Annual Report
European Stability Mechanism

ESM

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Introduction to the ESM
The European Stability Mechanism (ESM) is a permanent
crisis resolution mechanism established by the countries
of the euro area. It is an intergovernmental institution
based in Luxembourg, operating since 8 October 2012.
The ESM’s mission is to provide financial assistance to
ESM Members experiencing or threatened by severe
financing problems. Such assistance is granted if necessary to safeguard the financial stability of the euro area
as a whole and of the ESM Members individually.
The ESM raises funds by issuing debt instruments, which
are purchased by institutional investors. The proceeds
from this issuance enable the ESM to provide the following types of financial assistance:
• loans to ESM Members to cover their financing needs;
• loans to ESM Members for the purpose of recapitali-

sation of financial institutions;
• precautionary financial assistance in the form of a

credit line: Precautionary Conditioned Credit Line
(PCCL) and Enhanced Conditions Credit Line (ECCL);
• the purchase of bonds of an ESM Member in primary

and secondary debt markets.
All financial assistance provided by the ESM to its
Member States is linked to the implementation of appropriate conditions. These are reforms which are part of a
macroeconomic adjustment programme or designed to
address the specific imbalances and weaknesses of an
ESM Member. The conditionality is laid down in a
Memorandum of Understanding concluded by the
European Commission, European Central Bank,
International Monetary Fund (where applicable) and the
beneficiary Member State.
Comprehensive information about the ESM can be found
on our website: www.esm.europa.eu

The 2013 ESM Annual Report contains the Financial Statements for the
financial year ending 31 December 2013, together with the report of the
external auditors in respect of their audit concerning these Financial Statements,
and a report of the Board of Auditors in respect of these financial statements.
The description of the policies and activities of the ESM includes certain
information available as at 18 May 2014, but all historic financial data there
set out is limited to the period to 30 April 2014, unless otherwise stated.

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Annual Report

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Table of contents
Message from the Managing Director

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Letter of Transmittal to the Board of Governors

8

Chapter 1: Economic Developments

10

Chapter 2: ESM Activities

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Chapter 3: Institutional Framework and Organisation

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Europe’s crisis response: accomplishments and challenges ahead
New economic policies
A new model of governance
New support mechanisms
Strengthening the financial system
Conclusion
Macroeconomic and financial environment
Global rebalancing
Structural improvements in the euro area
Financial market conditions
Risks to the outlook
Programme country experiences
Cyprus
Greece
Ireland
Portugal
Spain

Lending activities
Cyprus
Spain
Funding activities
2013 review
Outlook for 2014
Investment and Treasury
Investment Policy
Investment and Treasury activities
Risk management
Nature of ESM activities and key risks
Transparency and communication

ESM financial assistance instruments
Governance
ESM shareholders
Governance structure
Board of Governors
Board of Directors
Board of Auditors
Internal control
Organisation
Responsibilities of departments
Human resources

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Chapter 4: ESM Financial Report

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2013 results
Outlook for 2014
Financial Statements

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Chapter 5: External Auditor’s Report on the Financial Statements

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Chapter 6: Board of Auditors’ Report on the Financial Statements

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Glossary

90

Acronyms and abbreviations

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Boxes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

The ESM and the banking union
Potential savings on EFSF/ESM interest payments
The ESM/EFSF’s Early Warning System
Restructuring of the Spanish banking sector
Addressing the challenges of the financial sector in Cyprus
EFSF extension of maturities for Ireland and Portugal
Investor relations
The ESM’s credit rating and the regulatory treatment of its issuances
Investment and Treasury performance
ESM Administrative Tribunal

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23
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29
34
35
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Charts
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Emerging market 10-year sovereign bond yields
10-year government bond yields in Germany, France, the Netherlands and United States
Fiscal balance and 2013-15 forecast, euro area Member States
Evolution of euro area GDP growth expectations
Stock prices in the euro area and United States
Spain, Ireland and Portugal 10-year bond spreads vs Germany
Composite household borrowing cost in the euro area across all maturities
Common Equity Tier one of Spanish banks under programme
Total deposits excluding bailed-in amounts (in Cyprus)
Total Assets of the Banking sector/GDP
Irish debt redemption profile
Portuguese debt redemption profile
ESM Inaugural issue — Breakdown by region and investor type
Swap spread of the first two ESM bonds
ESM Maturity Profile
EFSF and ESM Maturity Profile

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Tables
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Potential savings of EFSF/ESM financing vs theoretical market cost
Funds disbursed to Cyprus in 2013
ESM bonds that fund the Cypriot Bank Recapitalisation
ESM bonds that fund the Spanish Bank Recapitalisation
Funds requested by Spain for Group 1 banks
Split of the funds requested by Spain for Group 1 banks and SAREB
Funds requested by Spain for Group 2 banks
Split of the funds requested by Spain for Group 2 banks
ESM long-term funding targets for 2014
Daily and annualised VaR comparison, 2012 and 2013
Shares and subscribed capital per ESM member

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26
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Message from the Managing Director
Klaus Regling
Managing Director
European Stability Mechanism

If one word can characterise the year 2013 for the European
Stability Mechanism (ESM) and the euro area, it is normalisation. While market concerns about the future of the single
currency receded, the weaker economies within the euro
area kept up the pace of reform and have started to exit their
assistance programmes according to plan.
At the end of December, Spain exited its financial sector
assistance programme. This successfully concluded the first
ESM programme since the institution was founded in
October 2012 as the euro area’s permanent crisis resolution mechanism. Earlier in December, Ireland completed its
macroeconomic adjustment programme with the European
Financial Stability Facility (EFSF), the temporary crisis resolution mechanism created in 2010. More recently, in May
2014, Portugal followed the same route, also completing its
EFSF programme.
These three successful programme exits indicate that the
euro area is about to overcome the crisis. Although the beneficiary countries must continue their efforts, the progress
accomplished in Cyprus, Greece, Ireland, Portugal and Spain
shows that the strategy is working. The ESM, like the EFSF,
provides temporary rescue loans to countries that have lost
market access at reasonable interest rates. In exchange, the
beneficiary countries commit to strict conditionality. In the
case of macroeconomic adjustment programmes, the governments implement structural reforms and budget consolidation. In the case of Spain’s financial sector programme, the
government committed to sector-specific reforms.

The evolution of economic data shows that these efforts produced the expected results. Countries with an ESM or EFSF
programme have reduced their unit labour costs significantly,
which in turn has strengthened their competitiveness. As a
result, exports are starting to pick up, eliminating the countries’ long-standing current account deficits. At the same
time, the countries have reduced their budget deficits and,
after implementing labour market and other structural
reforms, are seeing the first signs of new job creation.
The ESM and EFSF loans provided at very low interest rates
and very long maturities demonstrate euro area solidarity at
work. These loans enable the governments to stretch the
painful economic adjustment over time and so ease the burden on their populations. Simultaneously, all euro area
Member States are benefiting from this approach. The
reforms in the programme countries, stronger economic
policy coordination across the euro area, and the completion
of banking union are making the entire currency union more
resilient and sustainable.
This strategy is convincing the markets. Investors are
rewarding the euro area for its determination in overcoming prior weaknesses with a decline of interest rates on
government bonds to below or near pre-crisis levels.
Latvia’s accession to the euro area in January 2014 shows
that the single currency remains attractive, contradicting
the doomsayers, and will continue to grow.

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Latvia joined the ESM in March, becoming the organisation’s
first new member since its inauguration. The ESM’s 18th
Member provides an example to the euro area. The Baltic
country was the first to enter the crisis in 2008.
Devaluation was not an option since the Latvian lat was
pegged to the euro. As a consequence, Latvia pioneered
the strategy of internal devaluation which was later successfully followed by beneficiary countries.
The ESM and EFSF together have so far disbursed €222 billion
to the five programme countries. With its two programmes
(Spain and Cyprus) the ESM has used €50.3 billion of its maximum lending capacity of €500 billion. The fact that almost
90% of the ESM’s financial firepower is unused bears testimony to the euro area’s resilience against future crises.
In January 2013, the ESM started its short-term funding
programme with bimonthly 3- and 6-month bill auctions.
The total amount raised by this programme in 2013 was
€50.1 billion. It effectively replaced the EFSF bills programme. In October 2013, the ESM launched its longterm funding programme. With two bond transactions the
ESM raised €10 billion in 2013. Throughout the year the
EFSF continued to be a very active issuer and it will continue to be so in the years to come.

Management Board & Heads of Division
European Stability Mechanism

In April 2014, the ESM received the fifth tranche of paid-in
capital from its Members, bringing the total amount to a
little more than €80 billion. With this volume, the ESM is
today the international financial institution with the strongest capital structure in the world. This paid-in capital
assures investors in ESM bills and bonds that the organisation will honour its obligations in any circumstances.
Following an ESM Treaty requirement, in March the Board
of Directors endorsed the ESM’s proposal to create an
Early Warning System. The objective is to determine the
ability of the programme countries to repay their loans to
the ESM. This requires an assessment of the short-term
liquidity position of the government, the country’s market
access, the fiscal position and the medium- to long-term
sustainability of public debt.
As the crisis becomes less acute and weaker economies
regain the trust of investors and creditors, the role played by
the ESM will evolve; but its responsibility and relevance as the
euro area’s last line of defence will remain.

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Letter of Transmittal to the
Board of Governors
19 June 2014

Dear Chairperson,
I have the honour to present to the Board of Governors the Annual Report in respect of the
financial year 2013, in accordance with Article 23 (2) of the By-Laws of the European Stability
Mechanism (hereafter the “By-Laws”).
The audited Financial Statements as at 31 December 2013, as drawn up by the Board of
Directors on 24 March 2014 under Article 21 of the By-Laws, are presented in Chapter 4.
The external audit was reviewed and monitored by the Board of Auditors as required under
Article 24 (4) of the By-Laws.

Klaus Regling
Managing Director

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ESM Board of Governors
(as of April 2014)

Jeroen Dijsselbloem
Chairperson of the
Board of Governors,
Minister of Finance,
The Netherlands

Koen Geens
Minister of
Finance,
Belgium

Wolfgang Schäuble
Federal Minister
of Finance,
Germany

Jürgen Ligi
Minister of
Finance,
Estonia

Michael Noonan
Minister of
Finance,
Ireland

Giannis Stournaras
Minister of Finance,
Greece

Michel Sapin
Minister of
Finance,
France

Luis de Guindos
Minister of
Finance,
Spain

Pier Carlo Padoan
Minister of
Economy and
Finance,
Italy

Harris Georgiades
Minister of
Finance,
Cyprus

Andris Vilks
Minister of
Finance,
Latvia

Pierre Gramegna
Minister of
Finance,
Luxembourg

Edward Scicluna
Minister of
Finance,
Malta

Michael
Spindelegger
Federal Minister of
Finance,
Austria

Maria Luís
Albuquerque
Minister of State
and Finance,
Portugal

Uroš Čufer
Minister of
Finance,
Slovenia

Peter Kažimír
Deputy Prime
Minister and
Minister of
Finance,
Slovakia

Jutta Urpilainen
Minister of
Finance,
Finland

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Chapter

1

Economic Developments

Europe’s crisis response:
accomplishments and
challenges ahead
Europe has come a long way in overcoming the structural
sources of the crisis. The great European recession
emerged as a consequence of the financial crisis in the
United States and home-grown problems in the euro
area. The key problems within the euro area were major
macroeconomic imbalances in several countries resulting from misaligned policies, a vulnerable banking system,
and institutional gaps in the governance structure, which
allowed national budgets to be insufficiently prepared to
weather a severe economic and financial downturn.
Moreover, it became apparent when the crisis unfolded in
an unforeseen manner that a second line of defence (a
euro-based financial backstop) was missing. These problems were addressed through a comprehensive and consistent set of policies, which is now showing results.
The crisis response of Member States consisted of several policy building blocks. To tackle the disarray in public
finances, Member States have implemented significant
fiscal consolidation programmes to reduce fiscal deficits
and to regain investor confidence. At the same time,
countries are implementing key structural reforms which
are already laying the foundations for sounder growth,
perhaps less buoyant but more sustainable. At the
European level, countries have adopted a new and
strengthened model of economic governance in the euro
area based on tighter coordination of policies. Decisively,
financial backstops — the EFSF and ESM — were created

from scratch, preventing the collapse of some euro area
economies and filling a significant gap in the architecture
of the monetary union. The euro area has also reinforced
its banking system, strengthening supervision and prudential regulation. This has laid the ground for a new pillar
of integration: the banking union, with the creation of a
single supervisory mechanism, a single resolution mechanism, a single resolution fund, and a harmonised system
of national deposit guarantee schemes.

New economic policies
The key part of the crisis response has been the efforts
at the national level to redress imbalances built up in previous years. A wave of structural reforms has transformed Europe, in particular in programme countries:
changes tailored according to the needs of each country,
but all geared toward raising competitiveness, employment and growth.
Greece was the country with the largest accumulated
imbalances and structural gaps, and therefore required
the most extensive programme. The authorities took
strong measures to improve the collection of taxes, fiscal
management and budget execution. They implemented
key reforms with respect to the pension system, labour
market and health system. The programme is still ongoing and these implementation efforts must continue to
complete the adjustment process and realise the full
benefits.
In Portugal, determined action was needed after a decade of low growth. In all key areas of government spending (health, pensions, wages) reforms have underpinned

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sustainability. The Portuguese authorities have liberalised gas and energy markets, and adopted a new solvency code and a new corporate restructuring framework,
among several other measures. Though the current programme was concluded successfully, the adjustment is
not yet over and reforms must be continued to reap all
the benefits of the efforts made so far.

Siret Vildo
Banking Sector Expert
Joined the ESM in July 2013
Worked in the European Central Bank as a Financial
Stability Expert. Previously worked in the Central Bank
of Estonia for six years.
The opportunity to join the ESM and to continue
working with countries needing European support
was too good to miss, as it enabled me to get
another perspective in supporting euro area
countries.

the average public deficit in the euro area has been
roughly halved and in economies under programmes the
correction was greater. Countries in this latter group
have also reversed the loss of competitiveness of the
last decade by consistently reducing their nominal unit
labour costs. In addition, economies driven by unsustainable consumption levels saw a strong deleveraging, which
managed to put a halt to a long record of large current
account deficits.
A demonstration of the efforts made by these economies
is found in a recent OECD report (Going for Growth),
which places them at the top of the ranking for implementing structural reforms. Despite some encouraging
signals, the so-called “light at the end of the tunnel” is not
yet apparent to many people in these countries, particularly those who are paying the price of the adjustment
with their jobs. But empirical evidence clearly shows that
focus on reform pays off; not only in market access and
credibility, but also in growth and jobs for the future.

