crisis. At that time, Cyprus was threatened by a large exposure to the Greek economy (where PSI talks started in November 2011).
This meant its access to markets was restricted to short-term financing,
and in September 2011 it lost access to bond markets entirely.21 Russia
provided a €2.5 billion loan without macroeconomic conditionality, which
temporarily mitigated financing pressures. In 2012, the government was
only able to issue limited amount of bills twice and arrange occasional
private placements.22
• For Ireland, market access troubles did not coincide with expert views.
Ireland was shut out of the bond and bill markets from October 2010, as
the banking crisis threatened public finances – just prior to the official
28

Evaluation of EFSF and ESM financial assistance | June 2017

request for assistance in the following month.23 After its request, only
from early 2012 onwards Ireland was able to develop some market access
by proceeding with bond exchanges and selling special amortising24 securities. It also re-launched a T-bill programme in 2012.
The vulnerability analysis in Chapter 2 supports the above observations. The heat map (Figure 2.3) shows red flags were raised for three countries (Cyprus, Portugal and Spain) up to 18 months before the official request
for assistance.
Sources of delay
Postponed decisions, lack of frank analysis and uncertain ownership
of reform measures at national level were the main cause of delay. The
political systems dominated by opposing factions, in some countries, did not
support consensus building. Leaders often considered the request for assistance as a political defeat. Governments may have had a tendency to delay
the request because they thought they were capable of managing the crisis
alone. IMF programmes suffer from such stigma,25 and respondents said that
the same applied to the euro area programmes. Some respondents said that
there would have been no public support to go into a programme earlier. In
some cases, ongoing approval processes of additional EFSF support instruments may also have played a role.
There were distinctly different perceptions on timing between politicians and technocrats. Those who were (former) politicians talked about
phases of denial followed by attempts to contain the problems themselves,
and attempts to delay the request because of the large political cost that
was associated with it. Respondents at the technocratic level said they had
often advised requesting a programme for months, and in some cases years,
before the request was actually made. They regarded a programme as a window of opportunity to implement a number of reforms they had long been
advocating but for which there had not been sufficient political support.
Programmes, once agreed, strongly reinforced the finance ministry’s position
in the government.
In this context, a number of senior officials interviewed said that the institutions should consider how, and to what extent, they could support the
national authorities in animating an early and constructive national dialogue.
A postponed request may, however, in certain cases strengthen the resolution capacity and ownership of country authorities as well as the acceptance
of programme measures by the population. The Irish authorities profited from
a period of hesitation to draw up a diagnosis of the problem and to consider
the corrective policies that led to their national recovery plan.26 This formed
the basis of the policy conditionality of their EFSF programme. Similarly,
Spanish authorities imposed extra provisioning on the banking sector and
implemented labour market reforms in the period before the request for
a programme.
In principle, early engagement would be beneficial. This can be seen in
the case of Cyprus where party interests and electoral cycles hindered discussions and delayed the application for too long, which made the problem
bigger. On the other hand, only problems that cannot be solved at national
level should be pushed for resolution at the European level.

29

Evaluation of EFSF and ESM financial assistance | June 2017

To facilitate early engagement without enticing moral hazard, we
asked: what could the ESM do to improve incentives? Respondents
suggested investigating how institutions might facilitate early application
in a more informal manner to alleviate any stigma from requesting financial
assistance.
Cost of delay
Had applications for financial assistance been made 12 months earlier (meaning comprehensive measures or programme reforms were
also taken earlier), it could have considerably reduced the costs for
the economy. While it is not possible to construct a full counterfactual, comparing financial market data at the time of the request with what respondents say would have been the earliest possible date for a request (Table 3.1)
allows us to illustrate potential costs. While there is no ‘optimum’ time for
asking for financial assistance, Figures 1-5 in Appendix E show costs arising
from delay-related uncertainty leading up to the final agreement entering into
force.27

Overall, timings of the official agreements entering into force coincided
with turning points for spreads, portfolio inflows, and the banking systems’ capitalisation levels. But non-performing loans (NPL) continued to
rise for several years. Given that the euro area crisis was largely defined by
fiscal and financial stress as well as external pressures, these indicators provide guidance on potential costs, acting as a reasonable proxy.28
First, examining financial indicators of possible costs one year prior to the
applications leads to the following conclusions:
• The rise in bond spreads and the fall in portfolio inflows were, in
most cases, particularly pronounced in the year prior to the official agreement entering into force. Bond spreads indicate an additional
cost of financing for the sovereign in comparison to Germany. Portfolio
flows provide capital and liquidity, and abrupt outflows may raise funding
problems.
• Bank asset quality in all the five countries would not have deteriorated by as much had assistance been sought earlier. The stock of
NPLs increased on average by five percentage points with Cyprus, Greece
and Ireland strongly affected, while the increase was mitigated in Spain
and Portugal. The Cypriot and Irish banking systems’ capitalisation levels
also sagged.29 Non-performing loans required provisioning and reduced
profits. In crises, bank capital is often scarce and shortfalls in systemic
institutions may put a burden on public finances. Several respondents
from different ESM member countries said that an earlier identification
of the problem in banking systems would have had a marked impact in
capping costs. One respondent estimated that the cost of banking measures could have been reduced by half for his country if assistance had
been requested earlier, as deposit outflows and the deterioration of bank
balance sheets could have been reduced. Most country authorities who
discussed the topic noted that it was not general practice in their countries
to quantify these types of costs.

30

Evaluation of EFSF and ESM financial assistance | June 2017

Second, examining a period longer than one year, leads to the following (see
Appendix E): bond spreads rose particularly sharply for two countries (Cyprus
by more than 200 basis points against July 2012, Spain by more than 300 basis
points against November 2010) making financing at sustainable rates increasingly challenging; large negative portfolio flows hit Greece, Spain and Ireland in
the quarters before the request; and the evolution of bank capitalisation varied.
While it fell considerably in Cyprus, it was less relevant for the other four countries. Bank asset quality problems accelerated most sharply for Greece and
Ireland. The depth of the secondary market for Greek and Spanish bonds deteriorated sharply as bid-ask spreads widened (Appendix E and Figure 4.4).
The quality of sovereign market access for refinancing purposes deteriorated considerably in the six months before programme approval. While
Spain and Portugal relied on increasingly short-term issuance, Greece and Cyprus
were practically closed out of bond market access. (Appendix E and Figure 4.3)

Figure 3.1
Average ratings of programme countries

Ja

n
A 08
pr
Ju 08
l
O 08
ct
Ja 08
n
A 09
pr
Ju 09
l
O 09
ct
Ja 09
n
A 10
pr
Ju 10
l
O 10
ct
Ja 10
n
A 11
pr
Ju 11
l
O 11
ct
Ja 11
n
A 12
pr
Ju 12
l
O 12
ct
Ja 12
n
A 13
pr
Ju 13
l
O 13
ct
Ja 13
n
A 14
pr
Ju 14
l
O 14
ct
Ja 14
n
A 15
pr
Ju 15
l
O 15
ct
Ja 15
n
A 16
pr
Ju 16
l1
6

AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
CCC
CCC-

CY

EL

ES

CY Request

EL Request

ES Request

BBB-

Ja

n
A 08
pr
Ju 08
l
O 08
ct
Ja 08
n
A 09
pr
Ju 09
l
O 09
ct
Ja 09
n
A 10
pr
Ju 10
l
O 10
ct
Ja 10
n
A 11
pr
Ju 11
l
O 11
ct
Ja 11
n
A 12
pr
Ju 12
l
O 12
ct
Ja 12
n
A 13
pr
Ju 13
l
O 13
ct
Ja 13
n
A 14
pr
Ju 14
l
O 14
ct
Ja 14
n
A 15
pr
Ju 15
l
O 15
ct
Ja 15
n
A 16
pr
Ju 16
l1
6

AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
CCC
CCC-

IE

PT

IE Request

PT Request

BBB-

Notes: Dotted vertical lines refer to date of the respective official request entering into force. Dotted horizontal lines refer to investment-grade threshold.
Sources: Moody’s, Fitch, S&P

31

Evaluation of EFSF and ESM financial assistance | June 2017

In the period preceding requests, rating agencies also tended to downgrade the countries’ creditworthiness. For example, Ireland’s rating was
cut half a dozen times in the 12 months preceding the request. Figure 3.1 highlights the evolution of the average ratings of Moody’s, Fitch and S&P of the
five programme countries. The agencies’ attitudes towards the likely success
of a programme improved as the overall (European) policy response to the crisis evolved. In fact, following the respective official agreements entering into
force, there were far fewer negative rating actions for Spain (1), Cyprus (2), and
Greece (3) compared to the earlier programmes of Ireland (9) and Portugal (5).
In addition, for the latter country programmes, rating agencies were faster to
reverse their actions to positive, approximately within 12-18 months of the official agreements entering into force.
3.2.	 Choice of instrument
The process governing the application for EFSF/ESM financing, and
the choice of instrument used for that financing, were rather informal,
to the extent that they took place outside EFSF/ESM Board proceedings. In practice, key discussions take place prior to the official request during
Eurogroup meetings and in the Eurogroup Working Group, which are the
key policy-setting bodies for EFSF programme governance. For all five programmes under consideration in this report, the process was initiated under
the auspices of the EFSF but in some cases (Spain, Cyprus) it was completed under the ESM. In each case, financial assistance was offered via
the instrument indicated in the official request, with the exception of Cyprus
which requested assistance targeting only the banking sector but was found
to require broader support.
The palette of instruments evolved during the crisis... Originally, the
EFSF could only provide financial assistance through loan facility agreements,
but members started to discuss a more flexible application of the facility soon
after the EFSF’s creation. In July 2011, members decided to offer the following additional instruments of financial assistance: precautionary facilities,
facilities to finance the recapitalisation of financial institutions through loans
to governments and market support instruments (primary and secondary
market purchases). The ESM adopted the EFSF’s instrument set but the eligibility criteria evolved. Appendix F describes the instrument set, the related
eligibility criteria and how they have been used in the recent crisis.30
…but only the main instruments were used. In practice, most members
were granted a loan facility which was conditional on the implementation of
a financial assistance programme. Only the loan facility was available at the
time of Irish and Portuguese negotiations. The Greek second arrangement
in 2012 required a financial assistance programme including a loan facility as
well. Spain was granted a loan to support the recapitalisation of its banking
system. Cyprus also requested banking sector support, but the challenges
proved broader in the governing bodies’ assessment, and Cyprus was also
granted assistance through the standard loan facility.
The board never activated the precautionary and market support
instruments although members actively considered their use during
the crisis. A precautionary credit line could be activated in place of a loan
facility or as a follow-up arrangement to a full programme. It could have
played a role in keeping members from rolling back reforms after programme

32

Evaluation of EFSF and ESM financial assistance | June 2017

exit thanks to the requirement of specific but lighter conditionality and active
monitoring. Discussions on the potential use of the market support instruments took place in the case of Ireland and Spain, respondents said. They
were not considered “very useful” or “needed,” so were not used.
Board respondents and many respondents from programme countries
said that the instruments used were appropriate, although there were
some questions regarding Cyprus.31 Given the focus of reforms in this
country, an indirect bank recapitalisation instrument similar to Spain might
have been used if requested earlier. Ireland might have benefited from the
indirect recapitalisation instrument, given its crisis was triggered by the banking system – but this would only have been possible if the July 2011 decision
to broaden the instrument set had been taken earlier. With hindsight, respondents said the loan facility used was appropriate, and the Commission’s
assessment underscores the role of front-loaded fiscal adjustment to regain
confidence.32
The requirement for unanimity may prevent the ESM from using the
best-suited instrument, according to respondents. The ESM direct bank
recapitalisation became available with delay and many programme country
authorities found it disappointing that the instrument’s availability was constrained following the introduction of the Bank Recovery and Resolution
Directive (see Section 3.6). They said that this instrument could have reduced
the debt burden on the sovereign. A minority said that it had become too
theoretical an instrument as “there could hardly be a case where the problem
concerns the financial sector only”. Similar views were expressed in relation
to precautionary instruments as exit tools.
Eligibility
Requests for all five programmes were submitted under the EFSF
framework, prior to the establishment of the ESM in October 2012.
This was also the case for Cyprus and Spain, whose financial assistance was
ultimately disbursed from the ESM. The EFSF Board of Directors made decisions on the financing facility agreement, while the Eurogroup and Eurogroup
Working Group agreed on the substance of the programme.33 The decision
on which instrument to use involves a trade-off between programme requirements and the need to signal confidence. But the choice also matters for
even-handed treatment of members and the gradual creation of a more rulesbased approach in crisis resolution.
The eligibility criteria for the EFSF emphasised preventing and fighting
negative spillovers within the currency union. Their purpose was to support euro-area members in difficulties caused by exceptional circumstances
beyond their control. Such assistance aimed at safeguarding the financial stability of the euro area as a whole and its Member States. Detailed terms and
conditions needed to take into account debt sustainability and the market
situation for bond issuance.
With the exception of Spain, members obtained a loan facility as part
of a financial assistance programme, designed following an assessment of the existence of heightened financial stability risks through
contagion and fiscal and structural challenges.34 The EFSF framework
agreement required the European Commission and the ECB to assess such

33

Evaluation of EFSF and ESM financial assistance | June 2017

risks in cooperation. This assessment had to be prepared under tight time
constraints. Most board members surveyed considered this assessment
adequate under the circumstances given that contagion was an overarching
concern.
The risk of contagion was perceived more strongly in the early period
of the sovereign debt crisis than in later programmes. For example,
the literature confirms the existence of contagion in the euro area in 20122013. Elkhaldi (2014) found that countries exhibited the highest contagion
characteristics before October 2012, while Tola (2015) found the proportion
of contagious country-specific shocks fell markedly after the “whatever it
takes” announcement by the President of the ECB in July 2012.35 A minority
of respondents to the board survey considered that the argument for contagion could have occasionally been made less forcefully. They said there was
room to reduce the ad hoc nature of the assessment by better fleshing out
the financial and economic interdependencies and recent shocks.
Given the division of roles in the decision-making structure, it was
not possible to conduct a full analysis of country eligibility for an
assistance programme as called for by this evaluation’s Terms of
Reference. Programme decisions drew on the assessments of the European
Commission and the ECB on financial stability risks. These were discussed
in the Eurogroup and the Eurogroup Working Group. The conclusions of the
assessments endorsed by them were not attached to the formal EFSF decision documents, nor explained transparently in the programme documentation that has subsequently been made public, nor in the Council implementing
decisions. Moreover, public programme documents did not sufficiently
demonstrate regional financial stability risks, which seem to have been used
as the primary thrust to activate the EFSF facilities.36

Table 3.2: Assessment of triggers for assistance request
Primary trigger for request in Council decisions

Triggers raised in policy discussions

Ireland

Ireland’s loss of market access, reflecting rising concerns
about the sustainability of the Irish public finances in
view of comprehensive public support measures to the
weakened financial sector.

Financial sector at the epicentre of the
problem. Bank financing pressures due
to high sovereign spreads. Significant
spillovers.

Portugal

Portugal’s increasing pressure in financial markets, creating rising concerns about the sustainability of its public
finances.

Budgetary and structural measures to
restore fiscal sustainability.

Greece

N/A

Structural weaknesses and fiscal gaps
as trigger, following PSI.

Spain

Burst of real estate and construction bubble and resulting Bank asset quality and its impact on
economic recession raised concerns about viability of
public finances.
some banks that had accumulated large stocks of problematic assets.

Cyprus

Increasing pressure in financial markets, against the
background of rising concerns about the sustainability of
its public finances, including the required public support
measures to the weakened financial sector.

Sources: European Council, European Commission

34

In particular financial sector, but also
on the fiscal and structural front.