A new model of governance
The credibility of this strategy is not only due to the fiscal
consolidation process or the national reform agendas. It
goes beyond the adjustment programmes and the need
to respond to market pressure. It also results from a new
model of economic governance, which was set up by
European Union (EU) leaders to overcome past
weaknesses.

In Ireland, where the origin of the crisis was rooted in the
banking and housing sectors, there was a need to counter the loss of competitiveness in recent years. EFSF
financial assistance has bought time to catch up. The
reform agenda placed a particular stress on banking and
policies to enhance competition of services and utilities,
redesigning incentives for R&D and turning the focus of
social support schemes further toward employment.
Cyprus signed up to an economic reform programme
with a strong focus on the complete overhaul of the financial sector to ensure its viability at a much reduced level.
Other peripheral euro area economies have also been
under pressure from markets. In these countries, which
kept market access, economic adjustment is also under
way with labour market, pension and tax reforms. Here
the pace of reform may be less urgent, but unsustainable
policies of the past are being corrected.
As a consequence, the euro area has proved its seriousness about fiscal consolidation, structural reforms and
the rebalancing of the economy. All Member States, not
only those that were under pressure or with a macroeconomic adjustment programme, have budgetary consolidation paths in place with a clear objective to reach a
balanced budget during the next few years. Since 2009,

There are four axes to this model: a new fiscal compact,
the reinforced Stability and Growth Pact, a new Macroeconomic Imbalances Procedure and the “European
Semester”.
At the European level, the Treaty on Stability, Coordination
and Governance in the Economic and Monetary Union
(EMU), which has been in force since January 2013, is
one of the key elements. The Treaty, also known as the
fiscal compact, provides for much enhanced coordination
in fiscal and economic policy. This Treaty, together with a
number of regulations, known as the Two-Pack, also
strengthens the Stability and Growth Pact and enhances
deeper fiscal coordination. Member States are required
to make significant progress toward their so-called medium-term budgetary objectives for their budgetary balances. Furthermore — for the first time — a continuous
and agreed reduction of the public debt ratio to 60% of
GDP is required. Both the reduction of the deficit
and total debt are subject to a new, graduated sanctions
procedure, in which proposals from the European
Commission can only be overturned by a large qualified
majority of euro area countries.
This has been complemented by a new procedure for identifying and avoiding excessive macroeconomic imbalances.
Where excessive imbalances exist, repeated failures to

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follow recommendations by the Commission will result in
sanctions. Although all Member States are analysed, the
procedure is clearly focused on those with competitiveness
problems and large current account imbalances.
Another major improvement is the introduction of the
“European Semester”. In the first half of every year, the
Member States’ budgetary and structural policies are
reviewed by the Commission and the EU countries. This
enables consistent policy guidance early enough for
Member States to take recommendations into account
when they adopt their national budgets for the following
year. Through this measure, the euro area has reshaped
its policy-making in a very substantial way in order to preempt the misalignments causing the crisis.

New support mechanisms
Collectively, Member States are putting national reforms
in place and strengthening economic governance at the
European level. This is really the core of the comprehensive strategy to overcome the crisis in a structural and
lasting way. The establishment of financial crisis mechanisms — the EFSF and ESM — is complementary and can
be regarded as the last line of defence in a situation when
a Member State’s financing problems may put at risk the
financial stability of the euro area as a whole or of its
Member States. Moreover, they help sustain the confidence of investors and contribute to stabilising the markets. They buy time for euro area Member States to
address the underlying issues.
The financial firewall has been strengthened as the crisis
evolved. Initially Member States created a facility to help
Greece, as an individual case. Later, governments set up
a temporary crisis resolution mechanism, the EFSF,
which committed an additional €43.7 billion to Ireland
and Portugal, as well as a second assistance package to
Greece totalling €144.6 billion. To provide the missing link
in the setup of the EMU, this mechanism had to be made
permanent. Therefore, the ESM was created, which added €500 billion in lending capacity. The ESM is financing
the Cyprus programme (with a total commitment of up to
€9 billion) and the Spanish bank recapitalisation programme (with €41.3 billion disbursed), yet still holds in
reserve a robust firepower of nearly €450 billion.
The European Central Bank (ECB) has evidently played a
crucial role in stabilising the markets with its other nonconventional measures, namely the Longer-Term
Refinancing Operations (LTROs) and the announcement
of Outright Monetary Transactions (OMTs). With the latter, the ECB may launch secondary market sovereign
bond purchases when a Member State receives financial
assistance under an ESM financial assistance programme entailing substantive reform conditionality and
the possibility of primary market purchases.

The successful exits of Spain, Ireland and Portugal show
that the model of crisis resolution is working. Financial
assistance is linked to appropriate conditionality. This
principle of EFSF/ESM lending has been and will continue
to be independent of the instrument, such as loans, precautionary credit lines, bank recapitalisation, or intervention in the primary or secondary debt market.
Conditionality may vary across instruments and cases
depending on a country’s adjustment requirements. The
key element, which is based on decades of IMF experience, is that successful financial assistance requires the
correction of structural and fiscal deficiencies. When this
is done, market confidence comes back and a successful return to the market or a full market financing at
sustainable rates can be achieved, leading ultimately to
an increase in growth and employment.
The continued existence of risk spreads does not question the success of the crisis resolution model and is to
some extent desirable. Before the crisis, virtually no risk
spreads existed among euro area countries. Investors
now look more closely at sovereigns from a credit risk
perspective. Fiscal deficits have been addressed and
debt developments have become more favourable, but
debt levels cannot be lowered in the short run. Sustained
but low-interest rate spreads, reflecting the fiscal sustainability of countries, will therefore remain a feature of
European fixed income markets. This is desirable as it
imposes a market discipline on governments which was
lacking before the crisis.

Strengthening the financial system
Both public and private sector efforts have made the
financial system more resilient. Since the beginning of the
crisis, policy-makers have taken a number of initiatives to
strengthen regulation. They created new European
supervisory authorities for different segments of financial markets, in particular for banks, insurance companies,
and capital market instruments and rating agencies.
Regulatory authorities also increased capital requirements for banks, as the European Banking Authority recommended a higher capital ratio of 9%. Ongoing efforts
aim at improving the quality of capital. In parallel, between
2008 and 2011 governments in the euro area made
€1.6 trillion available to back the banking system. Most of
these amounts took the form of guarantees to back bank
assets and liabilities. Others took the form of direct
capital injections. EFSF and ESM programmes also contributed to the recapitalisation efforts by making nearly
€100 billion available for that purpose to the governments of Cyprus, Greece, and Spain. The Commission
estimates that between 2008 and the second half of
2013, overall bank capital increased by €450 billion, using
both public and private sources, most of it being raised as
private capital. The European Systemic Risk Board
(ESRB) was created to monitor macro-prudential risks to

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complement micro-supervisory functions. The ESRB will
also have a role in gauging the macro-prudential instruments in the hands of supervisory authorities.
The situation of the banking system has improved but
fragmentation could not be entirely overcome. Bank
financing disintegrated across euro area countries for
quite some time. Since 2012 the interbank market has
again become more liquid and bank funding conditions
normalised. Against that background, the decline in
Target 2 balances and repayments of LTRO are indications of the need to rely on the support of the Eurosystem.
But even with this fragmentation receding, bank credit
developments and costs continue to differ substantially
across countries. Credit conditions are more restrictive
and costs are higher in peripheral countries.
With these problems in mind, policy-makers decided to
create a banking union (Box 1). The key objectives of the
banking union are, first, to put banking systems across
Europe on the same footing and create confidence, and
second, to break the vicious circle between banks and
sovereigns. The first objective should be achieved through
a set of common regulatory and resolution institutions —
the Single Supervisory Mechanism (SSM) residing with

the ECB, the Single Resolution Board and the Single
Resolution Fund. The second objective should be achieved
through a paradigm shift of rescue measures. Instead of
government bail-outs for financial institutions, private
investors and shareholders should carry most costs of
future bank restructuring or resolution through bail-in
requirements. This will shield the public sector from
demands in future crises.

Conclusion
Europe has implemented a far-reaching response to the
crisis. Budget deficits are being reduced; competitiveness is being restored; current accounts are moving into
surplus. Economic governance has been strengthened
with the fiscal compact, a reformed Stability and Growth
Pact, a new Macroeconomic Imbalances Procedure and
the European Semester. A permanent crisis resolution
mechanism is now fully in place. More needs to be done
to fully complete the banking union, re-integrate financial
markets and reduce unemployment levels, which are still
unacceptably high. All this has the aim of creating a better-functioning and financially stable euro area, which will
ultimately lead to more growth and employment.

Box 1. The ESM and the banking union
As part of its crisis response strategy, the EU has
undertaken a set of measures in the financial sector
that focus on better regulation, strengthened supervision and resolution frameworks, and financial backstops. The ultimate objective is to build a true banking
union where financial institutions provide financial services across Europe. The Bank Recovery and
Resolution Directive (BRRD) and the Capital
Requirements Directive (CRD) introduce significant
changes in the landscape for banking in Member
States. The Single Supervisory Mechanism (SSM) will
directly supervise the biggest 130 banks in the euro
area while being ultimately responsible for all financial
institutions of Member States concerned. The Single
Resolution Mechanism will be able to take resolution
action if needed, supported by a Single Resolution
Fund financed by the industry.
The ESM has an important role in the banking union,
as the organisation was created as a backstop for

euro area countries. Besides macroeconomic adjustment programmes and loans to Member States, the
ESM also has the capacity to deal with financial sector
issues. Currently the ESM can lend to an ESM Member
for the purpose of recapitalising its banks, as was the
case with Spain, or to provide financing to cover resolution costs.
Once adopted, the Direct Recapitalisation Instrument
(DRI) will allow the ESM to invest directly in equity of
ailing financial institutions, together with Member
States and under strict conditionality. This possibility
will mitigate the sovereign-bank nexus that has aggravated the sovereign debt crisis in Europe and should
provide further reassurance to investors. Once adopted as a new ESM instrument by unanimous decision of
the Board of Governors, the DRI could also be used —
according to agreed procedures — to address capital
shortfalls uncovered by the Balance Sheet
Assessment exercise undertaken by the SSM.

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Macroeconomic and financial
environment
In 2013, the euro area economy progressed from stabilisation toward a modest recovery and financial market
conditions normalised further. After several quarters of
recession, the euro area started to grow again, though at
a slow pace. This incipient growth has been driven mainly
by a rise in exports outside the euro area and a gradual
improvement in domestic demand, both of which are
expected to gain momentum in 2014. Most peripheral
programme countries continued to gradually stabilise or
saw improvements in trade balances.
The stabilisation and incipient recovery of the euro area
occurred against the background of strengthening
growth in other developed economies, which temporarily
proved challenging for emerging markets. In the euro
area, structural reforms were progressing and fiscal performance improved. At the end of the year, Member
States started to exit ESM and EFSF financial assistance
programmes, and euro area growth showed positive
momentum. From a financial markets perspective, developed market equities continued their strong rise on the
back of monetary stimulus while short-term interest
rates remained at very low levels. Peripheral euro area
yields fell sharply as countries regained the confidence of
investors and benefited from setbacks in emerging markets. The decline in volatility indices corroborated that
risk premium was gradually decreasing, further confirming the turning point for risk sentiment in the euro area.

Global rebalancing
The stabilisation and incipient recovery of the euro area
took place on the back of a rebalancing of the world economy. Growth prospects in developed economies improved
while emerging market economies struggled. In the
United States, growth decelerated in the short term due
to necessary fiscal tightening but the growth outlook
improved. Countries that had been lagging, such as the
United Kingdom and Japan, exceeded estimates of economic growth. The recovery of developed economies was
generally facilitated by the continued accommodative policy stance of monetary authorities.
At the same time, emerging markets struggled with higher rates of inflation, current account imbalances, high
dependency on foreign capital and lower commodity prices. This and the expectation of future higher rates in the
United States pressured a number of central banks into
tightening monetary policy in the hope of combating capital outflow. The positive momentum in developed economies translated into a sustained period of currency
weakness for emerging markets. In particular, countries

such as Brazil, India, Indonesia, South Africa and Turkey
and were affected by the expectations of a reduced pace
of Treasury purchases by the US Federal Reserve and a
subsequently less accommodative environment (Chart 1).
Chart 1. Emerging market 10-year sovereign bond yields
jump during the second half of 2013 (in %)

10

8

6
South Africa

Indonesia

India

Turkey

Sep.
13

Nov.
13

Jan.
14

4
Jan.
13

Mar.
13

May
13

Jul.
13

Source: Bloomberg

As investors repatriated money from emerging markets,
the euro area found itself one of the larger beneficiaries
of capital inflows from the second half of 2013 onwards.
The initial effect of the emerging market fallout was to
further reduce European sovereign yields, especially
those of peripheral economies. The same could not be
said for traditional safe-haven assets, which were the
first to react negatively to the reduced pace of US Federal
Reserve asset purchases (Chart 2). Beyond the impact
on yields, the emerging market turmoil could negatively
influence the euro area’s trade balance. However, euro
area exports to emerging market economies, such as
Brazil, China and Turkey, increased during the year and
the real economic effect seemed to have been limited.
Chart 2. 10-year government bond yields in Germany,
France, the Netherlands and United States (in %)
3.5
United States

France

Netherlands

Germany

Jan.
14

Apr.
14

3.0
2.5
2.0
1.5
1.0
Jan.
13

Apr.
13

Source: Bloomberg

Jul.
13

Oct.
13

ESM

Annual
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2013

15

Juan Rojas
Deputy Head of Economic
and Market Analysis
Joined the ESM in April 2013
Worked in the Bank of Spain for nine years.
Lecturer at the Universidad Carlos III
(Madrid).
Working at the ESM provides a unique
opportunity to contribute to the future of
Europe. It is also an excellent example of what
can be achieved by high quality team work,
within a small organisation. The ESM project
and design is not completed yet but it is well
equipped to cope with the new challenges
that lie ahead, and contribute to a more
integrated Union.

Structural improvements in the euro area
During the year, the euro area economy made progress
in several areas of adjustment and structural reforms;
though much work is yet to be done, the actions certainly
led to receding market concerns about the future of the
euro area. Current account imbalances within the euro
area were addressed, competitiveness improved and
banking union plans gradually took form. Fiscal performance also recovered (Chart 3), with the euro area deficit estimated to decrease to 2.5% of GDP in 2014 from
3.1% in 2013, while debt-to-GDP is expected to peak at
96% in 2014.

modest economic growth. Ireland and Spain successfully
exited their assistance programmes, and recently
Portugal reached a similar positive outcome. Cyprus,
which has seen a protracted recession that has had
grave socioeconomic impact on the country, is expected
to move gradually out of recession in 2014 and record
growth in 2015 (see Programme country experiences
below). However, Cyprus still has some distance to run
until it reaches this pivotal moment, demonstrating the
importance of the EFSF and ESM as the common crisis
resolution mechanisms for the euro area. The stringent
conditionality of the programmes and the continuous
monitoring of adherence to the targets and deadlines
have ultimately strengthened beneficiary Member States.
Though euro area GDP on average declined by 0.5% over
the year, signs of positive development have been evident.
The trend in GDP growth was increasingly positive as the
year progressed (Chart 4). Consumer and investment
spending picked up during the second half of 2013,
though the distribution of spending across euro area
Member States remained uneven. Euro area HICP inflation is expected to rise to 1.2% in 2015, reflecting modest cost pressures as domestic demand recovers. The
level of inflation below the ECB’s objective of price stability
should also be seen against the background of required
price adjustments in peripheral countries. After a persistent rise, unemployment is expected to remain fairly stable in 2014 at a rate just below 12%, again with significant
differences between countries.
Chart 4. Evolution of euro area GDP growth
expectations (in %)
2.5
Forecast 2014 euro area GDP
2.0

Chart 3. Fiscal balance and 2013-15 forecast, euro
area Member States (as % of GDP)

Forecast 2013 euro area GDP
1.5
1.0

5

0.5

0

0.0

-5

-0.5

-10

-1.0

-15

Mar.
12

-20
-25
-30
2010

2011

2012

Jun.
12

Sep.
12

Dec.
12

Mar.
13

Jun.
13

Sep.
13

Dec.
13

Germany

Ireland

Greece

Source: Bloomberg

Portugal

Spain

Italy

2013

2014

2015

Public debt in almost all euro area countries continued to
rise. The banking sector had not yet recovered to a level
where government support could be removed and household borrowing rates still showed substantial disparities
between countries. Notwithstanding these adverse elements, the euro area as a whole, illustrated by countries
such as Spain, made substantial progress in addressing
structural imbalances.

Source: Eurostat and EC, Spring forecast 2014

Specifically, Member States that went through EFSF/
ESM financial assistance programmes have made necessary fiscal adjustments and are now expected to experience

ESM

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16

Financial market conditions
Developed market equities maintained the positive trend
that has prevailed on the back of monetary stimulus. The
S&P 500 equity index recorded its best performance in
over 15 years, giving investors a 30% return (Chart 5).
The emerging market fallout further benefited euro area
equity performance as funds were redeployed in peripheral equities that presented relatively reduced risks to
investors.
Chart 5. Stock prices in the euro area (rhs) and United
States (lhs) (in index value)
1900

3200

S&P 500

3100

1800

3000
1700

2900
2800

1600

2700
1500

2600

Euro Stoxx 50
1400
Jan.
13

2500
Apr.
13

Jul.
13

Oct.
13

Jan.
14

Apr.
14

Source: Bloomberg

Short-term interest rates remained at very low levels
across all major developed economies, amid the low policy rate environment and forward guidance indicating that
lower rates were to be maintained for some time. Longermaturity Treasuries and Bunds experienced bouts of volatility as expectations of tapering set in during the summer
months. In Europe, the ECB cut the main refinancing rate
twice, in addition to extending the longer-term refinancing operations well into 2015 and introducing forward
guidance as a new tool to steer short-term rates.
European peripheral bonds experienced more favourable
financing rates, illustrated by Greece tightening by more
than 400 bps to the German curve, and Ireland and Spain
tightening by more than 150 bps (Chart 6).
Chart 6. Spain, Ireland and Portugal 10-year bond
spreads vs Germany (in basis points)
Spain

Ireland

Portugal

Oct.
13

Jan.
14

Apr.
14

600
500
400
300
200
100

Source:

Apr.
13

Jul.
13

DataStream and ESM calculations

Risks to the outlook
2013 was a year where the euro area progressed from
stabilisation toward modest recovery. The issues that
the euro area will need to overcome will not be new.
Inflation remains very low, unemployment is only expected to fall moderately in 2014, and both public and private
debt remain high. Despite some progress, disparities
between domestic economies remain in areas of unemployment as well as financing conditions for households
and SMEs (Chart 7). It is therefore evident that the biggest tasks at hand are restoring proper functioning of
the monetary transmission mechanism, and defragmenting the national economies and financial sectors in the
euro area. This essentially means that policy-makers
must continue to make the euro area a more efficient,
competitive and stable market-place. The ECB in its new
capacity of single supervisor should also encourage confidence to return to the financial sector.
Chart 7. Composite household borrowing cost in the
euro area across all maturities (in %)
15
Spain

Portugal

Ireland

Greece

Cyprus

2005

2007

2009

2011

2013

12

9

6

3
2003
Source: ECB

700

Jan.
13

These positive market developments clearly indicate that
confidence is returning to euro area markets, a trend
also confirmed by a decrease in risk premium observed in
volatility indices.

National policy-makers are urged by the European
Commission to implement country-specific recommendations, which should enable Member States to boost
domestic growth potential and job creation, further
reduce deficits and debt, and push through social
reforms. In this context the Excessive Deficit Procedure
and Excessive Imbalance Procedure should give further
incentives for appropriate actions to be taken.

ESM

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2013

17

Programme country experiences

Cyprus
The programme’s objectives are to restore financial sector stability, strengthen public finance sustainability, and
implement structural reforms in order to support sustainable and long-run growth. Under the Financial
Assistance Facility Agreement signed between the ESM
and Cyprus, an amount of up to €9 billion is available to
the country in order to finance debt redemption, fiscal
deficits and the recapitalisation of the financial sector. In
addition, the IMF contributes up to €1 billion to cover the
country’s financing gap. From May 2013 until March
2014, a total of €4.6 billion was provided to Cyprus by the
ESM, after ensuring compliance with prior actions and
programme conditionality defined in the Memorandum of
Understanding.
In the financial sector, the main policy measure adopted
in 2013 included the bail-in of uninsured depositors and
the imposition of restrictive measures in the economy, in
order to safeguard financial stability in the domestic
economy. Fiscal consolidation focused on reducing
expenditure growth on the public sector wage bill and
social benefits, while the authorities successfully implemented some important revenue side measures (for
example, an increase in immovable property taxes).
Regarding structural reforms, important steps have
been taken on revenue administration, reforming the
social welfare system and preparing for privatisations.
The recession in 2013 was severe (-5.4%), but less steep
than expected at the beginning of the programme. The
better than expected macroeconomic performance is
attributable to the dynamics of private consumption and
the contributions of tourism and professional business
services. Overall, consumption fell by 5.6%, while investment

declined sharply by 21.6%. The external sector contributed positively to GDP trends, with imports declining
more (-14.1%) than exports (-4.2%).
Fiscal developments were better than expected in 2013,
with the government reaching the deficit targets by a
considerable margin. The overall deficit is expected to be
5.5% of GDP, while the primary deficit is seen at 1.8% of
GDP. The fiscal outturn is attributed to better than
expected macroeconomic developments, as well as to
the expenditure constraint, which more than offset the
slight underperformance in revenues.
The banking system is burdened by very high level of
Non-Performing Loans (NPL). Despite the significant
restructuring that has taken place in the banking sector, the level of problematic loans is very high (NPL
ratio at 47.6% as of February 2014) compared with
other programme countries. Effective management of
NPLs is critical to restore banks’ ability to finance
domestic economy.
Overall, despite the robust programme implementation,
risks remain to the stabilisation of the economy. The
greatest challenge lies with the health of the financial sector; key policy issues are NPL management, private sector debt restructuring and ensuring that banks’
restructuring plans are fully implemented. Success in
bank restructuring will contribute to depositor confidence and pave the way to lifting the restrictive measures in accordance with the agreed roadmap. On the
upside, progress in negotiations on the Cyprus reunification issue would have a profound impact on the
programme.

ESM

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18

Greece
The objectives of the economic adjustment programme
for Greece are to restore sustainability of public finances,
restructure and stabilise the financial system, and support long-term growth by implementing an ambitious
agenda of structural reforms. From March 2012 to
March 2014, a total of €99 billion was disbursed from
the €109.1 billion Master Financial Assistance Facility
Agreement between the EFSF and Greece, after ensuring
compliance with prior actions and other policy conditionality defined in the Memorandum of Understanding. Policy
measures adopted in 2013 included improvements in tax
administration and public administration more generally,
liberalisation of regulated professions, labour market
reforms and rationalisation of public expenditures. In the
financial sector, the second phase of the recapitalisation
of the banking system was completed by June 2013.
The macroeconomic outlook improved in 2013. The
recession slowed to a pace of -3.9% in 2013, compared
with -7% the previous year. The contraction was led by a
12.8% drop in investment and a 6% fall in private consumption. The external sector continued to contribute
positively to growth, with exports rising 1.8% and imports
declining 5.3% on an annual basis. Data indicate that the
economy is slowly turning around, clearly supported by a
good tourism season, the government’s efforts to
restructure the economy, and the improvement of the
global environment.
Fiscal developments suggest that in 2013 Greece
reached a headline general government deficit of 2.1% of
GDP (excluding the impact of support to financial institutions) and over-performed its primary balance target.
The primary surplus reached €1.5bn, or 0.8% of GDP as
per the adjustment programme definition, better than
the target of a primary balance. This performance is
attributed both to lower expenditure and higher revenue.

The external adjustment is also proceeding fast, with
Greece registering its first ever current account surplus
in 2013 (in Balance of Payments terms), at 0.7% of GDP.
The improvement reflects primarily a 12% decline in the
trade deficit. Strong receipts from tourism helped trigger an 11% increase in the service surplus. As a reward
for the adjustment, foreign investors showed a renewed
interest in the economy.
Behind these positive trends stands a significant improvement in the competitiveness of the economy. Ambitious
labour market reforms leading to real wage cuts have
started to yield results, with Greece more than recovering the cumulative loss in labour cost competitiveness
recorded between 2000 and 2009. Implementation of a
wide range of growth-enhancing structural reforms has
also contributed to improving structural competitiveness.
Since 2011, Greece has gained 29 positions in the overall
ranking in the World Bank’s Ease of Doing Business index,
and the country has been leading the OECD’s Going for
Growth report.
The country now stands in a much-improved position
compared with 2010, when it lost market access. The
progress achieved in fiscal performance and competitiveness has translated into the elimination of the twin deficits in the primary fiscal balance and the current account.
Secondary bond market performance as well as a first
highly successful bond issuance in early 2014 show that
market participants have acknowledged the adjustment
made so far. Policy-makers should now focus on further
improving programme implementation, safeguarding the
pace of reforms and keep sufficient fiscal discipline to
entrench the prospect for a rebound of the economy.

ESM

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2013

19

Ireland
Ireland was able to regain market access gradually in
2013 and to conclude its EU/IMF financial assistance
programmes at the end of the year. The Irish financial
assistance programme started in November 2010, and
Ireland received €17.7 billion from the EFSF along with
close to €50 billion from the EFSM, the IMF and bilateral
loans. The main thrust of the economic adjustment linked
to programme conditionality was to restructure the Irish
financial sector, to assure the sustainability of the public
finances. During 2013, Ireland undertook reforms mainly
in its public sector and to increase the competitiveness
of its economy. Thereby it also strengthened the basis for
a return to growth, duly pursuing its fiscal and financial
adjustment paths and continuing to implement a range of
structural reforms.
GDP continued to expand during 2013 once one-off factors from the pharmaceutical industry are excluded. In
2013, real GDP declined by 0.3% due to the impact of the
“patent cliff” in the pharmaceutical industry but this was
mostly due to the recent revision of figures by the Central
Statistics Office (CSO) for the fourth quarter. The labour
market has been improving and the unemployment rate
declined to 11.7% in April 2014, down from a peak of over
15% in early 2012, according to the CSO. Also on a positive note, the housing market started to recover during
the course of the year.

The fiscal and current accounts also continued to improve.
The general government deficit declined to 7.1% of GDP in
2013 after reaching 8.1% in 2012, although it still
remains high. As a consequence, government debt
remains high and increased during 2013. It rose to 124%
of GDP at the end of the year, from 117.4% of GDP in
2012. Thanks to competitiveness gains, the Irish current
account surplus increased to close to 6.6% of GDP in
2013, one of the highest in the euro area.
By the start of 2014, market access had been fully
restored. Ireland was the first country under an EFSF
financial assistance programme to fully return to the
market. It was able to issue regularly in syndicated deals
and started an auction schedule in the first quarter of
2014. Irish sovereign bond yields have declined substantially since late 2011, with the 10-year yield down to
around 3% at the end of 2013 — the lowest yields in the
euro area peripheral programme countries.
Despite these positive developments and the successful
exit from official financial assistance, the Irish authorities
need to maintain the reform momentum. As the government deficit and debt remain high, Ireland requires a fiscal policy consistent with fiscal targets set in the Stability
and Growth Pact. Structural reforms shall boost competitiveness and support the solid growth rates necessary for public debt adjustment. On the financial sector
side, Irish banks are set to continue implementing their
restructuring plans.

ESM

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20

Portugal
During 2013, Portugal followed the positive adjustment
path that started in 2011 and successfully concluded the
programme in May 2014. Following the last disbursement in April, the EFSF financial assistance programme
made €26 billion available to Portugal. Since the beginning of the programme, Portugal has significantly corrected its macroeconomic imbalances (both external and
fiscal) and implemented a wide range of structural
reforms. More specifically, during 2013, Portugal continued to implement changes in the fiscal framework, labour
and product market that had started in the previous
years.
GDP contracted by 1.4% in 2013, somewhat less than
initially expected. This was mostly due to weak domestic
demand, which contracted by 2.6%. Exports continued to
increase, by 6.1% in 2013, thanks to continuing gains in
competitiveness. Economic activity finished the year with
a strong momentum, with three consecutive quarters of
expansion. The current account balance improved and
registered a small surplus in 2013 of 0.4% of GDP, versus the 2% deficit recorded in 2012. The unemployment
rate has also started to fall, down 2.3 percentage points
from its peak, to 15.3%.