Evaluation of EFSF and ESM financial assistance | June 2017

Drawing on the eligibility criteria and the primary trigger for each programme, we nevertheless conclude that the requirements for each
instrument were broadly met. We reviewed relevant Council decisions
and/or Commission proposals, and identified primary triggers in related policy
discussions (Table 3.2). Keeping in mind the timing of requests, stability risks
were evident as both Ireland and Portugal had lost access to bond markets,
which supports their choice of a loan facility. Greek structural weaknesses
and fiscal stress also fall into the criteria defined for this instrument.37 At the
same time, the banking sectors were not perceived as a major concern in
Greece and Portugal.
Respondents were widely of the opinion that the instrument choice for
Spain was correct. The request letter did not indicate a preferred instrument
but specified the amount, which had already been published in a Eurogroup
statement on 9 June 2012. As the Spanish facility for bank recapitalisation
was initially negotiated under the EFSF, and transferred to the ESM when
it started operations, it is not evident what eligibility criteria were used in
decision-making. Given the uncertainties in defining recapitalisation needs,
discussed further in Section 3.3, the decision could be justified by severed,
though not completely lost, market access. Respondents pointed to imminent
contagion risks, and this is supported in the academic literature, which argues
that Spain was one of the key countries affecting financial stability of the core
euro area.38
Spanish authorities strongly favoured an indirect bank recapitalisation
given the strong national stigma attached to a financial assistance programme.39 Chapter 2 nevertheless suggests that, with hindsight, the bank
recapitalisation instrument might not have been the only possible choice for
Spain.40
In Cyprus, however, the scale of the challenges called for a full adjustment programme in spite of the political costs. Cyprus submitted its
request to the EFSF at the same time as Spain, in June 2012, without a specified amount. Due to political constraints, negotiations were long, lasting
until 2013, with assistance finally granted as a macroeconomic loan from the
ESM. Owing to the relatively large size of the troubled financial institutions
and a loss of market access by the sovereign (see Section 3.1), the loan facility can be considered an appropriate choice. Fiscal and structural challenges
were clear for the three remaining countries, as were the fears of contagion
in the 2010-2012 period.
3.3.	 Sizing of financial assistance
We examine here how financing needs in the various programmes were
derived and whether programme contingencies, and the need for buffers,
were adequately taken into account, including the specific requirements for
bank recapitalisation. In line with the scope of the evaluation, the specific targets for fiscal deficits under the programmes are not assessed.
The size of financial assistance granted to the programme countries
had to address three key factors. First, it had to cover the financing gap
that arose between the gross financing needs (GFN) – the budget deficit,
amortisation of maturing debt, and capital injections to support the banking
system – and the country’s ability to provide for them on its own. Second, it
35

Evaluation of EFSF and ESM financial assistance | June 2017

had to cover contingencies that might arise from unexpected external events,
or if the underlying assumptions turned out worse than expected. Third, it had
to create the basis for successful access to the financial markets by creating
confidence for market participants that the country would be able to meet its
financial obligations, including beyond the programme period. The fact that
the request for financial assistance of the five EFSF/ESM programmes fell at
a time when the aftershocks of the 2008-2009 global financial crisis were still
being felt added to the usual uncertainty in making projections.
The approach to define the size of financial assistance evolved over
time and was linked to the country specific nature of the programme.
Typically, a delegation from the European Commission, the ECB, and the IMF
visited the country shortly after the official request. Initially, the EFSF/ESM
were not part of these visits. A review of documents and interviews with key
participants in the negotiations indicate that there was often considerable
initial disagreement both among the various institutions and with country officials, reflecting divergent views on the size of the macroeconomic and banking problems, the scope for realistic fiscal adjustment, and the potential for
burden sharing through PSI. For example, a major point of discussion at the
time of initial negotiations on the Irish programme was whether or not senior
bank bondholders should be subject to haircuts, which would have significantly reduced estimated financing needs but at the risk of potential regional
contagion. By the time of the Cypriot programme, greater emphasis was
placed on bailing in bank creditors to reduce the cost of bank rescue operations (see Section 3.6). Nevertheless, despite these differences of view, the
size of estimated financing needs was agreed quickly in most cases – typically within a month before or after the official request. The exception was
Cyprus where an agreement on the size was reached only nine months after
the official request, following the presidential elections.
The greatest variation in approach concerned the degree of rigour
underlying initial estimates of bank recapitalisation needs;41 and how
contingency buffers were factored into the programmes. In countries
where the banking sector was the core or at least a key part of the programme
(Ireland, Spain, and Cyprus), stress tests or similar due diligence on the banking systems were conducted. In the case of Spain, the IMF’s Financial Sector
Assessment Program report (concluded one month before the official request)
was considered the most reliable analysis.42 In the case of Ireland, the programme built on the Prudential Capital Assessment Review conducted by the
Central Bank of Ireland in 2010. The analysis included a stress test and identified
the additional capital needs of the largest banks. In Cyprus, a consultancy firm
prepared a due diligence report prior to the programme (March 2013) regarding the amount needed for the recapitalisation, which was further analysed by
another consultant. In contrast, in Portugal, the recapitalisation amount identified by the supervisor at the beginning of the programme was based on systematic stress tests that only covered the largest banking groups. Banks that
did not take recourse to public injections were not fully bound by programme
conditionality. While part of the foreseen funds remained unused at the end of
the programme, this prior assessment eventually proved too optimistic, with
greater problems emerging in the post-programme period.43
Financial assistance was predominantly used to serve existing liabilities towards creditors and, secondly, to finance the government’s budget deficit. In relation to the economic size of the country, the initial estimates
of GFN over the whole programme period were similar across most countries
(between 75% and 90% of GDP). Cyprus required larger funding in relative
terms (110% of GDP), while in Spain, the lower ratio of about 50% (measured
36

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.2
Initially planned vs. actual gross financing needs
(in € billion)
IE

PT

EL

180

180

180

160

160

160

140

140

140

120

120

120

100

100

100

80

80

80

60

60

60

40

40

40

20

20

20

0

Planning Outcome

0

Planning Outcome

Government budget deficit

0

ES
25

500

20
15

400

10

300

5

200

0

100

Planning Outcome

Bank recapitalisation

CY

600

0

Debt redemption

-5
-10
Planning Outcome

Planning Outcome

Other financing needs

Notes: Planned gross financing needs for Spain at programme start are based on ESM estimates, because no published official estimates are available. For
Cyprus, the data item “Other financing needs” includes privatisations, market financing, and other proceeds. For Greece, data on “Outcome” is based on the
fourth review of the programme which partly contains estimations.
Sources: European Commission, Bank of Spain, Tesoro Público, IMF, ESM

over two years) can be explained by the shorter programme period. Debt
redemption usually reflected the largest share of GFN (the second largest in
the case of Ireland) (see Figure 3.2). Financing the budget deficit was in general the second largest need. Initial GFN estimates included a specific cash
buffer target only in the case of Greece. While in some programmes a cash
buffer floor was defined, an upper limit remained unspecified. Bank recapitalisation measures reflected about 15% of initially planned total GFN in Cyprus
and around one quarter in Ireland, even though in both cases the banking
sector was one of the major sources of the crises.44 In Greece, where banking
problems were a consequence of the broader crisis, one quarter of GFN was
reserved for the banking sector. The Spanish programme, in which financial
assistance was dedicated solely to the financial sector, had the largest banking envelope in absolute terms (€100 billion). However, it was comparatively
small compared to other financing needs like debt redemption that a full programme would have potentially had to cover. In Portugal, initially estimated
bank recapitalisation expenditure, at about 10% of total GFN, was relatively
small. In the second Greek programme, the upfront cash payments to private
investors as part of their agreement on the PSI represented another large
category of financing (see other financing needs in Figure 3.2).
The EFSF/ESM contribution to these financing envelopes varied significantly across countries but was generally large and increased over
time. External assistance was provided by different sources, in particular
by the IMF, the EFSM and the EFSF/ESM. In the case of Ireland, bilateral
loans represented an additional significant share.45 In the Cypriot programme,
a bail-in of senior bondholders and uninsured depositors contributed to the
financing of bank recapitalisation measures, unlike in other programme countries where burden sharing was limited to junior bondholders. In the first two
programmes, for Ireland and Portugal, the EFSF share of disbursements was
one quarter and one third, respectively, alongside broadly equal contributions
by the IMF and the EFSM. In subsequent programmes, European support was
provided solely by the EFSF/ESM, which also represented the bulk of financial assistance. In the second Greek programme and the Cypriot programme,
almost 90% of total external assistance was provided by the EFSF/ESM, while
the Spanish financial sector assistance programme was fully financed by the
ESM (Figure 3.3).
37

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.3
Financial assistance provided, by institution
(in € billion)
160
140

12.0

120
100
80
60

26.4

22.5

40

17.7

26.0

20

22.5

0

4.8

24.3

IE
IMF

EFSF/ESM

PT
EFSM

130.9

41.3

EL

ES

1.0
6.3
CY

Bilaterals

Notes: For Cyprus, the IMF disbursed about €1 billion. For Greece, €10.9 billion disbursed and returned has been subtracted.
Sources: ESM, European Commission

Actual gross financing needs were at or below initial programme estimates, with the exception of Portugal. Total GFN recorded at the end of
the programme matched expectations in the case of Greece and turned out
significantly lower for Ireland, Cyprus,46 and Spain. By contrast, actual GFN in
Portugal exceeded initial estimates by 50%.47 With the exception of Portugal
and Spain, budget deficits developed more favourably than expected, but this
can be related to higher economic growth only in the case of Cyprus. Bank
recapitalisation measures turned out lower in all cases - if contingency buffers
are taken into account (see Figure 3.2).
• In Greece, initial expectations for bank recapitalisation expenditure were
broadly met at programme end, not taking into account the costs incurred
from the PSI.48 However, the cash upfront payments (for PSI and for bond
buybacks) turned out much higher than expected and offset the more
favourable outcomes in the government budget and debt redemption.
• In Spain, the outcome for GFN would have been higher if the regional governments had not been refinanced by a syndicated loan from local banks,
channelled through a state financial institution.
• For Portugal, the reasons why actual GFN was so much higher than projected are threefold. First, higher than expected financing needs were not
met by more frontloading of the financial assistance but by issuing treasury bills. The issuance of short-term debt, which needed to be rolled
over, as well as the execution of bond exchanges and buybacks artificially
blew up the total amount of GFN compared to a long-term funding solution. Second, while financial resources were too small in the beginning,
they became ample towards the end of the programme. This excessive
liquidity has been used to build up a sizeable cash buffer, also because
no cash buffer ceiling was defined at programme start. Third, the budget
deficit was higher than targeted in all programme years, partly reflecting weaker economic conditions and the incorporation of State Owned
Enterprises (SOEs) in the public accounts.

38

Evaluation of EFSF and ESM financial assistance | June 2017

While being flexible in the technical execution of payments, financial assistance disbursements showed limited flexibility across programme years. Usually, financing needs were high at programme start
and gradually decreased thereafter along with increasing market access.
Financial assistance disbursements were planned accordingly. The technical execution of payments was flexible in terms of precise date and size.
Across programme years disbursements showed limited flexibility, however,
and stuck to the original plan with a few exceptions. This rigidity might be
partly explained by the close link to progress with conditionality. A common
feature for Ireland, Greece and Portugal was that some of the disbursements
scheduled for the first programme year were somewhat delayed. On the
other hand, some interviewees mentioned that disbursements were too
frontloaded and an even stronger shift of disbursements towards later quarters would have been preferred.
In the early programmes, the magnitude of financial assistance also
showed limited flexibility, which had both positive and negative effects
on programme objectives. The limited flexibility of disbursements in light of
changing economic developments resulted in a replenishing of cash buffers
at the end of the Irish and the Portuguese programmes. Higher cash buffers led to an improvement of market confidence which was conducive to
regaining and maintaining market access, a key objective of the programmes.
However, these developments were an unintended residual rather than an
explicit feature of the original programme design.49 A number of respondents
and the Commission’s own evaluation, however, concluded that high cash
buffers have been supportive for exiting the programme with market access
and without a precautionary arrangement. There were also adverse effects,
however. The deceleration in reform momentum towards the end of the programme and the non-completion of the last Portuguese programme review
can be partly explained by the higher cash buffer, which lowered incentives to act. This assessment is supported by interviews and shared by the
Commission’s own evaluation.50 The initially determined size of the assistance
envelope might have been justified given uncertainties and high volatility,
especially with regard to the financial sector. The question remains, however,
whether the disbursement of unused contingency buffers was needed or
whether the main objective of the programme country was to take advantage of the favourable lending terms. The early repayments of IMF loans with
comparatively less favourable lending terms (e.g. in Ireland and Portugal) also
suggest such a conclusion. In its evaluation report, the Commission said that
the Irish authorities and market participants voiced concerns that reducing or
stopping the disbursements might have driven up sovereign funding costs.
Overall, the large build-up of cash buffers seems to be more of an issue for
the early programmes. In the cases of Spain and Cyprus, 60% and 30%,
respectively, of the available envelope was not disbursed. In Spain, this was
because no more funds were needed, and in Cyprus because the last review
was not completed.
Contingency buffers were considered in all programmes but not explicitly quantified in all cases. Consequently, we were not able to determine
how the total size of financial assistance was agreed by consulting the available programme documentation. Contingency buffers51 were discussed in all
programmes, but the available programme documentation reports the exact
amount only for Ireland, Cyprus and Greece.52 Explicit contingency buffers
were solely related to the financial sector in the cases of Ireland, Cyprus,
Greece, and Spain. In the Portuguese programme, a general buffer to provide for unexpected deviations from the baseline financing scenario was
factored in, but with poorly documented quantification. The financing needs
for financial sector support measures were subject to particular uncertainty.
39

Evaluation of EFSF and ESM financial assistance | June 2017

Also in some countries, when bank support measures took place before the
programmes started, they were insufficient. This may largely explain why
the buffers considered relate only to the banking sector. No buffers for the
financing of the budget deficit or the amortisation of public debt have been
explicitly highlighted. This ambiguity in the analytical discussion suggests that
the determination of the overall financing need was at least in part the result
of political negotiation.
Various limitations set by the lenders and borrowers influenced the
envelope for financial assistance. This was the case in the Irish and
Spanish programmes.53 For example, the size of early programmes (e.g. for
Ireland and Portugal) were influenced by an informal understanding that the
IMF would cover one third of financing requirements and EU institutions
two thirds.54 Other systemic considerations influenced whether senior bond
holders were bailed in as part of the Irish programme and the choice of instrument for Spain. More generally, interviews with senior officials confirmed
that the financing envelopes all faced such constraints. Programme design
also faced constraints from the lenders’ side.
Contingency buffers included in the overall financing envelope, where
earmarked, proved to be sufficient and only partly tapped. The varying
degrees of transparency with which these buffers were treated in the programmes complicates any ex-post accounting, but the situation in the countries can be described as follows:
• For Ireland, a contingency provision of €10 billion was factored into the
total GFN, equivalent to about 30% of the total banking support scheme.55
Baseline expectations for bank recapitalisation measures amounted to
€25 billion, while actual expenditure was €18 billion, which implies that the
buffer was not eventually tapped. This contingency buffer was not ringfenced, which made it possible to deploy the unused amount to replenish
the cash buffer. Eventually Ireland had a cash buffer of about €24 billion in
the last programme year, representing a large share of three quarters of
refinancing needs in that year.
• In the second Greek programme, a capital buffer of €5 billion was deemed
appropriate to provide for higher funding needs (e.g. related to the sovereign debt buy-back or a potential further deterioration of macroeconomic
conditions). The buffer accounted for about 10% of the total envelope
of €49 billion that was planned for the recapitalisation of Greek banks.
By contrast to Ireland, disbursements for bank recapitalisation were earmarked. Financial assistance for banks was paid through the Hellenic
Financial Stability Fund (HFSF). After recapitalisation needs proved lower,
the HFSF returned €10.9 billion to the EFSF in February 2015.
• In the Cyprus programme, a contingency buffer of around 50% was factored in, reflecting €1.3 billion out of the €2.5 billion envelope for financial
sector recapitalisation. A small proportion (15%) of this buffer was used,
leaving €1.0 billion untapped.