Despite negative rulings from the constitutional court
that cancelled some of the planned spending cuts, the fiscal deficit declined to 4.9% of GDP (5.3% excluding
one-off factors), or 4.5% of GDP excluding Banif recapitalisation from 6.5% in 2012, below the agreed Excessive
Deficit Procedure target of 5.5% of GDP. Yet, as a result
of the persisting government deficit and the weaker economic activity, government debt rose to close to 130% of
GDP at the end of 2013, up from 124.1% in 2012.
During the year, financial market perceptions and market
access continued to improve. Portugal finished its financial assistance program in May without requesting further official support. It was able to return to market
financing at long maturities, through syndicated deals of
5- and 10-year bonds. Following these encouraging developments during 2013 and the conclusion of the programme, it is important that Portugal continues to
implement the agreed structural reforms and fiscal
adjustment to improve economic growth and reduce
government debt.

ESM

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Spain
Spain concluded its financial assistance programme with
the ESM on 31 December 2013. The ESM’s Financial
Institution Recapitalisation Facility proved instrumental in
recapitalising and restructuring Spain’s troubled banks
and putting them on a sound footing. The facility, which
was made available in July 2012, amounted to €100 billion, signalling the determination of the Spanish authorities and the euro area governments to thoroughly
address any outstanding banking problem.
The policy measures taken by the Spanish authorities in
the context of the programme addressed the capital
requirements of the banks, set up a framework to handle
non-performing assets, and substantially improved
supervision and regulation. After the first disbursement
of ESM notes (€39.5 billion) transferred on 11 December
2012 to the FROB (the Spanish fund for orderly bank
restructuring), the Spanish government formally requested on 28 January 2013 the disbursement of €1.86 billion
for the recapitalisation of Group 2 banks. The funds were
transferred to the FROB in the form of ESM notes on 5
February 2013. Overall, the outlook for the Spanish banking sector, and for the economy in general, has improved
substantially. After posting significant losses in 2012,
banks returned to profitability in 2013 and the capital
position of recapitalised banks is now comfortable, with
Core Tier 1 ratios above 10%.
Latest macroeconomic developments suggest the economic recovery is under way. Growth has returned, with
quarterly GDP growth rates turning positive in the second half of 2013, up 0.2% in the fourth quarter relative to
the third. Domestic demand provided less of a drag on

economic activity during 2013, with an annual contribution to growth of -2.7% (compared with -4% in 2012). The
contribution of external demand to growth was more
moderated (1.5%) relative to 2012 (2.4%). Still, exports
continued to increase in the last quarter of the year,
although imports have also started to recover.
The correction of imbalances has continued, despite
some slippages observed on the fiscal side. The overall
fiscal deficit of the general government stood at 6.6% of
GDP, on the back of lower-than-expected revenue collections, above the 6.5% deficit target. The economy was
supported by further gains in competitiveness, resulting
in a 0.8% of GDP current account surplus in 2013, the
first in many years.
Growing investor confidence resulted in a solid bond market performance. This provided a welcome reward to the
gradual improvement of the real economy. Sovereign
bond yields reached new lows across maturities compared with the crisis period, and the rise in share prices
reflected the positive sentiment surrounding the economic recovery.
Spain has now entered a Post-Programme Monitoring
phase. The ESM will continue to implement its Early
Warning System in cooperation with the European
Commission to monitor Spain’s ability to honour the
repayments to the ESM. Further economic improvement
and the continuation of structural reforms shall entrench
the prospects for sustainable growth into the medium
term.

ESM

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22

Box 2. Potential savings on EFSF/ESM interest payments
EFSF and ESM financial assistance is granted to Member
States that cannot access capital markets at affordable
rates and pose a threat to the financial stability for the
euro area as a whole or its Member States. The EFSF/
ESM disbursed financial support to beneficiary Member
States at much lower interest rates than those that
would theoretically have been offered by the market. This
initially generates substantial resource savings, helping
to provide the assistance needed to implement fiscal and
structural reforms to foster growth in the medium term,
and thereby ultimately supporting market access and
debt sustainability.
The EFSF/ESM provided loans to Cyprus, Greece, Ireland,
Portugal and Spain. The simplest way to estimate the savings achieved in 2013 is to compare the effective interest rate payments on EFSF/ESM loans with the interest
rate that these countries would have paid had they been
able to cover their financing needs in the market in the
absence of disruption. In the calculation, we use the average theoretical market spread of the 5- and 7-year bond
of each country matching the EFSF/ESM maturity profile
on the three months before and after each country
requested support, and compare this with the equivalent
EFSF/ESM funding cost.
The results have nonetheless to be read with some caution, since market rates for these countries were not
available throughout 2013 in the amounts being considered and so do not reflect the true financing costs.
Moreover, countries requested support in different contexts of the euro area sovereign debt crisis, when different EU support mechanisms were available, which may

also account for the cross-country differences observed
in our estimates.
In addition, these rates neither take into account the conditionality that applies to EFSF/ESM loans and the related reduction in spreads in the course of the programme,
nor provide a quantification of the current situation, with
some countries such as Spain reporting record low market rates. Future funding costs, as well as potential savings for beneficiary ESM Members, will depend on their
precise funding structure and general sentiment in the
markets. Therefore, these future funding costs cannot
be extrapolated from this finding.
Looking at past performance, the table below shows the
results in terms of amounts saved and as percentages of
GDP in 2013. The savings are significant, ranging from
0.2% of GDP in Spain to 4.7% of GDP in Greece in 2013.
At the peak of the crisis, these were even larger: towards
the end of 2013, countries such as Ireland and Spain (and
to a lesser extent Portugal) were already approaching
the conclusion of their programmes and were benefiting
from lower spreads due to the effective crisis response
and good programme implementation.
For illustrative purposes, the savings are also represented as a percentage share of total primary expenditures.
This captures more closely the idea of fiscal space attributable to these savings. The budgetary space is again
particularly notable for Greece amounting to almost 9%
of total primary expenditures, which in this case effectively accounts for more than the total amount of public
resources spent on education.

Table 1. Potential savings of EFSF/ESM financing vs theoretical market cost in 2013
Level in € billion

As share of GDP

As share of total primary
expenditures

Cyprus

0.24

1.5

3.4

Greece

8.58

4.7

8.6

Ireland

0.68

0.4

1.1

Spain

2.43

0.2

0.6

Portugal

1.27

0.8

1.7

Source: Bloomberg, European Commission. Figures are based on ESM staff calculations

ESM

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23
Nicola Giammarioli
Head of Strategy and Institutional Relations
Joined the EFSF in August 2012
Worked at the IMF Executive Board as Senior Advisor/
Alternate Executive Director. Previously was an advisor of
the Italian Minister of Economy and Finance; Economist
and Senior Economist at ECB from 2001-07.
On my way back from Washington to Rome I stopped by
Luxembourg, where a bunch of pioneers were working day
and night — including weekends — to forge a brand new
institution. It is a pleasure to work with very motivated
colleagues with different backgrounds, pursuing the
objectives of creating better conditions for Europe and its
citizens.

Box 3. The ESM/EFSF’s Early Warning System
The objective of the Early Warning System (EWS) is to
determine the ability of an ESM Member to repay its
obligations. According to 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”. This requires an assessment of the shortterm liquidity position of the sovereign, its market
access, and the medium- to long-term sustainability of
its public debt. It may also require an assessment of
banking developments whenever relevant to assess
repayment flows. The work takes into account and
complements the fiscal and debt sustainability analysis undertaken by the European Commission (EC) and
the European Central Bank (ECB) during the programme and post-programme period.

cash flow overview for the period up to the payment
date and a schedule of the aggregate monthly cash
inflows and outflows including the ESM payment.
• The ESM deepens its analysis of the liquidity risk if

the repayment due exceeds a risk threshold.
This involves examining market access and the
conditions this depends on, in particular the public
debt sustainability of the country and its budgetary
developments based on the work by the EC in
liaison with the ECB. This entails close liaison with
the EC and ECB to incorporate their analysis.
The results are discussed with national authorities,
if necessary to collect further insight into the
economic and financial situation of the ESM
Member concerned.

The ESM’s Internal Risk Committee (IRC) assesses the
risks to the planned repayment schedule in the context of likely scenarios. In light of this assessment,
judgement by the ESM’s management and governing
bodies is required to identify any potential deterioration in the credit risk of the institutions and any adjustment to the loan value. No value adjustment has been
required as of 31 December 2013, and thus none has
been recognised.

• The report provided to the IRC includes an

The process is organised as follows:

EFSF guarantors agreed at the Eurogroup meeting
held on 9 December 2013 that the ESM warning system procedure should also be applied to the EFSF. The
EWS exercise will take place until the totality of ESM
and EFSF loans are repaid by beneficiary members. In
the meantime, close coordination of work and country
missions with the EC and ECB is ensured, in programme and post-programme review work.

• The ESM’s Asset and Liability Management (ALM)

department provides a monthly payment overview
for the next year for each beneficiary ESM Member.
• Five months before each payment date, the

beneficiary ESM Member provides the ESM with a

assessment of the likelihood of payment. Based on
the assessment, the IRC forms a view on the
financial situation of the borrower and likelihood of
payment of the amount due in three months.
Should a clear repayment risk be identified, the
ESM Managing Director consults the IRC, the
Board of Directors and the Eurogroup Working
Group.

ESM

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24

Chapter

2

ESM Activities
Lending activities

Cyprus
The ESM signed the Financial Assistance Facility
Agreement with Cyprus on 8 May 2013, which included a
Loan Facility for a total amount of up to €10 billion, including a contribution from the IMF. This was eventually fixed
at €8.968 billion, after the IMF decided to grant financial
assistance to Cyprus of SDR 891 million. The loans to
Cyprus will have a maximum maturity of 20 years and a
maximum average maturity of 15 years (14.86 years
WAM at the end of 2013).

Two disbursements were made under the first tranche of
the Cypriot facility: the first on 13 May 2013 for a total of
€2.0 billion; the second on 26 June 2013 for €1.0 billion.
Under the second tranche of the Cypriot facility, on 27
September 2013 a total of €1.5 billion was transferred
through the delivery of ESM notes to use for recapitalisation of the Cooperative Central Bank (Table 3). The third
tranche of €100 million was disbursed on 19 December
2013 (Table 2). No interest payment dates occurred in 2013.

Table 2. Funds disbursed to Cyprus in 2013
Tranche

Disbursement

Value date

Maturity

Loan amount (€ million)

Tranche 1

Disbursement 1

13/05/2013

13/05/2026

1,000

13/05/2013

13/05/2027

1,000

Disbursement 2

26/06/2013

26/06/2028

1,000

Disbursement 1

27/09/2013

27/09/2029

750

Bank Recap

27/09/2013

27/09/2030

750

Bank Recap

Tranche 2
Tranche 3

Disbursement 1

19/12/2013

19/12/2019

100

Tranche 3

Disbursement 1

19/12/2013

19/12/2019

100

Type

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Table 3. ESM bonds that fund the Cypriot Bank Recapitalisation (tranche 2)
ISIN code
EU000A1U98Y4

Maturity

Rate

Amount issued (€ million)

27/03/2015

Floating Rate 6m Euribor-21bp

1,500

Spain
The Financial Assistance Facility Agreement provided to Spain, signed on 29 November 2012, included a Financial Institution
Recapitalisation Facility for a total amount of €100 billion, with a maximum maturity of 15 years and a maximum average maturity of 12.5 years (12.49 years WAM at the end of 2013). The first disbursement under the first tranche took place in
December 2012, with an amount of €39.468 billion through the delivery of ESM notes (Table 4). Once the initial funding instrument matures, these notes will be rolled over to the ESM diversified funding pool.

Table 4. ESM bonds that fund the Spanish Bank Recapitalisation (tranche 1 and 2)
ISIN code

Maturity

Rate

Amount issued (€ million)

EU000A1U97C2

11/02/2013

Zero Coupon Discount bill

2,500

EU000A1U97D0

11/10/2013

Zero Coupon Discount bill

6,468

EU000A1U98U2

11/06/2014

Floating Rate 6m Euribor-12 bp

6,500

EU000A1U98V0

11/12/2014

Floating Rate 6m Euribor-12 bp

12,000

EU000A1U98W8

11/12/2015

Floating Rate 6m Euribor-6 bp

12,000

EU000A1U98X6

05/08/2015

Floating Rate 6m Euribor-15 bp

1,865

The bonds were provided to the Bank of Spain, which received them on behalf of the Kingdom of Spain, and subsequently
transferred to the FROB, which in turn used them to recapitalise the four financial institutions it had taken over (Group 1
banks) as well as SAREB (the Spanish asset management company). The loan amortises in equal amounts between
2022 and 2027 (Tables 5 and 6).

Table 5. Funds requested by Spain for Group 1 banks
Tranche

Disbursement

Value date

Maturity

Loan amount (€ million)

Type

Tranche 1

Disbursement 1

11/12/2012

11/12/2022

6,578

Bank Recap

11/12/2012

11/12/2023

6,578

Bank Recap

11/12/2012

11/12/2024

6,578

Bank Recap

11/12/2012

11/12/2025

6,578

Bank Recap

11/12/2012

11/12/2026

6,578

Bank Recap

11/12/2012

11/12/2027

6,578

Bank Recap

19/12/2013

19/12/2019

100

Tranche 3

Disbursement 1

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Table 6. Split of the funds requested by Spain for Group 1 banks and SAREB
Institution

Amount (€ million)

BFA-Bankia

17,959

Catalunya Caixa

9,084

NCG Banco

5,425

Banco de Valencia

4,500

SAREB

2,500

The second disbursement under the Spanish facility was made on 5 February 2013 for a total amount of €1.865 billion,
again through the delivery of ESM bonds, following a procedure similar to the one described above. The funds were used
to recapitalise four additional Spanish banks, which could not reach the required capital levels through other means
(Group 2 banks; Tables 7 and 8). The capital injection was made by the FROB in both Group 1 and Group 2 banks.

Table 7. Funds requested by Spain for Group 2 banks
Tranche

Disbursement

Value date

Maturity

Loan amount (€ million)

Type

Tranche 2

Disbursement 1
Disbursement 1

05/02/2013

11/12/2024

932.5

Bank Recap

05/02/2013

11/12/2025

932.5

Bank Recap

Table 8. Split of the funds requested by
Spain for Group 2 banks

Institution

Amount
(€million)

Banco Mare Nostrum

730

Banco Ceiss

604

Caja 3

407

Liberbank

124

During 2013, the ESM received interest
payments (including the margin) from Spain
totalling €207.555.822. At the end of 2013,
the availability period of the Spanish facility
came to a close, and at this point the
undrawn amount of €58.67 billion under
the facility was automatically cancelled.

Gong Cheng
Policy Strategy Officer
Joined the ESM in January 2014
Worked as an economist in the
International Macroeconomics
Division at the Banque de France.
For a Chinese who is interested in
European affairs, joining the ESM
represents a unique opportunity
to work on the most pressing
issues related to the European
debt crisis. The frequent
interaction with open-minded
colleagues coming from all around
the world is both fascinating and
enriching.

ESM

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27

Box 4. Restructuring of the Spanish banking sector
With the inception of the crisis in 2008, the real estate
bubble burst and impaired loans in the Spanish banking
sector soared. After several attempts by the government
to restructure the banking sector through recapitalisations of banks and a rationalisation of the sector through
mergers of weak and strong saving banks (cajas), the sector went into deep distress with some institutions reporting significant deposit outflows. On 25 June 2012, the
Spanish government made an official request to the
Eurogroup for financial assistance for its banking sector.

transferred problematic assets (mainly loans to real
estate developers and foreclosed real estate assets) to
SAREB, the asset management company/bad bank.1
The recapitalisation of the banks was undertaken by the
FROB in the first quarter of 2013. The FROB took the
majority control of four banks via equity shares, and
recapitalised the remaining banks by investing in additional tier 1 convertible contingent bonds. In parallel, the
banks undertook subordinated liabilities exercises

Chart 8. Common Equity Tier 1 of Spanish banks under programme
12%
10%
8%
6%
4%

Group 1

2%

Group 1+2

0%
Mar. Apr. May Jun.
12 12 12 12

Jul.
12

Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun.
12 12 12 12 12 13 13 13 13 13 13

The financial assistance aimed to support the Spanish
government in restructuring the domestic banking sector in order to cover capital shortfalls identified in a number of banks. An initial top-down assessment exercise,
released in June 2012, indicated that the additional capital needs of the Spanish banking sector as a whole could
be estimated in a range of €51–62 billion. In July 2012,
the Eurogroup approved an envelope of financial assistance for Spain of up to €100 billion (including a safety
margin on the initial estimation) and the Spanish authorities signed a Memorandum of Understanding. The assistance was initially provided under an EFSF programme;
on 28 November 2012, the ESM Board of Governors
decided that such a financial assistance programme
would be assumed by the ESM.
The support to the Spanish banking sector was based on
three pillars. First, an asset quality review and a bottomup stress test on the 17 largest Spanish banks identified
individual capital needs. The stress tests identified in the
adverse scenario capital shortfalls of €55.9 billion in ten
banks. Two banks were able to cover a €3.4 billion capital
gap using capital management measures, mainly through
disposal of assets (€900 million), and raising fresh
capital (€2.5 billion). Second, eight banks with estimated
capital needs of €52.5 billion were requested to present
capital and restructuring plans to address the shortfalls
and to obtain public resources in line with state aid rules.
Third, banks receiving public support segregated and

Jul.
13

Aug. Sep. Oct. Nov. Dec.
13 13 13 13 13

(SLEs)2 that generated €13.6 billion of new capital. This
reduced the total capital needs to €38.9 billion from the
initial €52.5 billion.
The ESM’s financial assistance for Spain was accompanied by “horizontal conditionality” intended to strengthen
the banking sector as a whole. This included regulatory
capital targets, bank governance rules (including an indepth reform of the savings banks), an upgrade of reporting requirements and improved supervisory procedures.
The ESM financial assistance programme for Spain
expired on 31 December 2013 on a very positive note.
Not only did the banks return to profitability and the capital position of recapitalised banks become comfortable,
but also the overall economic recovery is clearly under
way. However, Spain will need to continue with structural
reforms to avoid the return of imbalances and ensure
sustainable growth.

1

The Spanish government, through the Fondo de Restructuración
Ordenada Bancaria (FROB) provided SAREB with €2.5 billion in the
form of equity capital and subordinated debt. After this capital
injection, the FROB held 45% of SAREB, while the remaining 55% was
held by private shareholders (mainly domestic banks and insurers).

2

The SLE regime was introduced in the Spanish legislation on 31
August 2012 with the Royal Decree-law 24/2012, which was then
transformed into the law 9/2012. The new SLE regime introduced the
obligation for subordinated bondholders to bear the losses arising
from restructuring and resolution of banks after the shareholders.

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Box 5. Addressing the challenges of the financial sector in Cyprus
In 2012, Cyprus was going through an unprecedented
banking crisis - its banking sector amounted to about
800% of GDP (Box chart 10). The reasons for the vulnerabilities in the banking system were twofold. First, Cypriot
banks had very large exposures to Greece, which resulted in losses of about €4 billion, or about 25% of the country’s GDP, following the Greek private sector involvement
(PSI) operation. Second, the banking sector’s domestic
problems were fuelled by weak credit standards, unwinding of the housing boom and the economic downturn,
which all together led to sizeable credit losses. According
to the stress-test carried out by the Central Bank of
Cyprus during the second half of 2012, Cypriot banks
had an estimated capital shortfall of €10 billion (about
60% of GDP).
Chart 9. Total deposits, excluding bailed-in amounts
(100=1 Jan 2013; last data 18 March 2014)
100

Resident deposits
Non-resident deposits

90
80

depositors). CPB was split into a going concern entity
and a liquidation vehicle, with about €4 billion of uninsured
depositors fully bailed-in. The going concern entity was
taken over by BoC, which was simultaneously recapitalised through a senior creditors’ bail-in. As a result of
these actions, the size of the Cypriot banking sector
decreased by about 150% of GDP.
The cooperative credit sector, with total assets close to
€17 billion, had an estimated capital shortfall of €1.5 billion. The sector was recapitalised through the use of programme funds after the approval of the restructuring
plan (which involves a significant consolidation in the sector and strengthening of its supervision). Hellenic Bank,
the country’s third-largest bank, which had a capital
shortfall of slightly over €300 million, was capitalised
through private sources3 in November 2013.
Chart 10. Total Assets of the Banking sector/GDP
(% to GDP; total assets in €bn)
160

900

140

800

120

700
600

100

70
60
Dec.
12

500

80

400

60

Feb.
13

Apr.
13

Jun.
13

Aug.
13

Oct.
13

Dec.
13

Feb.
14

300

40

200

20

100

Source: Central Bank of Cyprus

0

Some €8 billion of these losses were faced by the two
largest Cypriot banks — Bank of Cyprus (BoC) and Cyprus
Popular Bank (CPB) — which represented about 50% of
the domestic banking sector and held assets approximating 400% of the country’s GDP. The problems in
these two banks had to be solved expeditiously, given the
large capital shortfalls and a loss of confidence in the
overall financial system, evident from massive deposit
outflows in the first quarter of 2013 (Box Chart 9).
In March 2013, a decision was taken to resolve CPB and
to restructure BoC. Given the large capital needs and
the government’s limited financial capacity, these banks
had to be recapitalised with means other than public
money. As a result, bank creditors — junior and senior
bond-holders and uninsured depositors — were bailed-in.
The Greek operations of BoC and CPB, and also of
Hellenic Bank, were sold to a Greek lender (Piraeus Bank)
and the recapitalisation of BoC and CPB took place
through bailing-in of senior creditors (mainly uninsured

0
2006

2007

2008

2009

2010

2011

2012

2013

Source: Central Bank of Cyprus

The recapitalisation of the two largest banks in Cyprus
was unique and required exceptional solutions (such as a
bail-in of uninsured depositors). To mitigate further risks
to financial stability (deposit outflows), the authorities
decided to introduce temporary restrictions on the free
movement of capital. These restrictions will be lifted
gradually, according to the roadmap agreed between the
authorities and the programme partners in August 2013.
The principal challenge for the Cypriot banking system is
the management of non-performing loans, which currently stand around €30 billion (close to 200% of GDP).
Resolution of such a large issue will take time and has to
target both the debtor (insolvency regime) and the creditor (robust NPL management procedures and sufficiency of capital).
3

Hellenic Bank increased its capital by €103 million and issued two
CoCos in amounts of €126 million and €128 million, achieving a core
T1 ratio of 9.5%.

ESM

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Box 6. EFSF extension of maturities for Ireland and Portugal
On 12 April 2013, the Eurogroup agreed, subject to successful programme implementation, to lengthen the
average maturity of EFSF loans granted to Ireland and
Portugal by up to 7 years. The agreement aimed to support these countries’ efforts to regain full access to market financing and successfully exit their programmes by
smoothing their debt redemption profiles, lowering their
refinancing needs in the period subsequent to their economic adjustment programmes, and improving the countries’ debt sustainability.

Ireland
The extension of EFSF and EFSM loan maturities aimed
to improve the Irish redemption profile during the amortisation hump of 2014-25 and to support the country’s full
return to market financing. Ireland successfully exited its
programme on 8 December 2013 without requesting a
precautionary credit line. Subsequently Irish credit
default swap (CDS) spreads have tightened about 55
basis points (bps), down to 65 bps at the end of March
2014. Year to date, 10-year yields have moved lower by
about 50 bps, which is evidence of continuing positive
market sentiment toward Ireland’s public debt
sustainability.
Chart 11. Irish debt redemption profile:
Initial versus extended maturities (in €bn)
30

IMF/EFSM/Billateral & Other Debt (Dec. 2013)
EFSF Loans - Extended Maturities (Dec. 2013)

25

For EFSM loans the revised maturity dates of individual
loan tranches will be determined closer to their original
maturity dates because they have a back-to-back structure with bond issuance. Ireland is expected to start
repaying its EFSM loans from 2027.

Portugal
Similarly, the extension of EFSF and EFSM loan maturities aims to improve Portugal’s amortisation profile during the redemption hump of 2014-23 and to support the
country’s return to full market financing. Portugal also
successfully exited its programme on 18 May 2014 without requesting a precautionary credit line. Portuguese
credit default swap (CDS) spread stands currently (end
of April) at 170 bps, down 180 bps from January 2014
to date. Ten-year yields have compressed about 250 bps
in the first four months of 2014 alone, demonstrating
investors’ confidence in Portugal’s public debt
sustainability.
As a result of the maturity extension, principal repayment will start only from 2025 instead of 2015 and full
repayment is expected by 2040. The EFSF contributed
€26 billion to a joint financing package of €78 billion for
the Economic Adjustment Programme for Portugal
shared equally by the EFSM, the EFSF and the IMF. For
EFSM loans the revised maturity dates of individual loans
will be determined when they approach their original
maturity dates, as is the case for Ireland. Portugal is
expected to start repaying its EFSM loans from 2026.

EFSF Loans - Initial Maturities (May. 2013)

Chart 12. Portuguese debt redemption profile:
Initial versus extended maturities (in €bn)

20
15

20

IMF/EFSM/Billateral & Other Debt (Dec. 2013)

10

EFSF Loans - Extended Maturities (Dec. 2013)
EFSF Loans - Initial Maturities (Jun. 2013)

15

5

Source: Central Bank of Cyprus

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

0
2018

The first repayment of the EFSF loan to Ireland was
extended from 2015 to 2029. The loan is expected to be
fully repaid by 2042. The EFSF contributed €17.7 billion
to a joint financing package of €85 billion for the
Economic Adjustment Programme for Ireland agreed by
international and bilateral lenders in November 2010.

5

2016

Source: Central Bank of Cyprus

10

2014

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

0

ESM

Annual
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30

Funding activities
2013 review
In 2013 the ESM began its funding activities on the capital debt markets. The initial step was the establishment
of a short-term funding programme, which was followed
in October 2013 by the ESM’s inaugural bond issue.
Short-term funding programme
On 8 January the ESM launched its financing activities on
the debt markets with the auction of a 3-month bill. This
raised €1.927 billion, with a weighted average yield of
-0.0324% and was subscribed with a bid-to-cover ratio of
3.2. This initial bill was followed by the auction of a
6-month bill on 22 January.
The ESM continued to hold regular 3- and 6-month bill
auctions throughout 2013. These were held using the
Deutsche Bundesbank’s ESM Bidding System (EBS). The
auction dates for each quarter were communicated in
advance through the ESM’s newsletter.
The total amount raised in 2013 was €50.1 billion, with
€16.2 billion outstanding debt on 31 December 2013.

Before the inaugural bond issuance, the ESM embarked
upon an extensive roadshow to reach investors in Europe
and across Asia. A global conference call was also organised
for investors who were unable to meet the ESM directly.
On 8 October, one year after its inauguration, the ESM
launched its long-term funding programme with a €7 billion 5-year bond with a coupon of 1.25%. The issuance
spread at reoffer was fixed at mid swap minus 1 basis
point. The investor interest for this first ESM bond issue
was exceptionally strong, with an order of close to
€21 billion from 300 investors worldwide (Chart 13).
Chart 13. ESM Inaugural issue — Breakdown by region
and investor type
2%

38%

Euro Area
Rest of Europe
UK & Switzerland
Asia
Other

The ESM bill programme has effectively replaced the
EFSF bill programme, which was launched at the end of
2011. All maturing EFSF bills are refinanced through longterm funding from the EFSF or temporarily through the
proceeds of ESM bills.
Long-term funding programme
At the end of August 2013, the ESM announced the start
of its long-term funding programme with a funding target
for 2013 of €9 billion. The proceeds were to be used to
finance disbursements for the macroeconomic adjustment programme for Cyprus and also the maturing notes
that were provided to the Spanish government as part of
the recapitalisation of the banking sector. The ESM
announced that it would apply the same diversified funding strategy as the EFSF, using a wide variety of instruments and maturities. The ESM’s funding concept rests
on the issuance of benchmark-sized bonds and the strategic bill programme, complemented by other funding
tools such as money market lines with banks and debt
management offices (DMOs).
The initial objective of the ESM long-term funding strategy was to start building a liquid bond curve offering attractive investment opportunities in different maturities to a
well-diversified investor base.