40

Evaluation of EFSF and ESM financial assistance | June 2017

• In the Spanish programme, impairment losses of €55 billion were initially
estimated. Under the assumption that financial sector stabilisation measures were planned to be solely financed by the EFSF/ESM assistance
of €100 billion, this implies a buffer of €45 billion for unexpected events,
which was also supposed to provide confidence to markets. In the end,
actual expenditure totalled €41.3 billion, which left the buffer untapped.
Also in Spain financial assistance was paid to a resolution fund, the Fund
for the Orderly Restructuring of the Banking Sector.
• For Portugal, no explicitly quantified contingency buffers were communicated.
3.4.	 Disbursement processes
We assess here three related issues: whether disbursements have shown an
appropriate degree of flexibility, both in terms of phasing and choice of funding instruments; the link between compliance with programme conditionality
and disbursements of EFSF/ESM financing and whether administrative processes for actually disbursing funds have operated efficiently. Processes have
evolved significantly over time and, where necessary, the main focus of the
assessment is on current ESM procedures.
3.4.1.	 Size and financial structure of disbursements
The EFSF and the ESM were effective at making disbursements, especially considering the challenging circumstances. Figure 3.4 shows the
considerable variation in disbursement patterns responding to programme
countries’ needs.56 The figure shows that the financial sector programme for
Spain was disbursed almost in one shot, and that disbursements under the
Greek and the Cypriot programmes were more front-loaded than under the
Irish and Portuguese programmes. The institutions were able to respond to
the front-loaded nature of financing needs, including for bank recapitalisation
purposes, under turbulent market conditions, often raising amounts comparable to the largest European sovereigns in individual auctions. Special effort
was required given that this was done without an established track record in
the market. The disbursement schedule of each programme was customised
to the financing needs of the programme country.
Both the nature and the process of disbursements changed over time,
with significant innovations introduced to meet changing circumstances. The first EFSF disbursements (‘pure back-to-back cash’) had the
same interest payment and maturity dates as the issuance. In addition, to
maintain the highest credit rating for the EFSF, it kept part of the proceeds as
a cash buffer. This meant additional costs because the full proceeds were not
available to the programme country. The introduction of an over-guarantee in
the case of the EFSF made cash buffers redundant for rating purposes, and
they were excluded to improve cost efficiency. In the next phase, multiple disbursements (for Ireland and Portugal) were matched with money raised from
a single issuance. Additional innovation was achieved by making several kinds
of disbursement under the same envelope. The EFSF developed a liquidity
pool by issuing long-term and short-term notes which allowed it to find payment and maturity dates that better fitted the programme country’s preferred
redemption profile. New disbursements would be financed by short-term
issuances which would be rolled over into long term issuances over time.

41

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.4
Quarterly disbursement, by country
(cumulative share of total disbursed amount in %, size of the bubbles represents the disbursed amount in € billion)

100

80

60

2.1

1.0

1.2

3.7

2.0
0.5

6.3
0.5

0.1

0.4
0.6

2.4

0.8

0.8

2.6

17.5

2.5

4.8

34.3
2.8

2.3

1.9

39.5

1.5

0.2

0.1

5.2
1.7
3.0

36.8
3.9

40

2.7

3.6

20

1.0 37.1

5.9

IE

PT

EL

ES

15
4
Q

15
3
Q

15
2
Q

15
1
Q

14
4
Q

14
3
Q

14
2
Q

14
1
Q

13
4
Q

13
3
Q

13
2
Q

13
1
Q

12
4
Q

12
Q

3

12
2
Q

12
1
Q

11
4
Q

11
3
Q

2
Q

Q

1

11

11

0

CY

Source: ESM

The EFSF also made significant innovations in providing financial
assistance for use by financial institutions, most notably the use of
disbursements in kind (see Box 3.1). Respondents raised several issues
regarding disbursements for bank recapitalisation. A few respondents
expressed their preference for cash instead of in-kind disbursement, because
the latter were traded by the recapitalised financial institutions in the international repo market, and it was not always possible to use the bonds as
collateral. Although respondents recognised that in-kind disbursements ultimately fulfilled their recapitalisation purpose, the ESM could consider ways
to provide cash disbursements in the future.

42

Evaluation of EFSF and ESM financial assistance | June 2017

Box 3.1: Disbursements and bank recapitalisation
Providing financial assistance for use by financial institutions required significant sums and alternatives to the cash disbursements that had been made
until then.
For example, the ESM made a disbursement consisting of two portions of
bills and three portions of floating rate notes to Spain.
In the Greek ECB Credit Enhancement Facility, the EFSF conducted a private
placement transaction with the Bank for International Settlements (BIS) in
Basel, delivered securities to the BIS and simultaneously booked a back-toback loan against Greece. The securities were used to replace Greek collateral at the ECB that had become ineligible. The Greek PSI and Bond Interest
Facilities worked in a similar way. Through an Issue and Repurchase Process,
securities were legally created by issuing them against a bank and buying
them back against the same price. After receiving them back to its custody
account, the EFSF could deliver them ‘free of payment’ to a securities custody account of the Hellenic Republic, while a corresponding (back-to-back)
loan was created with the same payment dates and amounts as the EFSF
securities.

3.4.2.	The link between conditionality and disbursements
Disbursements are linked to the compliance with conditionality.
The ESM Treaty entrusts monitoring compliance with conditionality to the
European Commission in liaison with the ECB and, wherever possible, the
IMF. The ESM Treaty, the instrument guidelines and the ESM’s contracts
call for the ESM Board of Directors to make a judgement on compliance
with the terms of the Memorandum of Understanding (MoU) prior to taking
a decision on disbursement, on the basis of an assessment by the European
Commission of the programme country’s performance.57 As appropriate for
a sovereign lending institution, the Board enjoys a large margin of discretion.
However, the EFSF/ESM have adopted the IMF practice of prior actions (also
called milestones) for certain key measures that need to be implemented
before a review can be concluded or a disbursement can be made.
Overall timing of the disbursement process is flexible, though delays in
compliance reporting created problems in early programmes. Most programme country respondents said that the EFSF/ESM disbursement process
was accurate and sufficiently flexible. The assessment of compliance with
conditionality takes the form of a quarterly review, but the timing of reviews
varied. Some respondents involved in early programmes said the timing of
the compliance report was very tight. In one instance it was reported to be
so tight that it caused the disbursement schedule to lag behind the financing
needs. By contrast, a number of respondents praised the timing flexibility
in the ESM’s disbursement approval process compared to the quarterly disbursement framework of the IMF, which they deemed more rigid.
The ESM has not established criteria for compliance monitoring and
reporting, which has led to some ambiguity about the links between
conditionality and disbursements. A few respondents deemed the framework for disbursement approval too open-ended and suggested the ESM
develop a policy to clarify the link between the compliance with conditionality
and disbursements.58 There is no evidence from the surveys or the interviews
that the partner institutions received guidance from EFSF or ESM as to how
43

Evaluation of EFSF and ESM financial assistance | June 2017

compliance should be monitored and reported on. Such guidance could also
provide better assurances for even-handed treatment of member countries
in the future. The evaluation team has not assessed compliance with conditionality as the latter was outside the scope of the exercise. However, the
European Court of Auditors audited financial assistance provided to five EU
Member States including two which received assistance from the EFSF.59
In its report, the Court found that reporting on compliance with conditions
was unsystematic60 and that instalments were released even though on-time
compliance varied greatly between countries,61 and despite compliance often
occurring after a certain amount of time had elapsed.62 On balance, this points
to a degree of flexibility in the disbursement approval process.
3.4.3.	Efficiency of administrative disbursement processes
Figure 3.5 shows a typical administrative disbursement process for ESM, from
Board of Directors (BoD) approval to payment. The order of some of the steps
may vary in individual cases. The process starts with BoD approval for the
disbursement of a tranche. The Member then sends a Request for Funds to
the ESM (the second step may also come first). The ESM sends the Member
a signed notice for it to countersign. Then, the ESM makes the disbursement
and sends a confirmation notice to the ESM Member, mostly on the same day.

Figure 3.5
Typical ESM disbursement process
T+0
ESM BoD
approves
Disbursements
of tranches

T+0
ESM Member
sends
Request
for Funds

T+2
ESM
sends
Acceptance
notice

T+3
ESM Member
signs
Acceptance
notice

T+3
ESM
makes
Disbursement

T+3
ESM
sends
Confirmation
notice

Note: T is the day of the Board of Directors’ approval.
Source: ESM

The administrative disbursement process became more efficient over
time. An approximate63 measure of the administrative efficiency of this process
is the number of days between the date on which a programme country sends
a Request for Funds and the date the disbursement is made. On average, it
took the EFSF/ESM less than 12 days to disburse, with a minimum of one and
a maximum of 67 days. The overall efficiency of disbursements improved over
time (Figure 3.6). There is no correlation between the number of days it took to
disburse and the size of the disbursed amount. In other words, the EFSF/ESM
was equally efficient at disbursing smaller and larger amounts.
Stakeholders are generally happy with the EFSF/ESM disbursement
process. Respondents from programme countries generally described the
disbursement process as accurate and express being happy as ‘customers’.
The terms, especially the maturity of individual disbursements, took into
account the maturity structure of existing public debt, avoiding a concentration of maturities in a specific year, and smoothing the debt profile as much
as possible. On one occasion, a stakeholder highlighted the need to disburse
a large amount very rapidly, when the EFSF confirmed that all the necessary
preparations had been made and that disbursement was to be made shortly
after. Various interviewees cited examples where the process had handled
challenging cases flexibly.

44

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.6
Frequency of disbursements, by days to disburse
(vertical axis: number of disbursements. horizontal axis: days to disburse)
7
6
5
4
3
2
1

IE

PT

EL

ES

> 40

31-40

21-30

11-20

0-10

> 40

31-40

21-30

11-20

0-10

> 40

31-40

21-30

11-20

0-10

> 40

31-40

21-30

11-20

0-10

> 40

31-40

21-30

11-20

0-10

0

CY

Source: ESM calculations

3.5.	 Lending terms and contribution to budgetary savings
This section assesses the pricing policies of the EFSF/ESM, and their
contribution to debt sustainability in programme countries. Resources
for EFSF/ESM financial assistance are raised in private capital markets. The
price of the instruments offered to programme countries is calculated to cover
funding and operational costs plus an instrument-specific margin. The pricing
of the financial assistance therefore directly depends on the funding strategy
(Box 3.2).
The main objective of the EFSF/ESM’s pricing strategy is to provide
assistance at low cost to programme countries. Initially this was a political decision that reflected a balancing of moral hazard and debt sustainability
considerations. In the early stages, it was not clear whether countries should
benefit from the lowest possible rates and the same lending conditions if they
were subject to different sustainability risks. Over time, the objective of the
euro area resolution strategy evolved towards underpinning debt sustainability. The EFSF/ESM were able to obtain funding at very low cost that was then
passed on to the programme countries, while applying margins that were
reduced over time to very small levels.
Pricing was not as important as size and maturity considerations for
countries receiving EFSF/ESM assistance. Survey respondents indicated
that the cost of the financial assistance was only a secondary issue for programme countries. Having access to a very large amount of funds at long
maturities, thus smoothening repayment profiles, was the most important
contribution, respondents said. For example, the Spanish request benefited
from the positive confidence effect of a large financing buffer, for which the
government incurred fees.

45

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.7
Average rates on EFSF/ESM loans, by type of funding
(in %)

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

n

Ja

Se

Ja

p

11
p
Se

M 12
ay
Se 12
p
Ja 12
n
M 13
ay
Se 13
p
Ja 13
n
M 14
ay
Se 14
p
Ja 14
n
M 15
ay
Se 15
p
Ja 15
n
M 16
ay
16

Se

ES
3.5

11

EL
3.5

n
M 12
ay
Se 12
p
Ja 12
n
M 13
ay
Se 13
p
Ja 13
n
M 14
ay
Se 14
p
Ja 14
n
M 15
ay
Se 15
p
Ja 15
n
M 16
ay
16

Se

p
Ja 11
n
M 12
ay
Se 12
p
Ja 12
n
M 13
ay
Se 13
p
Ja 13
n
M 14
ay
Se 14
p
Ja 14
n
M 15
ay
Se 15
p
Ja 15
n
M 16
ay
16

PT
3.5

p
Ja 11
n
M 12
ay
Se 12
p
Ja 12
n
M 13
ay
Se 13
p
Ja 13
n
M 14
ay
Se 14
p
Ja 14
n
M 15
ay
Se 15
p
Ja 15
n
M 16
ay
16

IE
3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

Pool

Blended rate

M

p
Se

Back-to-back

ar
Ju 12
n
Se 12
p
D 12
ec
M 12
ar
Ju 13
n
Se 13
p
D 13
ec
M 13
ar
Ju 14
n
Se 14
p
D 14
ec
M 14
ar
Ju 15
n
Se 15
p
D 15
ec
M 15
ar
Ju 16
n
16

Cost of funding
3.5

Ja 11
n
M 12
ay
Se 12
p
Ja 12
n
M 13
ay
Se 13
p
Ja 13
n
M 14
ay
Se 14
p
Ja 14
n
M 15
ay
Se 15
p
Ja 15
n
M 16
ay
16

CY
3.5

EFSF

ESM

Notes: Average rates on back-to-back and pool-funded loans. The blended rate is an average rate weighted by an outstanding amount of back-to-back and
pool-funded loans, including fees and margins, and as such depicts the overall price of lending.
Source: ESM calculations

The ESM's pricing policy provided a basis for even-handed treatment
of programme countries but lending rates varied and easing of lending
conditions reflected country-specific needs. The pricing strategy does not
discriminate between individual countries but evolving funding and lending strategies combined with the evolution of market rates resulted in different lending
rates (Figure 3.7). Replacing back-to-back loans with the diversified funding strategy increased flexibility and helped to reduce the interest rate and rollover risks.
It also implied convergence of lending cost among the programme countries.
This shift represented a decline in lending rates for Ireland, Portugal and Greece,
as their original back-to-back loans were granted when market rates were higher,
whereas the diversified funding strategy increased lending rates for Spain and
Cyprus as they originally benefited from short-term back-to-back loans. Countries
also benefited from reductions in margins, maturity extensions, and – in one
case – a deferral of interest payments. These reflected sustainability and market
access considerations and their size and timing differed across countries.
46

Evaluation of EFSF and ESM financial assistance | June 2017

Box 3.2: Evolution to a diversified, from a back-to-back, funding strategy
The EFSF/ESM raise funding for their respective programme loans by issuing
debt instruments in the capital markets. They have used different funding and
lending approaches over time, which enabled them to have low and stable
costs of funding.
In 2011, the EFSF used a back-to-back strategy, matching funds raised from
treasury bill and bond sales to programme countries’ disbursement schedules.
In March 2012, the EFSF adopted a diversified funding strategy. Under this
strategy, also adopted by the ESM, funds raised are allocated to a long-term
pool comprising capital market instruments, and a short-term pool comprising its money market instruments and short-term notes. Disbursements, and
a certain liquidity buffer, are funded from these pools.
Exceptionally, certain disbursements are sourced from individual funding
operations that are not integrated into the short and long-term pools. In particular, to recapitalise banks, loans are made via the delivery of EFSF or ESM
notes, termed ‘in kind’ disbursements, rather than with cash raised through
the usual funding operations.
To express all costs of lending in a single rate, the ESM computes so-called
blended lending rates. The blended rate reflects the overall lending rate,
including the rate for back-to-back funded loans and pool-funded loans, and
includes margins and fees. The evolution of the blended lending rates is
a result of movements in the cost of funding, disbursements or repayments
of loans, as well as decisions to adjust fees or margins.

Figure 3.8
Budgetary savings from EFSF/ESM financing
(in % of GDP)
Compared to hypothetical market financing

Compared to hypothetical IMF financing

6

2.5

5

2.0

4

1.5

3

1.0

2

0.5

1
0

2011

2012

2013

IE

PT

EL

2014
ES

2015

2016

0.0

2011

2012

2013

2014

2015

2016

CY

Source: ESM calculations

The EFSF/ESM financing brings sizeable budgetary savings for programme countries. Figure 3.8 shows two illustrative exercises comparing
budgetary savings from EFSF/ESM financing compared to hypothetical alternatives in which the additional gross financing needs would be met from market borrowing or from the IMF. In practice, neither option would have been
feasible, but the calculations give an estimated lower bound of the potential
overall impact of advantageous EFSF/ESM financing. Budgetary savings with
respect to alternative market financing were highest for Greece (over 5% of
GDP a year by 2015-2016), even though the calculation only includes the second programme, and sizeable for Cyprus. They were lower for Ireland and
Portugal, given higher lending interest rates, and also for Spain, given lower
47

Evaluation of EFSF and ESM financial assistance | June 2017

disbursed amounts as a percentage of GDP. Compared to a hypothetical scenario in which the full amount of assistance was provided by the IMF, or if the
EFSF and the ESM had followed IMF’s pricing strategy, savings are significant
for most programme countries.64 It should be stressed that these calculations
are approximate given uncertainty related to the counterfactual scenarios.