39%

5%
16%
5%

1%

19%
Central Banks/
Gov/Sov
Wealth Fund
Banks
Asset managers
Insurance/
Pension funds
Other

32%
Source: ESM

43%

ESM

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31

The second ESM bond was launched and priced on 12
November with the placement of a 10-year bond. Again
the bond met very strong interest, with over €9.5 billion
in orders received. This investor demand allowed the
ESM to issue €3 billion at mid swap plus 19 basis points
and thus complete the funding target for 2013 and raise
an additional €1 billion.
Disbursements in kind
Another tool of the ESM funding strategy is the use of
disbursements in kind. This has also been used by the
EFSF within the context of the recapitalisation of the
Greek banking sector. Instead of immediately providing a
beneficiary Member State with cash raised from the
debt markets, the ESM provides the beneficiary with
ESM notes in kind. This process allows the ESM to fulfil
its mission efficiently by providing timely support to beneficiary Member States in significant amounts without having

to enter the market. This therefore avoids volatility due to
unexpected oversupply and gives the ESM the opportunity to raise the funds in the market over a longer period.
Notes in kind have been used for the recapitalisation of
the Spanish banking sector, when the ESM provided the
Spanish government with bills and bonds.
Using this same strategy, the ESM provided a €1.5 billion
18-month Floating Rate Note on 27 September to Cyprus
as part of the macroeconomic adjustment programme.
The Cypriot government used the notes for the recapitalisation of the cooperative banking sector.
Performance of ESM bonds
The two ESM bonds issued in 2013 have subsequently
provided a positive performance in the secondary market:
1.25% ESM 2018 and the 2.125% ESM 2023 (Chart 14).

Chart 14. Swap spread of the first two ESM bonds
20
ESM 10-year

15

ESM 5-year

10
5
0
-5
-10
Oct.
13

Nov.
13

Dec.
13

Jan.
14

Feb.
14

Mar.
14

Apr.
14

Source: ESM

ESM as a reference

Outlook for 2014

The ESM is included in all the major sovereign, supranational and agency (SSA) and government bond indices:

In 2014, the ESM funding programme will be used to continue financing the programme for Cyprus. It will also be
used to roll over the existing debt, specifically the bills and
floating rate notes provided for the Spanish bank recapitalisation, into longer-term debt. The ESM intends to continue to build a liquid curve of benchmark bonds.

• BoAML EMU Broad Market index;
• JP Morgan Maggie Euro Credit index;
• iBoxx EUR Sub-sovereigns index;
• Citigroup World Broad Investment Grade index;
• Citigroup Euro Broad Investment Grade index;
• Barclays Capital Euro Aggregate index.

The ESM Maturity Profile (Chart 15) shows the amounts
that the ESM has outstanding that will be required to roll
over into longer-term debt, since the loans will be repaid
only from 2022 onwards.

ESM

Annual
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32

Chart 15. ESM Maturity Profile
20,000
ESM SP+CY bank recap

ESM

15,000

15,365

18,500

Source:

37
20

34
20

32
20

29
20

27
20

26
20

25
20

24
20

22
20

21
20

20
20

19
20

18
20

17
20

16
20

15
20

20

14

0

23

3,000

7,000

5,000

20

10,000

ESM

Long-term funding programme

Applying the diversified funding strategy, the ESM will
finance these amounts using a combination of the shortterm programme through the bill auctions and the longterm programme through bonds issuance. Additional
funding may be available through complementary sources such as money market lines with DMOs or banks from
the ESM Market Group.

The ESM long-term funding target for 2014 is €17 billion.
Following its 5-year and 10-year bond issues in 2013, the
ESM’s funding strategy in 2014 is to continue to build a
yield curve that will provide investors with opportunities
across all maturities. The ESM issues benchmark-sized
bonds and will be able to tap existing bonds should the
opportunity arise.

Short-term funding programme
In order to provide investors with as much clarity as possible, the ESM announces its funding target for each
quarter.

The ESM bill auctions will continue on a regular basis. The
amounts raised at each bill auction may vary in order to
provide the ESM with some flexibility in its funding programme but normally are in the range of €1.5-3 billion for
each auction. The auctions are usually held on Tuesday of
the first and third full week of each month.

Table 9. ESM long-term funding targets for 2014
€ billion

Q1

Q2

Q3

Q4

Total 2014

ESM long-term funding

6.0

4.0

0

7.0

17.0

On 25 February 2014, the ESM placed its first bond of 2014 with the launch of a 7-year bond, thus establishing a new
point in the ESM yield curve. The issuance spread at reoffer was fixed at mid swap plus 7 basis points. The solid demand
prompted the ESM to issue €6 billion.

ESM

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33

João Sousa Gião

ESM and EFSF: one funding team and two issuers

Senior Legal Officer for
capital markets

When the ESM held investor roadshows in August and
September ahead of its inaugural issue, a frequentlyasked question was whether the ESM would take over
the funding activities of the EFSF. The answer was a clear
“No”. While the EFSF will not enter into any new programmes, it will remain a frequent issuer in the market in
order to roll over the funding of the loans of existing programmes to Greece, Ireland and Portugal. It will also have
to roll over existing debt into longer maturities. Only once
the outstanding debt and loans have been repaid (the
final loan matures in 2051) will the EFSF close down
(Chart 16).

Joined the EFSF in October 2011
Worked since 2002 at the Portuguese
Securities Commission (CMVM), becoming
Deputy Director of the Regulatory Policy
and International Affairs Department.
The opportunity to design from scratch
ESM’s funding instruments and to set up
the legal framework that governs the
investment of ESM’s paid-in capital was a
very exciting prospect. For a capital
markets lawyer, this means taking part in
some of the most strategically important,
global and publicly scrutinised transactions
in the world.

The ESM funding team therefore manages the funding
programmes for both the EFSF and ESM.

Chart 16. EFSF and ESM Maturity Profile
35,000
EFSF

EFSF GR bank recap

ESM SP+CY bank recap

ESM

Source:

3,000

3,500

37
20

34
20

2,500

32
20

1,500

29
20

27
20

26

9,600
4,000

3,000 5,000

3,600

20

25
20

24
20

10,000
6,974

22

23
20

5,000 5,000

20

21
20

20
20

19
20

18
20

17
20

16
20

15
20

20

14

0

3,000

5,000
19,986

17,000

13,500

5,000

7,484

14,845

10,000

13,500

15,000

13,500

15,365

20,000

5,000

18,500

25,000

5,000 7,000

30,000

ESM

To provide transparency and clarity regarding both funding programmes, the ESM sends out a quarterly newsletter. This is sent to over 600 investors and market
participants, and posted on the ESM website:
www.esm.europa.eu/about/publications/index.htm.

It covers the key features of the funding strategy over the
previous quarter and presents the main information for
the next quarter. Notably this includes the weeks when
the EFSF and ESM could potentially issue a bond and the
dates of the bill auctions.

ESM

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34

Box 7. Investor relations
A stable and well-diversified investor base is crucial to
the success of the ESM’s funding programme and therefore to the organisation’s ability to fulfil its mission.
Building on the extensive roadshows the ESM held to prepare for the launch of its long-term funding, the ESM
holds regular meetings and roadshows with investors.
As the ESM is a unique institution, it is essential that
investors understand its structure and organisation. In
addition, these meetings with investors have provided

good opportunities to share information on developments in the euro area, particularly progress in overcoming the crisis.
A dedicated Investor Relations department has been created to provide ESM investors with as much information
as possible, to be available to answer any questions and
to maintain a continuous dialogue with investors to properly understand their requirements.

Overview of investor relations activity in 2013

37

cities
visited

32

conferences
attended

103

one-on-one meetings
with investors

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Siegfried Ruhl
Head of Funding
Joined the ESM in January 2013
Worked in Bundesrepublik Deutschland Finanzagentur
since 2002 and was involved in the set-up/initiation of
EFSF/ ESM. Started career at the Bundesbank.
Setting up a new issuer from scratch is a once-in-alifetime opportunity. The environment is challenging and
we are constantly looking for innovative solutions. It is also
very rewarding to know that the funding we raise serves
a vital role in the stability of Europe.

Box 8. The ESM’s credit rating and the regulatory treatment of its issuances
The ESM is committed to maintaining a very high level
of creditworthiness in order to successfully fulfil its
mandate. Throughout 2013 it continued to rank
among the most creditworthy international financial
institutions, with a long-term rating of AAA with a stable outlook and a short-term rating of F1+ assigned by
Fitch, as well as a long-term rating of Aa1 with negative outlook and short-term rating of P-1 assigned by
Moody’s.
The ESM’s very high credit rating derives from the
institution’s intrinsic strength, determined by the following key elements:
• The ESM has a higher paid-in capital (slightly over

€80 billion) than any other international financial
institution. The ratio between its paid-in capital and
the callable capital (€621.7 billion) also compares
favourably with its peers.
• A lending capacity of €500 billion compared with a

total subscribed capital of €701.9 billion highlights
the low leverage of the institution.
• The paid-in capital is not used for lending and is

invested conservatively in assets of highest creditworthiness and liquidity. These assets also contribute to the coverage of due payments arising from
the ESM’s liabilities in the next 12 months, underpinning a strong liquidity position.
• The ESM’s Early Warning System, entailing reviews

of the financial conditions of the borrowers well in

advance of repayments, and its preferred creditor
status are strong credit-enhancing factors.
The credit assessments also acknowledge the strong
support provided by the euro area Member States
through a unique and exceptionally robust capital call
mechanism, which allows the ESM’s Managing
Director to call capital to avoid a default on obligations
without requiring approval by the Board of Governors
and Board of Directors. In this regard, a high share
(61.4%) of callable capital provided by shareholders
rated AA− and above by Fitch is also emphasised.
In addition to credit agencies’ views, the regulatory
treatment of ESM debt is also important for maintaining its diversified investor base. On 20 December
2013 the European Banking Authority (EBA) recommended to consider securities issued by the ESM,
among other asset groups, as transferable assets of
extremely high liquidity and credit quality. This recommendation is expected to be included in the delegated
act specifying liquidity coverage requirements the
European Commission is empowered to adopt by the
end of June 2014, as per Article 460 of the Capital
Requirements Regulation (CRR).
A recommendation to apply a favourable regulatory
treatment to ESM issuances was also included in the
announcement on 18 March 2014 by the Basel
Committee that the ESM will be included in the list of
entities receiving a 0% risk weight. Claims on the ESM
will therefore be treated as Level 1 High Quality Liquid
Assets (HQLA).

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Investment and Treasury
Investment Policy
The ESM Investment Policy ensures that investment of
the paid-in capital is done in an efficient and conservative
manner. By preserving the paid-in capital, the Policy
ensures that the maximum ESM lending capacity remains
available.
The Investment Policy Guidelines, approved by the Board
of Directors, defines the overall framework within which
the ESM carries out investment and treasury activities
and management.
Investment and Treasury decisions are overseen by an
Investment Management Committee chaired by the Chief
Financial Officer. The Internal Risk Committee (IRC),
chaired by the Head of Risk, verifies that all investments
conform to the ESM Risk Policy.
The Managing Director is responsible for implementing
the Investment Policy and for setting up the appropriate
governance framework.

Investment and Treasury activities
Article 6(2) of the ESM Investment Policy Guidelines stipulates that:
“The Managing Director shall ensure a smooth implementation of the ESM Investment Policy guidelines, once paidin capital has been paid. As an immediate investment of
the capital payments along the targeted Investment Policy
might lead to market price impacts, some temporary
divergence, namely a higher share in short-term and very
liquid assets, shall be tolerated.”
The ESM’s investment strategy in 2013 was influenced
mainly by the payments of the third and fourth €16 billion
instalments of paid-in capital by ESM Members, in April
and October respectively, following the first two instalments paid in at the end of October 2012. As the ESM
aims to ensure capital preservation, not only to reduce
its market risk exposure but also to be a neutral market
participant, it has designed a process to ensure all these
objectives are met.

In general, 2013 was characterized by a low-yield environment in debt markets and credit rating downgrades
across both sovereign and banking entities. As in 2012,
the past year also highlighted the increased inter-linkages between countries’ creditworthiness, banking sectors
and economic performance which can amplify systemic
risks. However, yields managed to climb and spreads to
tighten by the end of December, as the euro area macroeconomic environment improved, specifically in the
peripheral countries. The German government bond
2-year, 5-year and 10-year yields were up respectively by
22, 62 and 61 basis points with a steeper 2-year–5-year
curve over 2013. The two paid-in capital instalments in
2013, made at the end of April and October respectively,
occurred in a near zero yield environment for maturities
up to two years.
Despite these challenges, the ESM’s investment strategy
was regularly adapted to the rapidly changing environment of the global financial markets, with the primary
objectives of strengthening the credit quality and liquidity
profile of the investment portfolios while limiting the volatility of their returns. Indeed, in the context of this very low
yield environment and the high risk of negative returns,
the overriding objective was preservation of capital rather than return generation.
Another important feature of the strategy during the
investment of the paid-in capital instalments was being
cognisant of market liquidity conditions and avoiding an
impact on market prices. As a result, the two paid-in capital instalments were invested progressively, without
affecting the targeted market segments. The ESM’s
Investment and Treasury implemented a conservative
asset mix prioritizing high credit quality issuers and
investing in low yield but low risk instruments and strategies, including a high initial cash cushion deposited with
central banks, while concurrently constraining the average portfolio modified duration to the lower bounds of
the target ranges, as well as limiting portfolio curve
exposure.
Looking beyond the 2013 financial year, during the first
quarter of 2014 the investment strategy remained
unchanged. Improved market conditions offered limited
opportunities for return generation, such as modest
duration extensions to capitalize on relatively steeper
yield curves for short-term maturities and take advantage of carry and roll-down effects.

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All ESM investment and treasury activities continue to be
thoroughly reviewed and are subject to a wide range of
controls carried out by Middle Office to ensure full compliance of these activities with relevant policies.

Based on the successful strategy for the investment of
paid-in capital instalments during 2013, a similar prudent
and neutral approach will be implemented for the deployment of the last instalment of the paid-in capital scheduled for the end of April 2014, in the context of prevailing
market conditions.

Yasser Abdoulaye
Senior Portfolio Manager
Joined ESM in December 2012
Worked as Senior Investment Officer at African
Development Bank’s Treasury in Tunis for over
five years, after seven years at Natixis Asset
Management in Paris as Fixed Income Portfolio
Manager.
The ESM is a productive workplace as it
encourages staff in creative thinking and
discipline, in a good working and learning
environment at the edge of recent technology
in every aspect of the institution’s activities.

Box 9. Investment and Treasury performance
During 2013 the aggregate performance of the paidin capital, which represents the profit and loss relative
to the amount of invested assets, was positive.
This performance was achieved despite an adverse
yield environment. Throughout 2013 relevant yield
curves steepened: as a reference, the Germany 2-year
and 5-year yields were up by 22 bps and 62 bps
respectively and France 2-year and 5-year yields rose
by 22 bps and 59 bps. The ESM’s prudent investment
strategy, consisting of progressive investment of the
proceeds of the paid-in capital over time, mitigated the
negative impact of decreasing prices.