3.6.	 Financial sector repair
Multiple causes led to the financial sector crisis experienced in
European countries at the end of the last decade. Programme documentation identifies the drivers relevant for the financial sectors in programme
countries (Figure 3.9).65 The causes can broadly be described as economic
and institutional, domestic and foreign. On the economic side these were low
growth, the bursting of a credit and housing price bubble, and government
indebtedness. Also, in some cases, the high debt of households or firms was
a contributing factor as it constrained their repayment capacity. In addition,
oversized banking sectors led to stiff competition and the low profitability of
banks. It therefore undermined their viability as the economic environment
became more difficult. Institutionally, weaknesses in corporate governance
structures and supervisory practices were the root cause of excessive lending in the years prior to the crisis. The economic and institutional problems
were mostly home-grown. However, cross border spillovers from sovereign
crises in other countries also had a direct impact on financial stability. More
specifically, in the case of Cyprus, the Greek debt restructuring had a direct
impact on its banking system. The crisis situation across Europe affected
investor sentiment, banks’ ability to lend at affordable rates, and peoples’
willingness to borrow across borders.
The causes of financial instability shaped the structure and timing of
financial sector reforms. As such, a specific financial sector repair strategy
was designed for each programme, with objectives targeting three important aspects of the financial sector, namely, bank liquidity, capital adequacy
and asset quality, and governance – in particular strategies for coping with
increasing levels of NPLs.

Figure 3.9
Drivers that led to the need for financial sector repair
Drivers
Weak corporate governance
Weak financial supervisory practices
Slowing GDP growth
Fast loan growth, real estate bubble, and poor lending practices
Overindebtedness of the private sector
Oversized banking sector
Overindebtedness of the public sector
Contagion
from the banking sector to the sovereign
from the sovereign to the banking sector
from other sovereign
Note: Timeframe used is one year prior to programme request.
Source: ESM compilation, as identified in programme documentation

48

IE

PT

EL

ES

CY

Evaluation of EFSF and ESM financial assistance | June 2017

As a first step, liquidity constraints were largely addressed via emergency measures taken by the Eurosystem. Adequate buffers built into the
financial sector envelopes contributed to improving confidence in the viability
of banking sectors and thus the liquidity situation. The ESM played a vital
role by authorising banks to use EFSF/ESM bonds as Eurosystem collateral.
Private sector deposit runs ceased following the initiation of their respective
programmes, with the exception of Cyprus, where private deposits suffered
another negative shock. However, this can be attributed to the loss of confidence arising from the uncertainty surrounding the third Greek programme and
its potential spillover effect to the Greek subsidiaries in Cyprus (Figure 3.10).

Figure 3.10
Private sector deposits before and after the initiation of the programme
(t=100%, horizontal axis in quarters)
160
140
120
100
80
60
40
20

22
t+

20
t+

18
t+

16
t+

t+
16

14
t+

12
t+

t+

10

8
t+

6
t+

4
t+

2

t

t+

t-2

t-4

t-6

t-8

0

ES

EL

14

PT

t-1

2

4

t-1

6

IE

t-1

t-1

8
t-1

0
t-2

t-2

2

0

CY

Sources: Bankscope, SNL, ESM calculations

All financial assistance programmes contained measures to address
problems related to banks’ capital adequacy. There were two reasons
for this. In one case, there was a need to preserve existing levels of solvency
against potential negative macro-developments identified as part of stresstest exercises as was the case in Portugal and Spain. In the other, capital had
already eroded and first needed to be restored, as was the case for the Greek
banks following the sovereign debt restructuring, which became known as
the PSI. A high formation of NPLs also increased the need for additional
recapitalisation actions, such as for Irish, Cypriot, and eventually, Greek banks
(Figure 3.11).

Figure 3.11
CET1 ratio - change before and after the programme initiation
(in percentage points, t=0, horizontal axis in quarters)

IE

PT

EL

ES

22
t+

20
t+

18
t+

t+

10
t+
12

t+

t+
8

t+
6

t+
4

t

t+
2

t-2

t-4

t-6

t-8

t-1
0

t-1
2

t-1
4

t-1
6

t-1
8

t-2
0

t-2
2

20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6

CY

Sources: Bankscope, SNL, ESM calculations
49

Evaluation of EFSF and ESM financial assistance | June 2017

At the start of each country programme, the potential risks to the respective banking sector’s capital adequacy differed, which influenced the
design and speed of the recapitalisation. In some cases recapitalisations
were front-loaded and thus executed at the early stages of the programme,
which contributed to an up-front improvement in depositor and investor confidence. The ESM internal survey and respondent testimony show, however,
that this approach also contributed to a loss of leverage by the creditor institutions to request necessary follow-up measures, given that the bulk of the
financial envelope had already been disbursed for the purposes of the recapitalisation. In Spain, the financial sector conditionality was met diligently. This
may reflect the different nature of the instrument and programme ownership.
In other cases, recapitalisations were conducted at a later stage, but the capital-raising deadlines set by the national supervisors were tight due to the
degree and urgency of the banks’ solvency risks. This may have contributed
to investors requiring a lower price to attract a sufficient amount of private
capital by the given deadline.
Programme objectives regarding banks’ capital adequacy were also influenced by the evolution of EU-wide regulatory changes. Those that most
influenced the capital adequacy objective were the introduction of burden
sharing, the increase of minimum capital requirements and associated stress
tests adopted since the establishment of the Single Supervisory Mechanism.
Respondents also said that the shift to bail-ins contributed to increased efficiency in the use of the financial sector envelope, given the lower potential
need for the state to intervene in the funding of a troubled bank. The shift to
a bail-in approach should reduce the need for state intervention and lead to
a more efficient use of public resources.
All financial sectors in programme countries suffered from poor asset
quality but to varying degrees. Many factors drove poor asset quality
including, but not limited to, poor lending practices, prolonged supervisory
forbearance, deteriorating economic conditions, overly debtor friendly legislation leading to moral hazard, lack of profitability and/or capital adequacy to
enable sufficient provisioning.
“In this kind of crisis
situation, banks are always
part of the problem.”
—Evaluation interviewee

50

The build-up of NPLs and lack of timely action to resolve them underlined weak bank governance in many programme countries’ banking
systems. In cases where NPLs stemmed from one specific loan segment,
high NPLs can be attributed to risky bank lending activities, indicating inefficient internal controls and procedures on loan origination. In other cases
such as Greece, NPLs stemmed from all loan segments due to the prolonged
recession, reducing borrower capacity to repay, as well as ineffective judicial
and legislative systems leading to moral hazard. Banks were also ineffective
at working out their large NPL stocks. This stemmed from a lack of expertise and weak institutional set-up, such as, a lack of adequate NPL workout divisions within a bank, inefficient internal reporting lines to banks’ credit
committees, and a lack of a secondary market for NPL sales. It has been
difficult to address governance with programme conditionality. Privately
owned banking institutions are not direct signatories to the relevant MoUs;
this was tackled indirectly via conditionality enhancing supervisory oversight
and intervention powers.

Evaluation of EFSF and ESM financial assistance | June 2017

The multiple causes of high NPLs highlight the need for comprehensive NPL management strategies,66 but in practice the implementation
record is mixed. Comprehensive NPL strategies were designed under all programmes, but the implementation of these measures has varied. In certain
programme countries, such as Ireland and Spain, the implementation of the
NPL strategy was more efficient, but in others, such as Greece and Portugal,
NPL strategy implementation was considerably delayed or has only been partially implemented (Figure 3.12).
Targeted NPL solutions proved effective in programme countries
where high NPLs were concentrated in a single sector. In Ireland and
Spain, Asset Management Companies (AMC) were used to relieve banks’
balance sheets of specific troubled assets, such as NPLs stemming from land
and development loans or mortgages. However, in Greece and Cyprus where
NPLs stemmed from all loan segments, AMCs were not part of the solution under the programmes. Rather, focus was placed on improving banks’
internal work-out capacity and reforming the overall insolvency and judicial
systems.67 The benefits of the latter approach, however, take a longer time to
materialise (Figure 3.12).

Figure 3.12
Change in net NPLs before and after the initiation of the programme
(t=100%, horizontal axis in quarters)
300
250
200
150
100
50

PT

EL

ES

22
t+

20
t+

18

16

t+

14

t+

t+

12
t+

10

8

t+

t+

6

4

t+

t+

t

2
t+

t-2

t-4

t-6

t-8

0

2

t-1

t-1

4
t-1

6
t-1

8

0
IE

t-1

t-2

t-2

2

0

CY

Sources: Bankscope, SNL, ESM calculations

The above factors created a vicious circle between banks and sovereigns across programme countries.68 Programme documents and economic studies provide significant evidence of this phenomenon. The vicious
circle can be explained by the deterioration of asset quality. When real estate
bubbles decelerate or burst, economic growth prospects become more subdued and households and firms face problems servicing their loans. The value
of bank assets, collateral and profits decline. This often led governments to
step in, offering state guarantees and public funding for recapitalising banks.
Increasing sovereign liabilities, explicit and implicit through guarantees, in
turn undermined the credit standing of the sovereign. As a consequence, this
forced banks to reassess the quality of government debt which they were
holding on their balance sheet. As described above, in many instances it was
not actual strains on banks which caused this but people’s doubts and lack of
confidence. A key challenge of the programmes was therefore to pre-empt
the emergence of a vicious circle, or to create at least sufficient confidence
to stop it.

51

Evaluation of EFSF and ESM financial assistance | June 2017

Financial sector repair has been one of the main components of the
financial assistance programmes. Financial sector repair has consumed
substantial portions of the overall EU financial assistance envelopes,69 amounting to 49.6% for the five programmes. In Spain, the assistance package was
fully dedicated to the financial sector. However, many respondents said that
in full programmes encompassing fiscal, structural, and financial reforms, the
focus on financial sector repair tended to be a secondary priority. Therefore,
in full and even pure banking sector programmes, a frontloading of corrective
actions regarding financial sector issues was warranted.
Upfront recapitalisations created credibility for the programmes.
However, it created disincentives for the banks to address their legacy
issues and left significantly less traction for the implementation of further
conditionality. This is reflected in the different exit practices. At the end of
the programme, Irish authorities conducted a Balance Sheet Assessment
(BSA)/Asset Quality Review (AQR) to justify the stability of the financial
sector, whereas in Spain, the programme ended without a comprehensive
assessment.70
The role of buffers for recapitalisation and resolution built into the financial sector envelopes were useful in restoring confidence, but their estimation, which reflected a high level of uncertainty, could not always
ensure full transparency. Buffers have ensured available financing is in place
for unexpected needs and have helped create flexibility for banking sector
stability. The flexibility was useful in particular for the financing of bank resolution, which is typically harder to foresee and has to be addressed in a rapid
and discrete manner in order to stem a sudden loss of confidence in the system. Nonetheless, the estimation of buffers within financial sector envelopes
was not transparent in all cases.
The overall methodology for the estimation of financial sector envelopes varied over time. The applied strategies were defined on a case by
case basis. In certain cases, the authorities conducted a top-down assessment to identify capital shortfalls. There are examples where this top-down
approach was complemented by a bottom-up exercise as well as the bottomup method being the sole approach (for more details, see Section 3.3). The
size of the associated financial envelope was on average twice the actual
recapitalisation from public sources (Figure 3.13). The difference between the
planned recapitalisation need and the actual capital injection was the largest
in Spain, where the programme envelope envisaged a €100 billion capital
shortfall, which was eventually reduced to €39.7 billion because of returned
unused funds. On the one hand, the relatively large buffer added costs for the
sovereign, but on the other hand it was necessary to restore the confidence
in the financial sector. As the macroeconomic cost of a lack of confidence
is difficult to quantify accurately, it is not possible to conclude on the overall
costs and benefits. The buffer was the smallest in Greece, reflecting the
trade-off between the prudent estimate for the recapitalisation needs and
concerns over the long-term sustainability of public debt.

52

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.13
Initially planned envelopes vs. actual funding needs in the financial sectors
(in € billion, right-hand scale in %)
120

120

100

100

80

80

60

60

40

40

20

20

0

IE

PT

Planned recapitalisation (from public sources)
Total actual recapitalisation

EL

ES

CY

0

Actual public recapitalisation

Actual/planned public recapitalisation (right-hand scale)

Source: ESM calculations, based on the relevant MoUs and ex post evaluation reports

Unused bank recapitalisation facilities were treated differently across
programme countries. Depending on the instrument provided and the programme design, the unused amounts intended for bank recapitalisation were
either re-shuffled and used for other purposes, cancelled or returned. Portugal
and Ireland received the full amount of the financial assistance package,
although they did not fully use the bank recapitalisation envelope. The unused
amount thus became part of the countries’ liquidity buffers (Section 3.3).
EU regulatory changes regarding bank recovery and resolution shifted
crisis management strategy to burden sharing of liabilities from public
rescue. As the EU regulatory framework evolved, the financial sector strategy under the programmes was also adjusted. Prior to the introduction of the
Bank Recovery and Resolution Directive (BRRD) in January 2016, the programme strategy included the role of the state as a backstop for financing
potential recapitalisation needs when private investment fell short. In cases
where privatisation proceeds were lower than expected due to the state’s
holdings in the banks subsequently deteriorating, this approach resulted in
losses and thereby increased overall programme costs.
Burden sharing helped reduce potential public losses. The conversion
of certain liabilities into equity as part of recapitalisations was applied prior
to the full implementation of the BRRD due to a change in state aid rules in
August 2013. Under the new rules, subordinated debt instruments had to
be converted prior to the injection of state aid which reduced the amount of
taxpayer money at risk.
Although it reduced the potential amount of state aid, burden sharing
was conducted in a non-systematic way. In Ireland and Spain, subordinated
debt was converted. In Greece, both subordinated and senior debt were voluntarily converted into equity as part of the recapitalisation at more favourable
terms than a mandatory conversion, yet reducing the execution risk of the process. On average for all programmes, 25% of the total recapitalisation amount
was borne by private sector participants (Figure 3.14) through various means.
In Cyprus, however, their involvement was significantly higher, at 80%, for
53

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.14
Public and private sector involvement in bank recapitalisations
(in % of initially planned from public sources)
120

350

100

300
250

80

200
60

150

40

100

20
0

50
IE
Private sector involvement

PT

EL

ES

CY

0

Public sector involvement

Planned recapitalisation (from public sources)
Sources: ESM calculations, based on the relevant MoUs and ex post evaluation reports

several reasons. First, bailing out the oversized banking sector was not feasible as it would have jeopardised the sustainability of the country’s public debt.
Second, with the implementation of the BRRD, capital increases from public
sources can only take place after a bail-in of private debt holders and uninsured depositors. Cyprus was the first programme country that underwent
a full bail-in, which reflected BRRD arrangements that were going into effect.
The timing of the approval of state aid and subsequent recapitalisation
plans varied among programmes,71 leading to uncertainty for the ESM.
In a number of cases, EFSF/ESM financial assistance was used before the
European Commission had approved banks’ restructuring plans. For the early
programmes such as Ireland, delays lasted up to four years at one bank, but
timing gradually improved over time. In the Spanish and Cypriot programmes,
all the recapitalisations took place following the approval of the restructuring
plans (Figure 3.15). Therefore, the risk of the EFSF/ESM injecting funds into
financial institutions with potentially non-viable business models decreased
over time.
Where established, AMCs proved beneficial when they had a clear scope
and objective. This was the case of the NAMA in Ireland and Sareb in Spain.
In both countries, AMCs were deployed to help clean banks’ balance sheets
of specific troubled assets. The AMCs’ success also hinged on the explicit
prescription that Spanish and Irish banks needed to carve out toxic assets,
which helped address disincentives banks may face when dealing with troubled loans.
The banking sectors of programme countries eventually stabilised, however, profitability and asset quality remained an issue after programme
exit. This highlights deficiencies in governance arrangements and, in
some countries, NPL strategy implementation. Banking sectors under all
programmes stabilised eventually, as measures to recapitalise banks, restore
depositor confidence, enhance supervisory oversight, and improve banks’
corporate governance were mostly implemented. Despite these improvements, banking sectors have not yet been able to fully recover due to persistent legacy issues such as high levels of NPLs.

54

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.15
Time lag between the disbursement of financial assistance and the approval of state aid
restructuring plans
(in years)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

IE

PT

EL

ES

Coops

Liberbank

Caja3

Banco Mare Nostrum

CEISS

Banco de Valencia

NovaCaixaGalicia

Bankia

CatalanyaCaixa

NBG

Piraeus Bank

Alpha Bank

Eurobank

Millenium BCP

BPI

CGD

BPN

PTSB

AIB/EBS

Bank of Ireland

0.0

CY

Sources: European Commission State aid decisions, ESM calculations

The recovery of the financial sector was faster when reform measures
were implemented upfront. In the Irish and Spanish banking sectors,
where authorities reacted promptly, profitability reached its trough on average
seven quarters after programme initiation and then stabilised (Figure 3.16).
Both Ireland and Spain successfully implemented fiscal and structural reforms,
which led to economic growth and supported the financial sector’s improving
performance. In the other programme countries, banks are hardly breaking
even and still suffer from high provisioning needs. A weak profitability outlook
weighs on privatisation prospects and reduces the chances of recovering public investments in banks.

Figure 3.16
Change in banks’ operating profitability before and after the start of the financial
assistance programmes
(t=100%, horizontal axis in quarters)
200
150
100
50
0
-50
-100
-150

EL

ES

22
t+

20

18

t+

16

t+

t+

14
t+

12
t+

10
t+

8
t+

6
t+

4
t+

2
t+

t

t-2

t-4

t-6

t-8

0
t-1

2
t-1

4

6

PT

t-1

8

t-1

0
IE

t-1

t-2

t-2

2

-200

CY

Sources: Bankscope, SNL, ESM calculations

55

Evaluation of EFSF and ESM financial assistance | June 2017

Comprehensive approaches for addressing crisis legacy issues proved
more efficient. The strategy to tackle financial sector problems covered
every crucial step to facilitate the clean-up of banks’ balance sheets both in
Ireland and Spain. The upfront recapitalisation, the introduction or streamlining of insolvency and foreclosure frameworks, the creation of the legal background for loan sales as well as the set-up of bad banks were all part of the
comprehensive strategy to reduce NPL formation and reduce the outstanding
stock of NPLs. Some of these measures were implemented in other countries as well but in an isolated way. As a result, they could only deliver partial and less sustainable results. In Spain, NPLs started declining six quarters
after the launch of the programme, while it took eight-to-10 quarters in Ireland
and Cyprus (Figure 3.17). In June 2016, NPLs were still on the rise in Greece
and Portugal, where – as mentioned earlier – the financial sector problems
became apparent at a later stage and were treated in a less consistent way.

Figure 3.17
Change in banks’ gross non-performing loans before and after the start of the financial
assistance programmes
(t=100%, horizontal axis in quarters)
250

200
150
100
50

EL

ES

22
t+

20
t+

18
t+

16
t+

14
t+

12
t+

8

10
t+

6

t+

4

t+

t

2

t+

t+

t-2

t-4

t-6

t-8

0

2

t-1

4

t-1

6

PT

t-1

8

t-1

0
IE

t-1

t-2

t-2

2

0

CY

Sources: Bankscope, SNL, ESM calculations

In countries where the financial assistance programme required substantial deleveraging, lending remained subdued. Both supply and demandside factors constrained new lending. As interest rates on lending increased
to reflect the over-indebtedness of the private sector and an increase in overall risk in countries facing an economic crisis, it is also likely that demand for
such loans also diminished. In the Portuguese banking sector deleveraging
was less pronounced, while net lending declined considerably (Figure 3.18).

56

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 3.18
Leverage ratio – change before and after the programme initiation
(in percentage points, t=0, horizontal axis in quarters)
12
10
8
6
4
2
0
-2

IE

PT

ES

EL

2

0

4
t+
16
t+
18
t+
20
t+
22

t+
1

t+
1

t+
1

t+
8

t+
6

t+
4

t+
2

t

t-2

t-4

t-6

t-8

t-1
0

t-1
2

t-1
4

t-1
6

t-1
8

t-2
0

t-2
2

-4

CY

Sources: Bankscope, SNL, ESM calculations

57

4. Programme exit and
ensuring repayment capacity

This chapter addresses whether the programmes had specific exit strategies,
including how the need for any possible follow-up arrangement was assessed;
how successful the programme exits were in restoring market access and
how the repayment capacity is being ensured after the exit.
4.1.	 Planning the programme exit
Exit strategies were not formulated in the initial programme plans and
discussions on exit usually started as the expiry of the programme
period loomed. They typically began informally about three quarters prior
to the expiry of each financial assistance arrangement, according to respondents.72 At least initially, a majority of country officials and the EU institutions
advocated for a follow-up arrangement. The European Commission and the
ECB asserted that follow-up arrangements were justified as the countries in
all the early programmes remained vulnerable to shocks post-exit. The ESM
was also prepared to provide further support, had Members decided to grant
further assistance, for example in the form of a precautionary credit line.
While potential follow-up arrangements were discussed in each case,
all countries, apart from Greece, made a “clean” exit. Ireland was the
first country to exit its programme. It set a model and precedent to follow, as
it moved directly to market financing without requiring an additional safety net
such as further official financing or a stand-by credit line (“clean exit”).

Figure 4.1
Order of exit
IRELAND
8 DECEMBER
2013

SPAIN
31 DECEMBER
2013

PORTUGAL
18 MAY
2014

CYPRUS
31 MARCH
2016

Source: ESM

Liquidity insurance and a continued focus on reform commitments
drove considerations for a follow-up arrangement. In two cases, the
prospect of relatively cheap insurance against potential liquidity shocks after
the prospective exit was the main driver of discussions. Both countries were
wary of continued market uncertainties, although market conditions had
started to improve. Some respondents said that in addition to backstopping
financing needs, follow-up arrangements could have been an opportunity
to maintain policy conditionality and ensure continued implementation of
reforms. Some senior authorities stressed that when a country exits a programme, the quarterly review framework disappears and the government
often starts facing demands to roll back reforms. Without a well-functioning
national policy framework, such pressures are difficult to resist. One senior
authority respondent advised planning this approach carefully, in advance.
59

Evaluation of EFSF and ESM financial assistance | June 2017

The possible, or perceived, political consequences of continued conditionality were the key factor motivating programme countries to reject
follow-up arrangements, according to most respondents interviewed.
Although some respondents regretted the easing up of pressure after programme exit, reform fatigue and change in electoral cycles meant further
external scrutiny was not acceptable. Approaching elections also led some
countries, such as Cyprus, to consider the exit option more favourably. Some
countries under EFSF programmes were also concerned about market signals
from the ESM’s preferred creditor status should they have moved to a followup arrangement. A clean exit was also preferred by some non-programme
countries.
A precautionary credit line was the main option for a follow up arrangement considered in all discussions. It would have provided a safety net
under less strict conditionality, and could have been politically more palatable.
However, some respondents said that uncertainty on the type of conditionality they would face became a hurdle to making progress in domestic deliberations. Others thought that it might not be worth taking the risk of sending
negative signals to the markets for a short facility.
Some authorities said that the institutions did not show enough support
in planning for the exit. For these authorities, the main target from the very
beginning was to negotiate conditionality that would best support access to
market financing. Other authorities said that they proactively approached the
institutions regarding programme exit well before the end of the programme.
4.2.	 Regaining market access
One of the fundamental objectives of EFSF/ESM programmes is ensuring
sustainable market access, which requires building sufficient credibility.
Implemented successfully, it allows countries to finance their needs through
the capital markets once again under conditions that do not jeopardise debt
sustainability. Four programme countries regained or maintained market
access during the programme period. Ireland managed to regain access to
markets in the second year of the programme. Portugal started to issue larger
amounts of medium- and long-term bonds after two years. Cyprus focused
on medium-term bonds in the second year and issued longer maturities in the
third year. In contrast, Spain was able to maintain its access over the whole
programme period. Greece returned to the market in the third year, but only
for shorter maturities and its access proved only temporary.
The circumstances of programme exit varied significantly across countries. Some exited after successful programme reviews without delays or setbacks (Ireland, Spain) while others exited their programmes without concluding
the final review (Portugal, Cyprus). As illustrated in Chapter 2, programme countries considerably improved those economic fundamentals relevant for regaining market access, such as underlying fiscal position and growth performance.
Stabilising the economies of programme countries, including their financial sectors was a necessary, but not sufficient precondition for a clean exit.

60

Evaluation of EFSF and ESM financial assistance | June 2017

The accumulation of sizeable cash balances was a key part of exit strategies. To support investors’ confidence, programme countries followed an objective to cover six-to-12 months of financing needs by a cash buffer.73 Respondents
agreed that the cash buffer was an important confidence-boosting factor for
bond sales. It also helped to build confidence with the programme partners in
the euro area. Programme strategies to manage such buffers differed according
to the type of programme. The Irish, Portuguese, Cypriot and Greek general
government cash balances or primary cash balances were monitored via performance criteria. The Spanish programme was banking sector-focused so the
government cash balance was not monitored under the programme.

"Building cash reserves
was important in accessing
markets and for prudence."
—Evaluation interviewee

Debt management offices also strove to diversify their investor base as
they approached the expiry of the programmes. They were strategically
targeting investors whose strategies were to buy-and-hold the securities until
maturity, while also tapping existing bond series to seek investors looking
for liquid assets. Moreover, initially there was also a focus on domestic niche
investors. Portugal focused on retail investors while Ireland launched amortising bonds, which enjoyed high demand from pension funds.
Long maturities of EFSF/ESM loans and their extensions facilitated
re-accessing the markets. EFSF/ESM lending conditions had a major positive effect on the maturity structure of debt in all five programme countries.
They smoothed repayment profiles, and thus reduced refinancing risks and
positively influenced market perceptions.

Figure 4.2
Maturity structure prior to and after extensions
(in %)
IE

PT

70
60
50
40
30
20
10
0

0-1

2-3

4-5

6-10 11-15 16-20 20-30 >30

2010
2013 (incl. EFSF, IMF, EFSM, and bilateral loans)

40
35
30
25
20
15
10
5
0

0-1
2010

2-3

4-5

6-10 11-15 16-20 20-30 >30

2014 (incl. EFSF, IMF, and EFSM)

2014 EFSF only

CY
40
35
30
25
20
15
10
5
0

0-1

2-3

2012

4-5

6-10 11-15 16-20 20-30 >30

2016 (incl. ESM and IMF)

2016 ESM only
Notes: For Spain, the maturity structure is little affected as the amounts disbursed are relatively small in relation to total debt. For Greece, the PSI distorted the
change in maturity structure and data on post PSI extensions are not available.
Sources: Debt management offices, ESM calculations
61

Evaluation of EFSF and ESM financial assistance | June 2017

• Ireland and Portugal were granted maturity extensions for their EFSF liabilities, following those
previously granted to Greece, supporting their ability to issue on the international capital markets towards the end of their programmes.74 These extensions increased the average weighted
maturity of EFSF loans to almost 21 years from 14 and brought down the high concentration of
maturities in the six-to-10-year period (Figure 4.2). The extension also reduced the Portuguese
short-term refinancing burden considerably around its EFSF programme exit. Interviews with
debt management officials indicate that the 2013 maturity extensions changed market perceptions about economic prospects for Ireland75 and, in particular, Portugal.
• The availability of long-term maturities of ESM financial assistance reduced Cypriot refinancing risks considerably. Cypriot market financing had been limited to relatively short-term
market access. ESM financial assistance smoothed the redemption profile significantly moving the redemption peak by over five years into the future. New bond investors would therefore be financing a country with lower rollover needs in the first 10 years.
• In the cases of Spain and Greece, it is more difficult to disentangle the effects of various
financing sources. Spain had continuous market access. Spanish interviewees nevertheless
commented that the 12.5-year average maturity of the ESM support strengthened the maturity structure following concentration on short-term issuance in the run up to the programme.
Greece had already benefited from longer maturities of the Greek Loan Facility and finally
from the debt restructuring as a precondition for the EFSF programme. A more detailed analy­
sis is constrained by the limited availability of fully comparable data.
The risk of failure of the first bond sales was initially a concern in each country, given
prevailing market uncertainties. As they gradually regained market access, each programme
country issued bills, syndicated bonds rather than auctioning them, gradually extended maturities
and built cash buffers with the goal of regaining credibility. Some respondents said that Ireland
and Spain had considered the option of using the ESM's primary market purchase instrument to
reduce the risk of failed auctions. The potential benefits of using this instrument did not outweigh
the political cost and negative signalling effects. The run-up to exit was challenging for the countries that exited first (Ireland, Spain, and Portugal). Respondents judged both the Banking Union
announcement and Ireland’s ability to sell non-performing bank assets as important factors supporting Ireland’s return to full market access.76
Accommodative monetary policy, and unconventional measures in particular, supported
countries’ market access. The ECB’s announcement of the Outright Monetary Transactions
had a major positive impact on market confidence in the euro area sovereign bond market. Later
on, its public sector purchase programme helped stabilise market access as it created strong
demand for bonds of programme countries included in the purchases (Ireland, Portugal, and
Spain). According to many respondents as well as the Commission, establishing the ESM also
contributed to these favourable developments.77
Box 4.1: Indicators of market access
Quality of market access can be monitored using a broad set of indicators. We look here at the volume and maturity of new issuances and bid-ask spreads as indicators of the robustness of market access around the time of
programme request and programme exit.
Figure 4.3 indicates that in the run-up to the programme, countries typically resorted to issuing at shorter maturities. By contrast, regaining stable market access is consistent with lower share of short-term issuances and
increasing volumes.

62

Evaluation of EFSF and ESM financial assistance | June 2017

Figure 4.3
Market access around programme start and exit
(left axis in € billion, right axis in % of total, horizontal axis in months)
IE (December 2010)
Issuances around programme start

IE (December 2013)
Issuances around programme exit

80

4

80

3

60

3

60

2

40

2

40

1

20

1

20

0

0

0

0

t
t+
2
t+
4
t+
6
t+
8
t+
10
t+
12
t+
14
t+
16
t+
18

PT (April 2011)
Issuances around programme start

t
t+
3
t+
6
t+
9
t+
12
t+
15
t+
18

4

t-6
t-3

100

t-2
1
t-1
8
t-1
5
t-1
2
t-9

5

t-4
t-2

100

t-1
0
t-8
t-6

5

PT (May 2014)
Issuances around programme exit
100

7
6

6

80

5

100

7

80

5

4

60

4

60

3

40

3

40

2

20
0

0

EL (March 2012)
Issuances around programme start

15
t+
18

t+

9

12

t+

6

t+

t+

3

t

t+

t-3

t-6

2

t-9

5

8

0

t-1

6
t+
8
t+
10
t+
12
t+
14
t+
16
t+
18

4

t+

t+

t

2

t+

t-2

t-4

t-6

t-8

0

t-1

t-1

2

0

20

1

t-1

1

t-1

2

EL (December 2014)
Issuances around programme exit
100

7
6

6

80

5

100

7

80

5

4

60

4

60

3

40

3

40

2

20
0

0

18

t+

15

t+

9

12

t+

t+

6
t+

3

t

2
t-1

t+

5
t-1

ES (July 2012)
Issuances around programme start

t-3

8

0

t-1

18

16

t+

14

t+

12

t+

10

t+

t+

8

6

t+

4

t+

t+

t

2

t+

t-2

t-4

t-6

t-8

0

t-1

t-1

2

0

20

1

t-6

1

t-9

2

ES (December 2013)
Issuances around programme exit

Exit

Bills

Syndications

Bond auctions

18

t+

15

t+

9
t+

12

6
t+

t+

3

t

t+

t-3

t-6

2

t+

t+

t+

t+

10

t+

t+

t+

t-1

t-1

Start

t-9

0

t-1

0

5

0

t-1

0

8

20

t-1

6

18

20

16

6

14

40

12

12

t+

40

8

12

6

60

4

18

t+

60

t

18

2

80

t-2

24

t-4

80

t-6

24

t-8

100

0

100 30

2

30

Issuance <6Y (right-hand scale)

Sources: Bloomberg, Dealogic, ESM calculations

Figure 4.3 (continued)
Market access around programme start and exit
(left axis in € billion, right axis in % of total, horizontal axis in months)
CY (May 2013)
Issuances around programme start

CY (March 2016)
Issuances around programme exit

63

Exit

Bills

Syndications

t+

t+

t

t+

t

t

t

t

t

t-

t-

t-

t+

t+
t+

t
t+
t+

t

t

t

ttStart

Issuance <6Y (right-hand scale)

Bond auctions

Evaluation of EFSF and ESM financial assistance | June 2017

Sources: Bloomberg, Dealogic, ESM calculations

Figure 4.3 (continued)
Market access around programme start and exit
(left axis in € billion, right axis in % of total, horizontal axis in months)
CY (May 2013)
Issuances around programme start

CY (March 2016)
Issuances around programme exit

1.4

100 1.4

1.2

80

1.0

100

1.2

80

1.0

0.8

60 0.8

60

0.6

40 0.6

40

0.4

0.4

Exit

Bills

Syndications

t
t+
3
t+
6
t+
9
t+
12
t+
15
t+
18

t-3

t-6

t
t+
2
t+
4
t+
6
t+
8
t+
10
t+
12
t+
14
t+
16
t+
18

t-2

t-8
t-6
t-4

t-1
2
t-1
0

Start

0

0.0

t-1
8
t-1
5
t-1
2

0

0.0

20

0.2

t-9

20

0.2

Issuance <6Y (right-hand scale)

Bond auctions

Sources: Bloomberg, Dealogic, ESM calculations

Bid-ask spreads in the secondary market, in short a difference between the highest price the buyer is willing
to pay and the lowest price the seller is willing to accept, can provide an indication of liquidity in the market.
Although the spreads can be affected by other factors, Figure 4.4 signals severe distortions in the sovereign debt
markets in the period of losing market access. The yellow areas show a period from the first expert indications on
the need to request the programme and the programme request. The normalisation of bid-ask spreads towards
the end of the programme periods indicates improving prospects for regaining market access.