In 2013, the individual performance of both the shortterm and long-term portfolios was positive and relatively better than the respective comparable index
(benchmark). For the short-term portfolio the 2013
performance of the most common relevant index was
8.5 bps and the performance of a generic 3M German
bill was -0.2 bps; with regard to the medium- to longterm portfolio the performance in 2013 of the most
common relevant index was 5.1 bps and for a generic
2Y German bond it was -2 bps.
The performance has remained positive during the
first four months of 2014 and has outperformed the
most common relevant indices.

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Risk management
The ESM has clear risk management objectives and an
established strategy to deliver them through appropriate
governance and core risk management processes. The
organisation’s approach to risk management derives
from the ESM Treaty and the High Level Principles for
Risk Management, both of which documents are publicly
available.
The ESM’s risk management objectives are stated in the
High Level Principles, and in summary are:
• To follow a prudent approach to risk-taking in order to

limit potential losses and to ensure continuity in fulfilling the ESM’s mandate and meeting its commitments.
• To maintain minimum capital requirements in order to

ensure the highest creditworthiness and to avoid
unexpected capital calls.
• To preserve the ESM’s funding, and hence lending,

capacity.
The ESM applies elements of its risk management framework to all aspects of its mandate, with the exception of
counterparty risk on financial assistance granted to ESM
Members experiencing severe financial problems, where
such assistance is indispensable to safeguard the financial stability of the euro area as a whole and of its Member
States. The ESM does not aim to generate profit on financial support granted to beneficiary Member States and
does not provide incentives for speculative exposures of
its investment portfolio.

Risk governance
The mechanisms for the governance of risk management
within the ESM include the various committees and decision-making bodies responsible for adherence and conformity with the ESM risk management framework as
well as how authority for decisions is delegated.
The Board of Governors delegates authority and accountability for establishment of the ESM risk management
framework to the Board of Directors and implementation
to the Managing Director. In addition, two risk committees have been established pursuant to the High Level
Principles for Risk Management:
• The Board Risk Committee is a permanent committee

of the Board of Directors. It advises the Board of
Directors on the overall current and future risk appetite, and assists the Board of Directors in reviewing
and overseeing the development and implementation
of the ESM risk management framework by the
Managing Director.

• The Internal Risk Committee is a permanent internal

committee of the ESM directly empowered by delegated authority from the Managing Director, whose members are the Management Board and the Head of Risk.
It considers and decides upon any matters of evaluating, monitoring and approving practices regarding the
implementation of the ESM risk management framework. It examines the overall risk profile and material
risk developments, and reviews the control
environment.

Risk appetite
A Risk Appetite Statement has been developed for the
ESM to provide a statement of the appetite for risk that
the ESM Board of Directors is willing to accept in the
execution of the organisation’s mandate. This risk appetite is then cascaded by ESM management and the Risk
department into relevant aspects of governance, policies,
frameworks and individual limits to ensure that all
aspects of the organisation’s activities remain within this
risk appetite.
In addition, internal statements have been drafted, defining the tolerance for specific material risks that the ESM
itself can manage and mitigate. These provide targets for
certain qualitative and quantitative measures relating to
target rating, capital adequacy, liquidity, ALM and funding,
financial and non-financial risks. These detailed provisions
for risk appetite objectives have been designed to accord
with other Board-approved policies, such as the
Investment Policy, and are overseen and monitored by
the Board Risk Committee.

Risk culture
The establishment of a strong risk culture is of paramount importance to the ESM. Risk culture is the combined set of individual and corporate values, attitudes,
competencies and behaviours that determine the ESM’s
commitment to the management of risk at all levels.
Supported by the Managing Director and the Management
Board, risk culture in the ESM is founded on a close alignment throughout the organisation with the objectives of
the risk management framework. Such a culture embeds
and operationalises an independent discipline, which in
turn ensures rigorous challenge and objectivity in
decision-making.

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Three Lines of Defence
Risk management is a shared responsibility between the various
parts of the organisation. The Three Lines of Defence concept, as established in
the High Level Principles and expected by stakeholders as best practice, sets out the
principles for ensuring the appropriate segregation of powers and duties, clearly drawn lines of
authority, and distinct roles and responsibilities for the management and control of risk. ESM staff have a
direct responsibility for understanding and managing risk, and are subject to the ESM Code of Conduct.

1st Line of Defence
Departments and business functions assume direct
responsibility for the day-to-day management of risk. All staff are
responsible for ensuring that risks relating to their operations are identified,
followed up and reported to the Risk department. Each of the First Line of Defence areas
conducts its activities to meet the objectives of the ESM in line with stated risk appetite,
operates within the limits, policies and guidelines set by the Risk department and other control
functions (such as Compliance and Legal), and is responsible for the risks taken in performing its function.
All staff are regarded as the First Line of Defence with respect to non-financial risks, particularly compliance and
operational risks.

2nd Line of Defence
This is principally an independent risk management
function responsible for ensuring that risks assumed by the
business are appropriately managed and controlled. It proposes mandates,
guidelines, policies and limits to ensure risk-taking remains within the institution’s
risk appetite, and provides reporting and monitoring of the organisation’s compliance with
risk governance. The Risk department exercises independent central oversight of risk and
ensures the comprehensiveness and consistent implementation of the risk management framework
by all business functions.

3rd Line of Defence
Internal Audit is an independent function responsible
for providing a reasonable assurance that the risk management
function is operating properly and efficiently. Internal Audit reports to the
Managing Director and has direct access to the Board of Auditors on issues
related to risk management. It provides independent assurance of the robustness and
correct application of risk management processes through identification, assessment,
monitoring and management stages, as well as identifying any operational weaknesses or defects.

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Risk management process
The ESM has chosen to implement
a systematic process for the management of the various types of
risk to which the organisation is
exposed in the course of executing
its mandate. The management of
risk at the ESM is a four-step process which applies equally to the
management of both financial and
non-financial risks:

• Risk identification

• Risk assessment

the identification of all
material risk exposures,
both financial (credit,
market and liquidity risk)
and non-financial.
• Risk monitoring and control

the on-going monitoring and
control of material risk
exposures, including limit
frameworks, key risk
indicators, reporting and
escalation.

the assessment of identified risk
exposures to determine their
materiality, based on a combination
of quantitative tools and expert
judgement.
• Risk management

the process of determining and
executing appropriate actions to
actively manage risk exposures,
such as mitigation, transfer,
reduction or acceptance of the risk.

Nature of ESM activities and key risks
The ESM is an intergovernmental, non-commercial entity,
established to support the stability of the euro area and
euro area Member States. In order to fulfil this mandate
successfully, the ESM needs to maintain the highest creditworthiness so as both to minimise the cost of borrowing to support lending operations and to ensure market
access. To achieve this aim, risk management policies
and the Investment Policy are formulated prudently and
conservatively.

Credit risk from lending is the risk of loss due to
the ESM lending to beneficiary Member States
(those to which stability support has been extended when facing financial difficulties) should they not fulfil
their contractual obligations. While its lending operations
result in significant lending exposure, the ESM Treaty
incorporates two measures for controlling the credit
risk:

1

• Heads of State or Government have stated that the

Nevertheless, as with all financial institutions, the ESM
remains subject to a number of types of financial and nonfinancial risks. These risks are a function of the nature of
the ESM’s mandate and operational activities, as well as
its operating model and financial policies. Appropriate
procedures and processes are implemented to identify,
assess and measure, monitor and manage these risks.

Credit risk
The foundation for the ESM’s credit risk framework has
been laid down in the ESM’s Investment Policy and the
High Level Principles for Risk Management approved by
the Board of Directors. In addition, the main principles of
the risk management framework have been defined in
the ESM’s Risk Policy. These are complemented by credit
risk policies adopted by the Internal Risk Committee.
Credit risk is the potential for loss arising from inability of
a counterparty, issuer, insurer, or other obligor to fulfil its
contractual obligations. The ESM is exposed to credit risk
from two sources: (1) lending and stability support activities, and (2) investment and funding operations.

ESM loans will enjoy preferred creditor status in a
similar fashion to those of the IMF, while accepting
preferred creditor status of the IMF over the ESM.
• As part of its Early Warning System, the ESM assess-

es the ability of a beneficiary Member State to repay
its obligations. Findings are summarised in a regular
report which is considered by the Internal Risk
Committee. This activity is in accordance with the
mechanism for drawing down callable capital if
required (see the publicly available “Terms and conditions of capital calls for ESM”).

2

The ESM encounters two main types of credit risk
in its investment and funding operations:

• Issuer and counterparty risk – the risk of financial loss

as a result of the non-fulfilment of contractual
obligations.
• Credit concentration risk – the potential for financial

loss due to investments being too heavily concentrated in a particular issuer, class of issuer, sector, country or similar category, and therefore being exposed to
the risk that issuer and counterparty risk losses could
be highly correlated with each other.

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The ESM is exposed to these risks through its need to
invest proceeds from its paid-in capital, the liquidity buffer
and the reserve fund.
Credit exposure is mitigated by a set of credit limits and
by minimum credit quality thresholds. Compliance with
these thresholds is checked against the ratings assigned

to counterparties, issuers and individual issuances, by
the three major rating agencies, namely Fitch, Standard
and Poor’s, and Moody’s. In addition, credit risk is also
mitigated through the use of collateral which is also subject to eligibility requirements and margin calls. Credit
risk exposures, and compliance with credit risk rules, are
measured and monitored daily.

Market risk
Market risk is the risk of losses arising from changes in the values of financial assets and
liabilities (including off balance sheet items) due to fluctuations in market factors such as
interest rates, foreign exchanges and prices of securities. Market risk can be structural (in
relation to assets and liabilities) or non-structural (in relation to investments). The ESM has
both types of market risk: structural for the lending and funding activity, and non-structural
in relation to the investment of the paid-in capital.
The main market risk that the ESM faces is interest rate risk, which is the potential for loss
arising from adverse movements in market yields or the term structure of interest rates.
This type of risk can manifest itself in different ways:

Non-Structural

Structural

• General interest rate risk is the risk of loss due to an adverse change in

the overall level of interest rates acting on the net level of interest rate
exposure between assets and liabilities.
• Refinancing risk is the risk of loss of income arising from the differences

in maturity profiles of the assets and liabilities (maturity mismatch or
ALM risk) due to changes in the term structure of interest rates, i.e.
steepening or flattening of the curve. Refinancing risk occurs when the
maturity of assets is longer the maturity of the liabilities used to fund them.
• General interest rate risk is the risk of loss due to an adverse change in

the overall level of interest rates affecting the value of the investments.
There will not be a realised profit or loss unless the investments are subsequently sold at the new interest rate level.
• Basis risk is the risk of loss due to an unexpected divergence in the

spread between different sectors of the interest rate market used as
the basis for pricing the investments, or between a derivative product
and the exposure it is hedging.

Structural interest rate risk is controlled by reference to
cashflow projections performed by the ALM function, leading to a requirement for available cash to repay maturing
bills and bonds, supported by a short-term liquidity buffer as
defined in the Investment Policy. The ESM is required to
maintain coverage of all outflows up to one year using the
liquidity buffer and a set proportion of its capital. Even

though all funding costs arising from refinancing risk are currently “passed through” to beneficiary Member States
under financial assistance, as defined by the ESM Pricing
Policy, the ESM measures and monitors this risk continually,
since it is generally the case that long-dated assets will be
funded by shorter-dated liabilities.

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Non-structural interest rate risk is controlled by a series
of limits on portfolio duration, monitored daily. There are
also longer-term value-at-risk (VaR) limits for each
tranche of the paid-in capital as described in the
Investment Policy. These are monitored by means of a
VaR calculation, which is performed daily on the portfolio
using a 99% confidence level. The daily values are then
converted to longer-term values and compared with risk
appetite.
VaR does not measure the worst loss that could be experienced. Hence, in addition, various yield curve and market sensitivity stress tests are carried out daily, as well as
periodic exercises related to economic scenarios that
are then reviewed at the Internal Risk Committee and, in
some cases, at the Board Risk Committee.

The ESM recognises other market risks. Credit spread
risk is the risk of loss on an investment in a debt security
as a result of a decrease in the value of the security due
to an actual or market-implied decrease in the creditworthiness of the issuer. Spread risk can be specific to a particular issuer as well as being driven by changes in sector,
country and other relevant spreads. This risk is controlled
within the set of value-at-risk limits described above.
Foreign exchange risk is the potential for loss arising
from changes in the exchange rates. Since the ESM currently funds and invests only in the euro, this risk is not
present. The ESM also currently does not use derivative
instruments in any of its activities.
Table 10 gives a daily and annualised VaR comparison
between the end of 2012 and the end of 2013.

Table 10. Daily and annualised VaR comparison, 2012 and 2013
Portfolio value
in € million

1 day Value-at-Risk
in € million

Daily % of portfolio value

Annualised % of
portfolio value

As at 31.12.2013

78,307

56

0.07%

1.13%

As at 31.12.2012

32,973

19

0.06%

0.93%

Liquidity risk
Two main types of liquidity risk are faced by the ESM:
• Funding liquidity risk is the risk of losses arising from

difficulty in securing the necessary funding, or from a
significantly higher cost of funding than normal levels,
due to a deterioration of the ESM’s creditworthiness,
or at a time of unfavourable market conditions (such
as periods of high stress).
• Liquidity concentration risk is the potential loss arising

from concentrations in assets and liabilities as major
sources of liquidity, particularly in times of market
stress.

sation further minimises liquidity risk through a diversified funding strategy. The notes to the ESM Financial
Statements provide a table of liquidity gaps by maturity
band, and the section covering funding in this Annual
Report describes the strategy and instruments used to
fulfil ESM’s liquidity needs (see page 30).
A third type of liquidity risk, market liquidity risk, is the
potential for loss arising from a position that cannot easily be unwound or offset at short notice without significantly influencing its market price due to inadequate
market depth or market disruption. This risk is controlled
by limits such as the total proportion of a bond issuance
that can be held.

Non-financial risks

ESM addresses these liquidity risks by holding sufficient
capital at all times, invested in appropriately liquid assets,
plus an adequate liquidity buffer to cover short-term liquidity
needs. The liquidity buffer is managed according to two principles: (1) it must comply with sound liquidity risk management principles; and (2) it may not become too large
compared with these risks, so as not to generate excessive
cost of carry for beneficiary Member States. At the end of
December 2013, the liquidity buffer stood at €5.0 billion; on
average in 2013 it was €5.0 billion.