Figure 4.4
Functioning of the government bond market
IE

PT

350

500
450
400
350
300
250
200
150
100
50
0

300
250
200
150
100
50
0
n

Ja

09

n
Ja

10

n
Ja

11

n
Ja

12

n
Ja

13

n
Ja

14

n
Ja

15

n
Ja

16

n

Ja

EL

10

n
Ja

11

n
Ja

12

n
Ja

13

n
Ja

14

n
Ja

15

n
Ja

16

45
40
35
30
25
20
15
10
5
0

6,000
5,000
4,000
3,000
2,000
1,000
0
09

n
Ja

10

n
Ja

11

n
Ja

12

n
Ja

13

n
Ja

14

n
Ja

15

n
Ja

16

Sources: Bloomberg, interviews conducted by the ESM

n

Ja

Expert indications/formal request gap (for EL, date of request)

64

n
Ja

ES

7,000

n
Ja

09

09

n

Ja

10

n

Ja

11

n

Ja

12

n

Ja

13

Bid-ask spread (basis points)

n

Ja

14

n

Ja

15

n

Ja

16

Evaluation of EFSF and ESM financial assistance | June 2017

Box 4.2: ESM’s technical cooperation in Cyprus
The ESM engaged in technical cooperation to support Cyprus regaining sustainable market access.
At the request of the Cypriot authorities, the ESM delivered technical assistance on debt management and NPL
management. It advised the Public Debt Management Office (PDMO) of Cyprus on its core work and made
recommendations to the Cypriot Treasury on how to assess and manage the risks of its government guarantees
and also analysed those risks itself. Specifically, the ESM focused on optimising the PDMO’s core work and
strengthening its risk management. The ESM assisted the PDMO in defining its organisational structure, including on information technology infrastructure, internal controls, and staffing. It also looked at enhancing its market
intelligence function, covering investor relations and the communication of market information. Part of the work
was done jointly with the IMF.
The ESM’s technical assistance is complementary to other institutions within its area of expertise. On the
European level, the European Commission provides technical assistance to stakeholders to help implement
Commission-funded programmes and projects. Under the European Union’s cohesion policy such financial
support can be used to pay for preparation, management, evaluation, monitoring, audit, and control. Capacity
development through technical assistance and training is a core activity of the IMF, together with surveillance
and lending.
Technical assistance is not linked to any policy conditionality but it requires development of an in-depth understanding of a particular member’s institutional set-up and practices, as well as building strong working relationships. The Cypriot authorities expressed support for continued engagement at this level.
Unlike some of the other regional financing arrangements (Asean +3 Macroeconomic Research Office, Arab
Monetary Fund, Eurasian Fund for Stabilisation and Development), the ESM does not have a specific mandate
for technical cooperation. These activities were conducted on the basis of the ESM’s institutional cooperation
mandate and its financial assistance framework.

4.3.	 Ensuring repayment capacity after exit
The EFSF/ESM relied mainly on information exchange with the programme countries and partner institutions to ensure repayment capacity. The programme relationship continues as long as financial assistance
remains outstanding because the programme country is obliged to repay the
financial assistance provided. Mindful of the sovereign context, the EFSF/
ESM contractual lending framework expresses a measure of confidence. The
contract terms, agreed by all member countries, are based on standard commercial lending contracts, leaving out some clauses. And though some eventof-default clauses apply, these are not used lightly in a sovereign context. To
ensure repayment capacity, the EFSF and ESM therefore mainly rely on information provided by the programme countries through contractual information
undertakings and the Early Warning System (EWS).
Countries exiting the programmes are subject to post-programme surveillance. The ESM Treaty78 attributes post-programme surveillance tasks to
the European Commission, and EU law79 stipulates that the Commission conducts post-programme review missions in liaison with the ECB. In addition,
the ESM Treaty provides for the establishment of an EWS to ensure that the
ESM receives repayments in a timely manner. For reasons of efficiency, the
institutions organise their post-programme and EWS missions jointly.

65

Evaluation of EFSF and ESM financial assistance | June 2017

The ESM can adequately monitor a country’s ability to repay, but the
role of the EWS is only that of a signalling device. The EWS relies on moral
suasion, peer pressure, and the powers of other institutions to achieve its
purpose. Most Board respondents said the ESM adequately monitored programme countries’ ability to repay. Respondents said that the EWS monitors
but does not manage repayment capacity. They added that countries would
be unlikely to support post-programme policy changes for the sole purpose
of ensuring repayment capacity. A high-level official said the ESM Managing
Director should notify the Eurogroup if he identifies risks to a country’s ability
to repay, and advise ministers of potential financial risks for the ESM’s shareholders. A few respondents recommended that the ESM produce regular
debt sustainability assessment updates, including information on cash buffers, market access conditions, and financing needs.
The EWS did not pose an excessive administrative burden itself, but it
added to other international surveillance frameworks. There was broad
consensus among respondents that the ESM needs to minimise the administrative burden of the EWS on member country authorities. The EWS is based
on standardised data provision requirements, but in some cases it required
additional enforcement efforts. Requests for confidential information should
be carefully calibrated and duly justified. Some respondents pointed to the
fact that certain types of information like cash projections are very volatile
and therefore unreliable. Also, for reasons of efficiency, overlaps should be
avoided between the activities of the European Commission and the ESM,
while ensuring proper information sharing.
The ESM needs to cooperate with other institutions as much as possible.
Some respondents stressed the importance of cooperation with the European
Commission and the ECB, not only to enhance efficiency but highlighting the
ESM’s reliance on the information provided by these institutions. This further
strengthens the case for establishing formal agreements on data provision
between the ESM and the partner institutions as mentioned in Section 5.1.
The IMF Independent Evaluation Office has also raised this issue.80
Many authorities said that the euro area would benefit from a stronger preventive capacity. Respondents raised this issue in the context of
the EWS. The ESM’s repayment capacity monitoring framework does not
respond to this aspiration as it is not designed to prevent the rollback of
reforms or address vulnerabilities in non-programme countries. In addition,
the current monitoring and enforcement mechanisms did not prevent waning
reform momentum towards the end of programmes and a standstill, if not
reversal, of reforms after the programme exit in some countries.

66

Evaluation of EFSF and ESM financial assistance | June 2017

Box 4.3: ESM’s Early Warning System
According to 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”. The
objective of the EWS is to determine the ability of the ESM Member to repay its obligations. This requires
a regular assessment of the short-term liquidity position of the sovereign, its market access, the medium-term
economic and financial outlook, and the long-term sustainability of public debt. It also requires an assessment of
banking developments whenever relevant to assess repayment flows. Moreover, it takes into account and complements the fiscal and debt sustainability analysis that is provided by the European Commission and the ECB to
the ESM during the programme and post-programme period.
ESM Members decided in December 2013 that the EWS system should not only apply to ESM programme countries (Spain, Cyprus), as foreseen in the Treaty, but also to EFSF programme countries (Greece, Ireland, Portugal).
In February 2015, the ESM Board of Auditors recommended improvements to the implementation of the EWS.
The ESM subsequently prepared an updated EWS procedure following consultation with the ESM Members
which the ESM Board of Directors approved on 4 February 2016. The updated EWS switched reporting to a quarterly pattern from the former irregular, payment-dependent reports. It required an expanded analysis of liquidity
projections and medium-term outlook, the specification of information requirements related to cash flow data,
and an assessment of the medium- and long-term economic and financial outlook.
The EWS is a process that feeds information into the ESM internal risk committee. When the committee identifies a repayment risk, it escalates it to the Board Risk Committee and subsequently, if needed, to the Board of
Directors. So far, the EWS procedure has been escalated for two countries.

67

5. Institutional framework

This chapter assesses the following: whether the framework governing the
cooperation was adequate; the EFSF/ESM role in programme activities, especially the effectiveness of coordination with other partners; and how well
internal ESM processes functioned.
5.1.	

Governance of EFSF and ESM programmes

The ESM provides stability support via financial assistance programmes that are conducted jointly with the partner institutions. As
illustrated in Figure 5.1, the ESM Treaty assigns tasks to the ESM Board of
Governors (BoG, comprising all euro area ministers of finance), the BoD, the
Managing Director, the European Commission, the ECB, and wherever possible, the IMF.81 The BoG takes key decisions by unanimity. These include
approving programmes, changing the authorised capital stock or the list of
instruments, and admitting new ESM Members. It takes other decisions by
qualified majority. The BoD takes decisions, mostly by qualified majority, on
topics such as the disbursement of tranches or the adoption of instrument
guidelines. The most important tasks assigned to the European Commission
are to negotiate conditionality with programme countries, to assess risks to
financial stability, debt sustainability and potential financing needs prior to
programme approval by the BoG, and to monitor and report on compliance.
The ECB is tasked with liaising with the Commission on some of these activities, and where possible the IMF is involved as well. The Managing Director
conducts the current business of the ESM. In practice, several national parliaments also play a significant role in decision-making processes, based on
different arrangements within the Member States.

“The partition of who
does what between
programme partners could
be more efficient.”
—Evaluation interviewee

Figure 5.1
Governance structure of ESM programmes
Assistance request

Conditionality
& monitoring

Lending terms
& disbursements

Country

ESM BoG

ESM

International
Monetary Fund

ESM BoD

ESM BoG

European
Central Bank
European
Commission

Source: ESM

69

Evaluation of EFSF and ESM financial assistance | June 2017

The institutional framework governing the cooperation between the
EFSF/ESM and partner institutions worked reasonably well but its
complexity had some adverse consequences with regard to coordination and information sharing. The joint nature of the programmes required
a strong alignment of objectives among the partner institutions. This posed
challenges for all the institutions given that they have diverse mandates and
are accountable to different stakeholders. These challenges have also been
highlighted in reports by the European Parliament82 and the IMF.83
Programme governance faced a multiplicity of stakeholder interests
that were difficult to crystallise in a consistent strategy.
• Despite extensive coordination efforts, the institutions did not
always speak with one voice. Many respondents from programme
countries said that the institutions communicated different messages and
pursued different priorities. Examples of this include attempts to impose
the implementation of EU legislation, addressing competition concerns,
protecting balance sheets, or insufficient consideration for the limitations
posed by operating in a currency area. They underlined that other instruments are available for the pursuit of those objectives and suggested
not burdening the EFSF/ESM programmes with them. The Independent
Evaluation Office of the IMF identified the same phenomenon.84
• ESM shareholders have specific preferences. According to ESM Board
respondents, they attach particular importance to shareholder interests
when assessing proposed EFSF and ESM decisions. To varying degrees,
they considered the preservation of the paid-in capital, the avoidance of
future capital calls and nominal haircuts, timely repayment of disbursed
loans, the avoidance of sovereign default, and the preservation of the
ESM’s credit rating to be key. However, it transpires from the interviews
that these did not always translate clearly into operational guidance for
the institutions.
Different intensities in Board scrutiny reflected the developing nature
of the EFSF/ESM. Each organisation needs to operationalise its governance
structure to ensure an effective implementation of its mandate. The IMF,
as a mature organisation, provides a benchmark for crisis resolution organisations with its tradition of a rules-based decision-making framework. The
EFSF/ESM were created in the middle of the crisis and established their
rules and guidelines as it unfolded. As a consequence, EFSF/ESM Boards
were naturally more involved in elaborating decision criteria and in setting
up the programme governance framework. Simultaneously, individual ESM
Board members took different approaches to assessing reports and proposed decisions. Responses to the Board survey show that they did not
use common methods for their assessment of draft decisions. A number of
Board members indicated that they conducted their own (risk) assessment
of documents submitted to them85 in particular prior to taking programme
and disbursement decisions at Board level. Other respondents said they
either did not conduct their own assessments, or only made a plausibility
assessment, either because they trusted that the relevant author institution
took their interests as a shareholder into account, or citing a lack of administrative capacity to do so. Some respondents from the institutions suggested
that the ESM develops a policy for assessments by the Board, for example
of compliance reports. Some Board respondents underlined the importance
of independent staff assessments.

70

Evaluation of EFSF and ESM financial assistance | June 2017

Cooperation and procedural arrangements between partner institutions
often relied on informal working relations. There were no agreements
governing exchange of information between the ESM and its partner institutions, either for ongoing programmes or for the post-programme phase.
Experiences with data sharing varied based on the programme focus (fiscal
vs. banking) and phase (ongoing programme vs. post-programme monitoring).
Several interviewees cited personal relationships as important when it comes
to the sharing of data and draft documents. Confirming similar findings from
IMF and European Commission staff,86 they said that the exchange of and
access to prudential data for the financial sector was limited across the programmes, especially following the establishment of the Single Supervisory
Mechanism (SSM). The ESM needs access to this data in cases where part of
programme financing may be used for bank recapitalisation and when it is an
important input for the assessment of repayment capacity.87 In some cases,
due to the reluctance of supervisors, the ESM was not allowed to participate
in the supervisory meetings where individual banking issues were discussed.
While this issue was swiftly addressed through a work-around during the programme phase, it re-emerged in the post-programme period.
The data reporting on country programmes was not fully harmonised,
which makes comparison of countries difficult and undermines programme transparency. The published programme reports occasionally had
information gaps and varying definitions. This made a direct comparison of
country programmes as well as the comparison of programme review vintages of the same country difficult. The programme reviews are to some
extent standardised but in several cases different approaches and definitions
have been used. Though the presentation of information improved over time,
fully standardised tables would enhance transparency. Furthermore, in those
cases where the last review was not concluded, no final programme review
is available (Cyprus and Portugal). In the case of Portugal, the Commission
published a concluding programme report, which contained useful information. The Spanish programme documentation is not fully comparable with
the other countries since detailed information on gross financing needs and
national financing sources are not available. This might reflect the specific
instrument for the Spanish programme, but a reporting approach that allows
for direct comparison with other programmes would foster transparency.
5.2.	 ESM’s involvement in programme activities
The EFSF/ESM role in the programmes evolved over time and its contribution gained prominence in later programmes, in particular since the
establishment of the ESM. The early programmes were run under the EFSF
which was a financing facility rather than an institution with a broader crisis
resolution mandate. Many stakeholders said that the role of the EFSF was not
clear to them and that it should have featured more prominently. This changed
with the creation of the ESM, whose mandate and role in programme design
was better defined and laid down in the ESM Treaty.88 In the course of the
programmes it became involved in the substantive discussion on policy conditionality. The EFSF/ESM participated through the Eurogroup Working Group
and Eurogroup policy discussions, and through decisions of their respective
Boards. This greater involvement enabled it to assess the implementation
risks and prepare disbursements. Some respondents noted that the ESM’s
expertise was gradually recognised as complementary. Others said that in the
future the ESM would be well placed to lead the coordination of programme
activities on the European side, as it reports directly to its shareholders.

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The ESM’s engagement with national authorities improved over time.
Many respondents from programme countries said they had a positive experience cooperating with the EFSF and ESM, commending their knowledgeable
and expert staff. Respondents who were involved in early programmes point
to some tough discussions on legal issues, noting that they were new to
everyone. Various respondents expressed appreciation for the way the ESM
assisted authorities in explaining and reviewing complex legal documents
under tight deadlines. Figure 5.2 describes country authorities’ perception
based on reporting from interviews. It shows the proportion of positive and
negative sentiment among respondents from national authorities about the
intensity and quality of involvement with EFSF/ESM. For this analysis, the
evaluation team used an experimental tool.89
As countries began to regain market access, some tensions tended
to emerge. According to both ESM staff and other respondents, national
authorities regarded the institutions’ interventions as more intrusive towards
the end of programmes. Respondents from partner institutions said the
commitment of the national authorities to pursue the reform agenda relaxed
considerably. Fiscal and reform fatigue set in and the political costs of austerity created stronger resistance. The relationship with national authorities
suffered as a result.
Within the ESM, the Country Team Coordinators (CTCs) play a key role
in managing country programmes. Their activities include the preparation
of the Managing Director’s proposal for financial assistance facility agreements, preparation of disbursement decisions following the completion of
programme reviews, input to the EWS, and country missions.90 CTC duties
are clearly spelled out in a document called CTC Terms of Reference.91
Management guidance provides an appropriate operational framework for CTCs. The internal survey and respondent interviews show that
CTCs receive enough guidance from management. At the same time, they
also have a sufficient degree of flexibility to discuss and represent ESM policy views externally. The study also revealed that they frequently worked
together to draw lessons on country work, and that management considered
the arrangements suitable to the current scale of operations.

Figure 5.2
ESM’s involvement with national authorities
(countries in chronological order, proportion of positive and negative answers)
100
80
60
40
20
0
-20
-40
-60
-80
-100

2010-13
IE
Poor cooperation

2011-14
PT
Good cooperation

Note: An analytical tool auto-coded for sentiment in NVivo.
Source: ESM interviews
72

2012-14
EL

2012-13
ES

2013-16
CY

Evaluation of EFSF and ESM financial assistance | June 2017

Efforts were made to minimise the risk of conflict of interest. To reduce
the risk of conflicts of interest or undue pressure in the country relationship, a CTC cannot be a national of the respective programme country as
long as the programme is ongoing. This does not, however, apply to postprogramme monitoring work. This could be reassessed. Country authorities
said in a broader context of interviews that the institutions, without specifying
the EFSF/ESM, should make an effort to better manage the turnover rate in
mission teams to improve efficiency.

73

6. Conclusions

The creation of a euro area firewall proved necessary. The build-up of
macroeconomic imbalances amid divergent economic policies, coupled with
insufficient economic surveillance and banking supervision, made the euro area
vulnerable to economic shocks. When the global financial crisis hit, this resulted
in severe financial stress and the eventual loss of market access for several euro
area countries. Given various political and capacity constraints, international
financial safety nets available at that time were not sufficient to deal with the
euro area crisis. The firewall’s mere existence provided a strong financial structure that lent the credibility of resilient members to the more vulnerable ones.
The EFSF/ESM fulfilled their mandate of safeguarding financial stability in the euro area, with support from other crisis measures. The EFSF
and ESM successfully filled the sovereign financing gap in the euro area. They
also significantly supported government debt sustainability in programme
countries by improving lending conditions and smoothing repayment profiles.
The EFSF/ESM’s contribution to financial stability is, however, difficult to fully
disentangle from other factors, such as accommodative monetary policy and
national reform efforts.
EFSF/ESM financial assistance helped restore or maintain market
access in all but one programme country, but the programmes' macroeconomic outcomes were mixed. The programmes addressed three main
challenges – fiscal sustainability, financial stability, and structural problems –
albeit with different priorities and outcomes. Despite considerable achievements, some serious issues remain in most programme countries, such as
high government debt, non-performing loans, and high unemployment.
The scope and sequencing of the measures were at times a source of
tension among key stakeholders. The programme design included measures that were not always crucial for addressing the causes of lost market
access and burdened the reform agenda. At the same time, short- and longterm objectives were not always commonly understood and communicated,
leading to unrealistic expectations and subsequently to weakening ownership.
Delays in requests for assistance increased the cost of rescue. To varying degrees, the authorities waited too long with bold policy actions and, with
the benefit of hindsight, programmes could have been requested earlier in
most programme countries. Delay is an inherent feature of financial assistance to sovereigns. However, postponing comprehensive corrective measures weakened confidence and increased the risk of spillovers. Financing
needs increased and government bond spreads widened. The overall cost
increase is, however, difficult to quantify.
The palette of instruments evolved during the crisis but only some
instruments were used. Even after the broadening of the toolkit, newly
established instruments were actively considered but not activated. The
design of the direct recapitalisation instrument made it very difficult to use
in practice.
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The funds were sufficient to implement the programme strategy. The
financing envelopes varied according to country-specific needs. In some
cases, however, unforeseen adjustments to financing and policy strategy
were needed to comply with the programme envelope. The EFSF/ESM’s
share in official financing increased in later programmes. Contingency buffers were discussed during financing negotiations. They were included in all
programmes but in many cases not sufficiently explicit to create confidence.
Where explicitly quantified and documented, they helped to build confidence.
The ESM developed the disbursement process to adjust to changing circumstances. The back-to-back funding of disbursements was replaced by
a diversified funding strategy. It made disbursements for bank recapitalisations in the form of securities. Though disbursements were linked to compliance with conditionality, there were no common criteria for compliance
assessment. Delays in reviews required flexibility from the EFSF and ESM.
Established policies provided a basis for even-handed treatment of programme countries but lending terms were eased with a view to countryspecific needs. Sustainability and market access considerations led to reductions in margins, extension of maturities, and a deferral of interest payments.
The size and timing of these measures differed across countries. While flexibility in the disbursement approval process was a sign of efficiency, it also
provided a poor basis for the even-handed treatment of member countries.
The financial sector recovered more quickly when reform measures
were implemented upfront. The extent of financial sector challenges was
not always recognised in time. Where recapitalisations were undertaken at
the early stages of a programme, they contributed to early improvement in
depositor and investor confidence. However, this approach also weakened
the institutions’ influence on timely implementation of agreed measures.
Comprehensive approaches for addressing financial sector issues proved
more efficient. The multiple causes of high non-performing loans highlighted
the need for comprehensive strategies to address poor asset quality. These
strategies included upfront recapitalisations, enhancement of out-of-court
insolvency and foreclosure frameworks, judicial reforms, as well as the establishment of companies managing impaired assets (“bad banks”).
Where established, “bad banks” had a clear role and, therefore, proved
to be effective. Targeted solutions proved successful where concerns about
bank asset quality were concentrated in a single sector, such as troubled
mortgages. In countries where non-performing assets stemmed from all loan
segments, bad banks were not part of programme solutions. Instead, the
focus was on improving banks’ internal work-out capacity.
To safeguard financial stability, in some early cases EFSF/ESM financial
assistance was used prior to the approval of restructuring plans associated with state aid, which carried a risk. For the early programmes,
delays in approvals of plans reached up to four years, but timeliness later
improved. This reduced the risk of financing potentially non-viable business
models because recapitalisations in later programmes took place only after
the approval of restructuring plans.

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Programme duration was mostly sufficient to regain market access but
reform momentum waned over time. Countries regained market access at
sustainable rates supported by buffers and favourable circumstances, even
if not all problems were solved. The standard three-year programme period
provided a window of opportunity for reforms, but public and political support
for reforms faded as countries gradually regained market access. Countries
would have needed more time to finalise structural reforms.
Follow-up arrangements were considered but a clean exit was preferred for political and market confidence reasons. Countries developed
exit strategies mainly based on a build-up of cash buffers to establish the
credibility needed for market access. Some programme countries exited without completing a final review which can be considered a programme governance flaw.
The effectiveness of the Early Warning System relies on moral suasion and cooperation with partner institutions. Concern over a country’s
ability to repay can only be escalated on the basis of a liquidity assessment.
Long-term and structural considerations are assessed under post programme
surveillance by the Commission. Although the Early Warning System evolved
over time and was seen to provide an adequate monitoring framework with
a focus on risks, its scope is limited to programme countries.
The institutional framework governing the cooperation between the
EFSF/ESM and partner institutions worked despite its complexity. The
joint nature of the programmes required a strong alignment of objectives
among the partner institutions which posed challenges for all the institutions
involved. Programme governance faced a multiplicity of stakeholder interests
that were difficult to crystallise in a consistent strategy.
Cooperation and procedural arrangements between partner institutions often relied on informal relationships, in particular in relation to
the sharing of data and draft documents. The ESM depended on data
from partner institutions for defining financing needs and assessing repayment capacity, yet there were no information exchange agreements in place.
This was problematic in particular in relation to supervisory information.
Partly due to the evolving programme governance framework, this
evaluation exercise was at times constrained by accessibility of data
and documents. The data on country programmes is not reported in a fully
harmonised manner, which complicates scrutiny by stakeholders, both across
time or countries. Reports sometimes use different approaches and definitions. While the IMF provides data via a public database, the European institutions did not disseminate underlying data in a fully harmonised format. In
several cases it was cumbersome to trace non-EFSF/ESM documents that
were relevant for this evaluation.

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Evaluation of EFSF and ESM financial assistance | June 2017

In synthesis:
• The creation of the firewall was necessary for effective crisis resolution
and confidence building. The EFSF/ESM effectively served their mandates
and contributed considerably to financial stability in the euro area.
• Favourable financing conditions helped programme countries to regain
debt sustainability, notwithstanding historically large country financing
needs that were further increased by delayed requests for assistance.
• The financial assistance provided was sufficient to implement programmes. Implementation and monitoring of structural measures may
require longer time horizons, and stronger administrative capacity in some
cases.
• The recovery of the financial sector was more successful and conducive to growth when measures were taken upfront and comprehensively
addressed non-performing assets.
• The ESM had limited access to information, especially to financial stability
assessments with a potential impact on financing needs in various programme phases.
• The ESM has achieved credibility by acting in a professional and ‘neutral’ manner. Its assessment is appreciated both by creditor and borrower
countries.

78

7. Recommendations

In line with the Terms of Reference, the report draws up a number of recommendations, for which the ESM Management Board is requested to ensure
appropriate follow-up. These recommendations are not meant as a criticism
of past decisions that were taken in difficult circumstances, but are an invitation to further develop the policy framework and the ESM’s role in the euro
area institutional setup.
Recommendation 1.
The ESM should focus on programme credibility and support
ownership.
• The ESM should pre-empt delays in programme requests when
problems cannot be effectively solved at national level. Early determined policy action or programme requests can reduce financing needs,
and contain the decline in confidence and the risk of spillovers in the euro
area as a whole.
• The Board should require the inclusion of clearly specified contingency buffers to reflect uncertainty. Programme financing has to
provide sufficient room for manoeuvre so that surprises do not require
additional assistance. Markets and stakeholders are more confident when
buffers are made explicit to correspond to perceived risk scenarios. The
availability and early announcement of sufficient financing underscores
the credibility of the ESM as the euro area firewall.
• The ESM should seek ways to support programme ownership.
Ownership represents a key element of programme success. Realism of
the programmes, an appropriate communication strategy, and maintaining
political legitimacy can support programme ownership. The ESM could
also consider how it could support consensus building.
Recommendation 2.
Programme design should have clear objectives and priorities.
• The Board should give priority to macro-critical conditionality in
programme design. A clear focus on returning to the market and the
adequacy of measures, as well as early implementation, would improve
the chance of programme success.
• The Board should clarify the short- and long-term objectives in
order to develop more realistic expectations. Short-term measures
need to focus on closing financing gaps and maintaining financial stability. Disbursements should take place contingent on the implementation
of agreed measures. Measures addressing long-term fiscal sustainability,
competitiveness and other structural issues should be phased in from the
outset of the programme, but may take beyond the programme period to
bear fruit.

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Evaluation of EFSF and ESM financial assistance | June 2017

• Regaining market access is a key objective of the programmes. Exit
strategies should form an integral part of programme design. They should
be discussed and specified early enough to provide sufficient time for
their implementation and to support their credibility.
• The Board should consider strategies to help maintain reform
momentum in the post-programme period. To ensure reforms are
continued, follow-up arrangements should be considered in the future.
The Board could seek agreements with programme countries on their
commitments toward the ESM after exit.
Recommendation 3.
Programmes should address financial sector issues upfront, but associated disbursements should be phased, based on progress.
• The Board should ensure that an explicit and comprehensive financial sector specific strategy, including the management of non-performing loans, is put in place from the start. The extent of financial
sector challenges was not always recognised in time. A comprehensive
strategy would help break the vicious circle between the financial sector
and the rest of the economy, and help speed up recovery.
• The Board should require an upfront and continuous review of banking recapitalisation and restructuring needs and related risks. This
will allow the ESM to assess the potential impact from the financial sector
developments on financing needs, and align supervisory action with programme processes.
• The Board should link disbursements to progress on the comprehensive strategy. This is particularly relevant when the financial sector
share of the financing package is considerable. Phased disbursements
would improve the Board’s capacity to maintain an appropriate level of
control.
Recommendation 4.
The Board should further refine and develop the ESM governance
framework.
• To align stakeholder objectives, the Board should set a policy
framework for programme negotiations, design and review, as well
as criteria for review of compliance – within the limits of the ESM
Treaty. Furthermore, the Board should clarify the responsibilities of the
programme partners ex ante to ensure effective collaboration and management of risks. This would ensure more consistent programme strategies but still allow for an adequate level of flexibility.
• The ESM should establish formal cooperation agreements including
on information sharing. They would improve interinstitutional cooperation procedures and ensure that the ESM is provided with the information
it needs for defining financing needs and assessing repayment capacity.
• The policy framework should require a closing report. As a matter of
good governance, a closing report should be presented to the Board, even
if some reviews were not concluded.

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Recommendation 5.
The ESM should enhance programme transparency and evaluability.
• The ESM should implement mandatory public reporting, including
a database for the dissemination of harmonised data on country
programmes. A public database in line with IMF practice would allow
appropriate scrutiny by stakeholders.
• The ESM should evaluate the Early Warning System and the Greek
programmes in due course. The current evaluation was the first evaluation conducted on EFSF and ESM activities in the context of country
programmes. The effectiveness of the Early Warning System should be
evaluated separately. It merits its own appraisal because of its focus on
risks to ESM shareholders and the fact that it was only recently reformed.
The Greek programmes would require further evaluation – as foreseen in
the Terms of Reference for this exercise – since they were largely outside
the scope of this exercise given that it was too early to evaluate them.
• The ESM should ensure the evaluability of EFSF/ESM activities. The
ESM should further develop its record keeping practices, improve databases, and enhance the traceability of documents that may be relevant for
future evaluation exercises.
Recommendation 6.
ESM Members may clarify the ESM’s role in euro area institutional
development.
• Going forward, ESM Members may discuss a broader preventive
mandate for the financial stability of the euro area. This evaluation
found that the establishment of a firewall in the euro area was needed and
that its mere existence helped to restore confidence. The ESM achieved
credibility by acting in a professional and ‘neutral’ manner. Currently, the
ESM’s early warning mandate only focuses on programme countries and
is limited in purpose. While discussion on the future of the euro area institutional setup is ongoing, the euro area would benefit from a stronger
crisis prevention capacity. Euro area countries still face challenges that,
however diverse, may require policy responses at the euro area level.

81

Endnotes

82

1.

The Terms of Reference are published (as is) in the Appendix.

2.

The role of the evaluator is to ensure the independence, credibility, and
impartiality of the evaluation process. (Terms of Reference)

3.

Jeroen Dijsselbloem, ESM press conference (2016).

4.

Given the limitations to the scope, the evaluation did not analyse the degree
of implementation. However, evaluations by the European Commission and,
for example, Darvas (2017) offer some insight to this aspect.

5.

A few key persons had left the public sector and were not easily reachable in
the timeframe of the interviews. Programme countries and partner institutions have not always published information consistently over time and
across reports, making comparisons difficult in some cases. The evaluation
team relied mostly on public statements and programme documents, as well
as summaries or summing-up letters of the Eurogroup or Eurogroup Working
Group. The team did not analyse confidential Eurogroup or Eurogroup
Working Group documents.

6.

The desk studies include analyses of sovereign vulnerability, the cost of delay
in requesting programmes, the financing needs and the sizing of assistance,
the ESM-centred timeline of the crisis, the evolution of EFSF/ESM lending
terms, the effectiveness of financial sector repair, and others.

7.

Further profiling of the respondents is provided in Appendix B.

8.

Euro area summit 29 June 2012.

9.

European Council 9-10 May 2010.

10.

The funds raised in the framework of the EFSF are recorded in the gross
government debt of the euro area Member States participating in the support
operation in proportion to their share of the guarantee given. Eurostat.
Newsrelease, 27 January 2011.

11.

See conclusions of the European Council, 28-29 October 2010.

12.

“[…] borrowing of the ESM on financial markets will be recorded as ESM
debt, and not re-routed to Euro Area Member States.” Decision of Eurostat
on deficit and debt, Luxembourg, 31 January 2013.

13.

More information on the EFSF/ESM programmes: https://www.esm.europa.
eu/financial-assistance.

14.

For comparison, the IMF’s global lending capacity, including all its quota-based resources and multilateral and bilateral borrowing arrangements,
currently amounts to more than €1 trillion.

15.

See, e.g., IEO 2011, Ioannou et al. 2011, and ECA 2015 and 2016.

16.

The Portuguese programme concentrated on fiscal stabilisation and
structural reforms. The financial sector was not a primary element.

17.

Some of the programmes benefited from a more buoyant external environment than initially forecast.

18.

The analysis draws primarily on expert interviews and a press search was
conducted to validate the findings. In some instances, newspaper articles
started debating the need for external assistance almost two years before
any formal request was submitted. With the exception of Ireland, the
perceptions of the interviewees and timing of press reports collected from
FACTIVA corroborate each other. The references are to The Guardian, the
Telegraph, Wall Street Journal, Der Spiegel, Dow Jones Global News Select,
the EU Observer and Thisismoney.co.uk. There are further indications in The
Irish Times on relevant public debates.

19.

The view was also confirmed in a number of public depositions to the Irish
parliamentary inquiry into the crisis.

20.

Based on data by Bloomberg and Dealogic.

Evaluation of EFSF and ESM financial assistance | June 2017

21.

There were frequent press reports between June and November 2011 about
money market funds’ fragility and its links to the European debt crisis.
References can be found for example in Wall Street Journal 27 June,
Bloomberg.com, 3 June and Huffington Post, 20 November, 2011. The issues
were initially raised in the IMF Global Financial Stability report October 2010.

22.

Based on data by Bloomberg and Dealogic.

23.

Interviews conducted by the ESM and Rojas (2016) explain how the Irish
10-year bond yield increased to almost 10% in September 2010, and how the
Portuguese yield reached about 9% by April 2011.

24.

Amortising bonds make equal annual payments over their lifetime (National
Treasury Management Agency (NTMA) website).

25.

IMF (2016), IMF (2010) and IMF (2008).

26.

Ireland implemented significant consolidation measures (€15 billion,
equivalent to 9% of GDP) in 2008-2010 prior to the agreement and implementation of the programme. These measures, however, did not prove
sufficient at the time.

27.

Use of the 12-month period allowed for a standard comparison between
countries. Since the international surveillance cycles are annual, a 12-month
period was considered reasonable.

28.

The exceptions are Irish and Portuguese spreads, as well as portfolio inflows
into Portugal, which continued to worsen for several months after the official
agreement entered into force.

29.

Portugal was an outlier with a rising CET1 ratio from 2010 to 2011, in advance
of the NPL ratio.

30.

Simplified from the EFSF and ESM guidelines.

31.

IMF (2014a) suggested that the direct recapitalisation instrument could have
served Cypriot purposes.

32.

The economic adjustment programme for Ireland, European Commission
(2011): “The activation of this financial assistance programme primarily aims
at restoring confidence regarding Ireland, notably in the banks by providing
assurances about their solvency and long-term viability as well as by
enhancing the credibility of sovereign guarantees.” Other Commission
reports said that programmes primarily aimed at restoring confidence in
banks and restoring external and sovereign debt sustainability to help the
country recover access to international capital markets.

33.

Indeed the board documents did not include request letters, Memoranda of
Understanding or eligibility assessments.

34.

This was corroborated in many programme country interviews, where
respondents made clear that the euro area could fragment the financial
system and that fiscal positions were fragile.

35.

Elkhaldi, Chebbi, Naoui (2014) and Tola, A., Wälti, S., (2015).

36.

Documentation of policy discussions revealed no particular discussion on the
relevance of the regional risk criteria. The Board survey nevertheless shows
that the partner institutions argued vehemently that there was a risk of
contagion. A number of respondents argued that this was not fully convincing
on occasion.

37.

See also IMF (2013b).

38.

For example Gonzalez-Hermosillo – Johnson (2014).

39.

Kirkegaard (2012) and Garcia-Herrero – Wolff (2016).

83

Evaluation of EFSF and ESM financial assistance | June 2017

84

40.

European Commission evaluation (2016c), p. 26, nonetheless noted the
following on the choice of instrument: “With the benefit of hindsight, the
choice of a banking sector programme was appropriate given the overall
state of the Spanish economy and the limited amount of assistance finally
required. However, there was no certainty in mid-2012 that the relatively
small programme envelope for the recapitalisation of Spain’s banks would
suffice to safeguard the sovereign’s continued access to capital markets.
Empirical evidence suggests that the latter was facilitated by the ECB’s OMT
scheme […], rather than being the impact of the bank recapitalisation
programme alone. […] Still, in addition to measures directed at the financial
sector, Spain needed a broader strategy to tackle macroeconomic sustainability issues given the country’s large macroeconomic imbalances at the
outset of the programme, which were being addressed by the European
Semester/MIP recommendations.“ In addition, the paper underscored the
positive role of the flexibility of the economy and its adjustment capacity in
response to changing economic conditions, highlighting foreign trade, current
account balance, and labour cost (ULC) developments.

41.

In this section, the term “bank recapitalisation needs” includes bank
resolutions and capital injections. By contrast, in Section 3.6, the term
“financial sector envelope” is used. Both refer to the same amount.

42.

Additionally, a bottom-up assessment of the capital needs of individual banks
was undertaken by a consultancy firm.

43.

An additional issue in Portugal was an underestimation of the financing
needs of state-owned enterprises (SOEs).

44.

The difference to the ratio used in Section 3.6 is due to the difference in the
denominator, i.e. here the GFN versus EFSF/ESM disbursements in
Section 3.6.

45.

Ireland also contributed €17.5 billion of its own reserves (15% of GFN).

46.

For Cyprus, the Commission’s programme documentation reports financing
needs excluding amortisations of short-term debt. It is noted in the initial
programme description that Cyprus was supposed to continue rolling over
T-Bills on the market at programme start and that programme funds would
not be used for the redemption of T-Bills.

47.

The GFN include the flows resulting from the rollover of T-bills and the
execution of bond exchanges and buybacks.

48.

In February 2015, €10.9 billion originally disbursed to the HFSF and
earmarked for bank recapitalisation was returned to the EFSF, as recapitalisation needs proved lower.

49.

Targets for cash buffers were defined explicitly only at later stages of the
programme.

50.

European Commission (2016a), p. 42.

51.

The estimation of financing needs over a programme horizon can only be
reliably quantified within a certain range. Buffers served to ensure sufficient
financing under worse than expected outcomes and to generate investor
confidence and support the economic recovery process.

52.

For the quantification of the capital buffer in the second Greek programme
see Bank of Greece (2012), Report on the Recapitalisation and Restructuring
of the Greek Banking Sector.

53.

European Commission (2015b, p. 37) and European Commission (2016c,
p. 37).

54.

Because of the large financing needs the euro area countries exceeded IMF
access limits and were required to qualify for exceptional access under the
IMF policies. This made the programmes highly political, which together with
a high level of concentration of IMF commitments in (emerging and
advanced) Europe, constrained the sizing of the Irish, Portuguese, and
Cypriot programmes. As a consequence, the adjustment speed and the
availability of financing had to be balanced. See also Truman, E. (2013).

Evaluation of EFSF and ESM financial assistance | June 2017

55.

See European Commission (2015b) and IMF (2015a), p. 12. It should be
mentioned that the Commission’s initial programme report mentions a
contingency buffer of €25 billion by contrast.

56.

The figure shows quarterly disbursements made by the EFSF and ESM to all
programme countries. The Y-axis shows the cumulative amount of total
disbursements made in percentage terms (adding up to 100%) and the size
of each bubble shows the nominal size of quarterly disbursements. Due to
rounding off, the figures do not necessarily add up with the total disbursed.

57.

For ESM loans, Article 16(5) provides “The Board of Directors shall decide
[…] after having received a [compliance] report from the European Commission […], the disbursement of the tranches of financial assistance […].”
Article 3(3) of the Guideline on Loans specifies that “[…] after having
received a report from the European Commission, on the monitoring of and
compliance by the beneficiary ESM Member with the policy conditionality
attached to the financial assistance facility […], the Board of Directors shall
decide to disburse […].” Clause 5.3.4 of the General Terms for ESM Financial
Assistance Facility Agreements requires that “the Board of Directors, after
considering the most recent periodic assessment of the Beneficiary Member
State by the Commission in liaison with the ECB, [is] satisfied with the
compliance by the Beneficiary Member State with the terms of the MoU,
including prior actions (if any).”

58.

The IMF sets performance criteria for each review which condition disbursements. It nevertheless has a policy of waiving non-observance of individual
criteria when the non-implementation is for justifiable reasons.

59.

European Court of Auditors (2015).

60.

European Court of Auditors (2015), paras 104-107; 191.

61.

European Court of Auditors (2015), para 191. In its reply to the European
Court of Auditors, the European Commission stated ‘Instalments were
released on the basis of an in-depth assessment of whether countries had
complied with conditionality. Any delays in compliance were assessed on a
case-by-case basis.’

62.

European Court of Auditors (2015), para 201.

63.

The aim is to assess efficiency of the ESM’s internal processes; however,
these are sometimes delayed by exogenous approvals, or events on which
the EFSF and ESM processes depend, which reduces the reliability of the
measure.

64.

The IMF funds its assistance from central bank reserves and its charging is
based on a short-term rate of the SDR, but the SDR is also a foreign currency
for ESM Members and carries an exchange rate risk.

65.

The heatmap (see Figure 2.3) identifies the key sources of sovereign
vulnerability.

66.

Aiyar, S. et al (2015).

67.

Kilngebiel, D. (2000).

68.

Acharya, Drechsler and Schnabl (2014).

69.

Overall EU financial assistance envelopes relate to EFSM/EFSF/ESM
disbursed amounts only. This excludes disbursements from the IMF. In
comparison, Section 3.3 (endnote 41) the denominator is EFSF/ESM
disbursements versus the GFN.

70.

A Comprehensive Assessment was conducted in April 2014.

71.

European Commission (December 2016b).

72.

According to Eurogroup documents, the discussions on Ireland's exit started
in March 2013 and on Portugal's in September 2013. IGCP annual report
confirms 2013 as the year of planning the return to medium to long-term debt
market.

85

Evaluation of EFSF and ESM financial assistance | June 2017

86

73.

Interviews and Commission programme review reports; National Treasury
Management Agency (NTMA) annual report; NTMA focused on having
twelve-fifteen months advance funding in place when the programme
reached its end.

74.

Eurogroup and Ecofin ministers meeting on 12 April 2013 agreed to lengthen
the maturities of the EFSF and ESM loans for these countries by a weighted
average of seven years, shifting short-term maturities beyond 2020. At the
time of the decision, the same average maturity for the whole euro area
stood at 7.3 years (European Commission 2013).

75.

This is also mentioned as an important factor in the NTMA 2013 annual
report.

76.

The analysis draws on issuance data from Bloomberg and Dealogic.

77.

European Commission (2016a).

78.

Recital 17.

79.

Regulation (EU) No 472/2013 of the European Parliament and of the Council
of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with
serious difficulties with respect to their financial stability.

80.

“The IMF should establish a policy on cooperation with regional financing
arrangements. […] Areas where clarity could be provided include: (i) sharing
of confidential information; […] (iv) efforts to reduce the burdens placed on
country authorities by large mission teams and duplication of information
requests.” Independent Evaluation Office (2016).

81.

EFSF programmes, though slightly different, involved many stakeholders.

82.

Report on the enquiry on the role and operations of the Troika (ECB,
Commission and IMF) with regard to the euro area programme countries,
28 February 2014 (2013/2277(INI)).

83.

“Among the areas identified for improvement are: (i) agreed procedures
among the troika institutions that are transparently shared with their
memberships and the public; (ii) enhancing the information flow to, and the
role of, the IMF Executive Board in order to avoid information asymmetry
with high-level euro area authorities; and (iii) efforts to reduce burdens placed
on country authorities by large missions, staff turnover, duplication of
documentation, and extensive conditionality.”; The IMF’s Role in the Euro
Area Crisis: What are the Lessons from the IMF’s Participation in the Troika?,
IEO background paper (2016).

84.

“These and other conflicts arose in part because the IMF’s objectives were
not fully aligned with those of the euro area. The overriding concern of the
European authorities was to preserve stability, and especially to preserve the
single currency project. In contrast, the IMF’s responsibility was also to the
individual countries requesting financial assistance.” (IMF IEO 2016).

85.

For example assessments on the threat to the financial stability of the euro
area, debt sustainability analyses, or compliance reports.

86.

IMF (2016b): “The staffs of the three Troika partners were of the view that
there is room for improving collaboration. The EC staff felt that the following
issues need to be addressed in a more systematic manner: the reconciliation
of technical analysis, the division of labor in terms of design and monitoring
of conditionality, communication strategies, and information-sharing. The
Fund staff raised the issues of sharing confidential information and modalities of assurances regarding euro area-wide policies affecting member
countries with Fund-supported programs. These two issues have intensified
since the establishment of the SSM in 2014. Staff were not guaranteed
sufficient confidential supervisory information on Greece. In addition, in the
future, it is not clear how to reconcile potential tensions between the staff’s
financial sector advice specific to Greece and relevant EU directives and the
EC’s and SSM’s views or to secure EC’s and SSM’s assurances for
implementation of agreed measures.”

Evaluation of EFSF and ESM financial assistance | June 2017

87.

In written comments submitted on the ESM draft consultation report, the
ECB does agree that a formal agreement between the ECB and the ESM on
the sharing of confidential supervisory information or other data would be
required.

88.

In its Opinion attached to Eurostat’s decision on the statistical classification
of ESM debt (note 10), a few members of the Eurostat Committee on
Monetary, Financial and Balance of Payment Statistics expressed concern
that the proposed system of governance for the ESM would not provide
enough autonomy in its decision-making process.

89.

It extracted respondents' sentiment based on a standard linguistic examination of text (interview summaries and verbatim transcripts of the interviews)
specifically coded for cooperation with national authorities. Then automatic
filters were applied, looking at the sentiment of words in isolation regardless
of context. The filters categorised text by “very negative”, “moderately
negative”, “moderately positive” and “very positive”. The percentages are
calculated based on the number of words without assigning specific weights
and aggregated by programme country. Negative sentiment on intensity/
quality of cooperation is shown in yellow, positive sentiment in blue. The
analysis does not differentiate between quality and intensity.

90.

Country team coordinators broadly correspond to mission chiefs in the peer
institutions.

91.

Following an exploratory ESM staff survey at the beginning of the evaluation
project, the evaluation team reviewed the existing guidance documents and
interviewed the CTCs to understand their challenges. Having summarised
the findings, management was interviewed to verify the consistency of
views, and a background note was drafted for the record.

87

List of acronyms

AMC:
BIS:
BoD:
BoG:
BRRD:
CET1:
CTC:
ECB:
EFSF:
ESM:
EWS:
GDP:
GFN:
HFSF:
IMF:
MoU:
NAMA:
NPL:
NTMA:
PDMO:
PSI:
SAREB:
SGP:
SOE:
SSM:

Asset Management Company
Bank for International Settlements
Board of Directors
Board of Governors
Bank Recovery and Resolution Directive
Common equity Tier 1 capital
Country Team Coordinator
European Central Bank
European Financial Stability Facility
European Stability Mechanism
ESM’s Early Warning System
gross domestic product
gross financing needs
Hellenic Financial Stability Fund
International Monetary Fund
Memorandum of Understanding
National Asset Management Agency
non-performing loans
National Treasury Management Agency
Public Debt Management Office
Private Sector Involvement
The Company for the Management of Assets proceeding from
Restructuring of the Banking System (Sociedad de Gestión de
Activos Procedentes de la Reestructuración Bancaria)
Stability and Growth Pact
State-owned enterprise
Single Supervisory Mechanism

Country codes
IE:
EL:
ES:
CY:
PT:

88

Ireland
Greece
Spain
Cyprus
Portugal

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94

meetings

access

billion

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reforms

Spain

need

EFSF

Ireland

think

positive policy
government done public
EWS understand important sector
european member success country
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involved
IMF state
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actually
instrument
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2012

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Print

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doi:10.2852/187211

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doi:10.2852/667170

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beginning
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6a Circuit de la Foire Internationale
L-1347 Luxembourg
Tel: (+352) 260 962 0
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