The ESM is subject to a number of non-financial risks due
to the nature of its activities and its mandate, which
include operational risk, reputational risk, legal risk, compliance risk and political risk. Careful vigilance in regard to
all of these risks is a major priority for the ESM. Each is
identified, assessed and monitored by the relevant ESM
department, with periodic oversight provided by the
Internal Risk Committee and Board Risk Committee.

The ESM continually monitors funding conditions, and
stresses its projections of asset and liability cashflows
based on a number of alternate assumptions. The organi-

Operational risk is the potential loss and/or damage
(such as the inability of the ESM to fulfil its mandate)
resulting from inadequate or failed internal processes,

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Françoise Blondeel
Head of Middle and
Back Office
Joined the ESM in March 2012
Worked previously for the French
Ministry of Finance and the DMO in
the post trade and risk
department.
I was very enthusiastic to help build
an adequate control framework for
ESM financial trades. I very much
enjoy working at creating new
public institutions where a spirit of
adventure, professionalism and
commitment coexist.

people and systems or from external events. The categorisation of the ESM operational risks is based on guidance from the Basel Committee on Banking Supervision
known as Basel II (2006), namely risks related to:
• Execution, delivery and process management
• Counterparts, products and business practices
• Internal and external fraud
• Business continuity and system failures
• Employment practices and workplace safety
• Damage to physical assets

The ESM’s risk appetite contains no tolerance for material operational risks and a very low tolerance for other
operational risk losses.
All departments ensure proactive mitigation of operational risks and robust controls in their processes. Should
specific operational risk events occur, these are reported
to an internal operational risk register. Follow-up of
events takes place to establish causes and agree on mitigating actions. Formal escalation procedures are established involving the Internal Risk Committee and the
Board Risk Committee in order to ensure active involvement of senior management and, where necessary, the
Board of Directors in addressing operational risk issues.

The above approach to operational risk management is
complemented by an annual self-assessment of the top
operational risks of the ESM (based on likelihood and
potential impact), which are reviewed and monitored by
the Internal Risk Committee.
Reputational risk is the risk of loss and/or damage arising from a deterioration in the ESM’s reputation, reducing its access to the market, lowering of credit rating,
loss of political capital, inability to attract suitably qualified
staff and other similar consequences. This risk is managed by the ESM undertaking its mandate in accordance
with the highest professional standards and prudent
management of risks, and by having centralised coordination of external communication, including permanent
media monitoring, regular meetings with journalists covering the ESM, and membership of a network of European
institutions maintaining an alert on reputational risks.
Legal risk is the risk of loss as a result of: (1) inadequate
or inefficient documentation, legal capacity, enforceability
of national and international laws, (2) litigation against the
ESM or its assets and (3) non-compliance with the Treaty
establishing the ESM, associated By-Laws or any other
applicable laws and contractual obligations. Legal risk is
managed by obtaining review and advice from internal
and external legal counsel to ensure ESM activities are in
compliance with the law and supported by enforceable,
robust contractual arrangements.
Compliance risk is the risk of loss and/or damage associated with the non-compliance with internal policies, procedures and guidelines as well as any external policies,
regulations and directives which might govern the ESM.
The Code of Conduct, as part of the ESM legal framework,
defines the fundamental ethical principles to be assumed
by ESM personnel, such as the requirements regarding
the employee’s integrity and loyalty, guidelines for handling conflicts of interest, prohibitions on insider trading,
restrictions on financial interest and rules regarding confidentiality of information. Compliance risk is managed by
the Compliance Officer, who on behalf of the Managing
Director identifies and assesses compliance risks, formulates policies in such areas as anti-money-laundering control and information barriers, and provides guidance and
training to staff on compliance matters, particularly in
relation to the Code of Conduct.
Political risk is the risk of loss and/or damage arising as
a result of a single or multiple political events that affect
the ESM’s ability to perform its mandate (for example, by
reducing access to the market for funding). Political risk
is managed principally by the ESM Board of Governors
and closely monitored by the ESM Managing Director.

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Eleftheria Christakou
Communications Officer
Joined the ESM in March 2013
Previously held communications positions in Eurobank,
Hellenic World Foundation and the Greek Ministry of
Finance; also a visiting academic lecturer.
I joined the ESM in the midst of a crucial period for
Greece, my country of origin, having a clear vision,
which eventually became everyday work reality:
effectively contribute to the effort of assisting euro
area countries with financial difficulties, and personally
evolve as a communications professional.

Transparency and communication
Since its creation in October 2012, the ESM has proved
its commitment to transparency. It communicates frequently with its stakeholders and also with the general
public. Those interested in the ESM are entitled to understand what the organisation is and what it does. This
commitment was demonstrated in 2013 through the
consistent presence of the ESM in the public domain.
The ESM’s communication is shaped by its specific mandate and institutional nature. The ESM’s mission is to provide financial assistance against conditionality to
safeguard financial stability in the euro area as a whole or
in its Member States. The institution’s actions are directly controlled by its shareholders, the 18 euro area
Member States. As the shareholders’ political appointee,
the Managing Director is at the centre of the organisation’s communication.
Following continuous interest from the public, the
Managing Director and ESM senior staff made numerous media appearances. This helped to explain the ESM’s
actions, economic developments in the euro area
Member States, particularly those with assistance programmes, market developments, policy decisions concerning the euro area, and the wider economic context
that influences the euro area. Given the global interest in
the currency union and the ESM’s global investor base,
there is also a significant global communication effort.
The Managing Director participates in the press conferences held at the conclusion of the monthly euro area
finance ministers’ meetings. On an ad hoc basis, the
Managing Director also visited individual euro area
Member States.

The Managing Director and ESM senior staff participated
throughout 2013 in several meetings and conferences
worldwide, attended by policy-makers. The speeches,
presentations and video recordings of these conferences are available on the ESM’s website:
www.esm.europa.eu/press/index.htm.
Following an invitation by the European Parliament in 2013,
the Managing Director attended meetings of the Economic
and Monetary Affairs Committee. Since the ESM is not an
EU institution, this participation is done on an ad hoc basis
with a view to inform and debate with the European people’s
representatives. In its Luxembourg headquarters the ESM
regularly accommodated requests of visitor groups for onsite institutional presentations.
Press releases are the standard means of communication for all important news regarding the ESM. Communication of important topics, such as Spain’s ESM programme
exit in December 2013, is reinforced by comprehensive
information packages. Public communication is further
underpinned by the use of social media.
The ESM Annual Report, presented to the Board of
Governors at the Annual Meeting, is the organisation’s
reference document with an extensive description of its
mandate, its activities and the economic situation of the
euro area with a view to its crisis resolution and financial
stability. The 2012 Annual Report was the first and,
although it covered only three months of activities, it presented the new institution to all interested audiences.
The ESM’s shareholders, other stakeholders and the public can find a comprehensive and regularly updated set of
relevant information, such as legal documents, financing
agreements, institutional information, and programme
and investor-related information, on the ESM website.

ESM

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45

Chapter

3

Institutional Framework
and Organisation

ESM

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ESM financial assistance instruments

Stability support loans
within a macroeconomic
adjustment programme

Secondary
market
purchases

Objective:
to support the sound functioning of the government debt
markets of ESM Members in
exceptional circumstances
where the lack of market liquidity threatens financial stability.
Such intervention is designed to
enable market-making that
would ensure some debt market
liquidity and incentivise investors to further participate in the
financing of ESM Members.

to assist ESM Members in significant need
of financing, but which have lost access to
the markets, either because they cannot
find lenders or because lenders will provide
financing only at excessive prices that would
adversely impact the sustainability of public
finances.
Conditionality:
to ensure a return to full market financing
and a sustainable economic and financial
situation, all loans are subject to a macroeconomic adjustment programme which
includes appropriate conditionality prepared
by the Commission, in liaison with the ECB
and, where appropriate, the IMF.
Monitoring:

Scope:
secondary market support
could be provided for ESM
Members under a macroeconomic adjustment programme
and also for non-programme
Members whose economic and
financial situation is fundamentally sound, as determined by a
set of eligibility criteria.
Conditionality:
for countries with a macroeconomic adjustment programme,
no additional conditionality is
required. For ESM Members
outside of a programme, the
European Commission, together
with the ECB, would negotiate
the policy conditions with the
ESM Member concerned.

Instrument to
implement

Objective:

Programme

Primary
market
purchases

Objective:
to support the sound functioning of the government debt
markets of ESM Members in
exceptional circumstances
where the lack of market liquidity threatens financial stability.
Such intervention is designed to
enable market-making that
would ensure some debt market
liquidity and incentivise investors to further participate in the
financing of ESM Members.

the Commission, in liaison with the ECB, and
wherever possible the IMF, is entrusted with
monitoring compliance with the conditionality. The beneficiary ESM Member is obliged
to provide these institutions with all the
information necessary to monitor the
agreed policy conditionality and for the ESM
to perform its financial due diligence.

Conditionality:

Disbursements:

primary market purchases will
be conducted at market prices.
The amount purchased by the
ESM will, as a rule, be limited to
50% of the final issued amount.
The means of implementation
will depend on the issuance
approach taken by the ESM
Member:

loans are provided in tranches, of one or
more disbursements. The disbursement of
the first tranche is decided by the Board of
Directors together with the approval of the
Financial Assistance Facility Agreement
(FFA). A decision regarding the disbursement of subsequent tranches of financial
assistance will subsequently be taken by the
Board of Directors on a proposal from the
Managing Director. If monitoring processes
highlight significant deviations from the
macroeconomic adjustment programme,
the Board of Directors may withhold the
disbursement of a tranche.

Standalone programme

no additional conditionality
beyond that of the underlying
(fully fledged or precautionary)
programme.
Procedure:

• Via a participation in auc-

tions, at the average weighted price of the auction.

• Via participation in syndi-

cated transactions, at the
re-offer price.

ESM

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Precautionary
credit line

Loans for indirect bank
recapitalisation

Objective:

Objective:

to support sound policies and prevent crisis situations from
emerging. It aims to help ESM Members whose economic conditions are still sound to maintain continuous access to market
financing by strengthening the credibility of their macroeconomic performance while ensuring an adequate safety net.

to preserve the financial stability of the euro area by
addressing cases in which the roots of a crisis are
primarily in the financial sector and not directly
related to fiscal or structural policies. Loans limit the
contagion of financial stress by ensuring that a
government has the capacity to finance recapitalisation at sustainable borrowing costs and repair the
financial sector to eliminate vulnerabilities.

Two types of ESM credit line are available:
both can be drawn via a loan or a primary market purchase,
have an initial availability period of one year and are renewable
twice, each time for six months:
• Precautionary Conditioned Credit Line (PCCL):

available to a euro area Member State whose economic and
financial situation is fundamentally sound, as determined by
respecting six eligibility criteria such as public debt, external
position or market access on reasonable terms. The beneficiary country is obliged to respect these criteria after the
PCCL is granted.

• Enhanced conditions credit line (ECCL):

access open to all euro area Member States whose general
economic and financial situation remains sound but that do
not comply with some of the eligibility criteria for accessing a
PCCL. The beneficiary ESM Member is obliged to adopt corrective measures aimed at addressing such weaknesses and
avoiding any future problems in respect of access to market
financing. It must also ensure continuous adherence to the
eligibility criteria that were considered met when the credit
line was granted.

Once the credit line is granted, the beneficiary ESM Member
has the flexibility to request the draw-down of funds at any time
during the availability period.
Monitoring:
when an ECCL is granted or a PCCL drawn, the ESM Member is
subject to enhanced surveillance by the European Commission.
The scope of surveillance includes the beneficiary country’s
financial condition and developments in its financial system. It is
also obliged to carry out and report to assess the reliability,
completeness and accuracy of the public accounts for the
purpose of the excessive deficit procedure.

Eligibility:
the beneficiary Member State should demonstrate
an inability to:
• Meet capital shortfalls via private sector solutions

such as tapping new market investors or existing
shareholders.

• Recapitalise the institution(s) without generating

adverse effects for its own financial stability and
fiscal sustainability.

The financial institution(s) concerned should be of
systemic relevance or pose a serious threat to the
financial stability of the euro area or its Member
States. The beneficiary ESM Member should also
demonstrate its ability to reimburse the loan
granted.
Conditionality:
will apply in the domains of financial supervision,
corporate governance and domestic law relating to
restructuring/resolution. The policy conditions are
negotiated by the European Commission in liaison
with the ECB and a relevant European Supervisory
Authority (EBA, ESMA or EIOPA).
Monitoring:
compliance with EU State aid rules is enforced by
the European Commission, which also monitors
other policy conditions with the ECB and the relevant
European Supervisory Authority.

ESM

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Niyat Habtemariam

Governance

Corporate Governance
and Audit Officer
Joined the ESM in August 2013

ESM shareholders

Worked as a corporate
governance analyst in Brussels and
in London for MSCI Inc., a provider
of financial advisory services for
institutional investors.

The ESM’s shareholders are the 18 euro area Member
States. The contribution key for subscribing to ESM
authorised capital is based on the ECB capital contribution key, which reflects the respective country’s
share in the total population and GDP of the EU.
Member States with a GDP per capita of less than
75% of the EU average will benefit from a temporary
correction for a period of 12 years after their date of
adoption of the euro.

The ESM is a very special place to
work — a very young, dynamic and
comparably small institution. I am
surrounded by exceptionally
motivated, bright and capable
colleagues. I feel that I am
constantly learning new and
exciting things, which I find very
stimulating and rewarding.

Latvia’s accession
In July 2013, the Council of the European Union formally
approved Latvia’s accession to the euro area from
1 January 2014. According to the ESM Treaty, all euro
area Member States will become ESM Members.
Following Latvia’s application to join the ESM, the Board
of Governors approved its application in October 2013
and Latvia officially became the ESM’s 18th Member on
13 March 2014.

capital, which will be paid in five annual instalments of
€44.24 million. Latvia paid the first instalment on 19 March
2014, and the remaining four instalments will be paid annually until 2018.

Latvia’s ESM capital contribution key was set at 0.2757%.
With the correction mechanism, Latvia’s capital subscription is €1.93 billion, including €221.2 million in paid - in

Latvia’s accession in 2014 does not affect the capital
subscriptions of the other ESM Members, which remain
the same.

Table 11. Shares and Subscribed Capital per ESM Member
ESM Members
Belgium
Germany
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Luxembourg
Malta
Netherlands
Austria
Portugal
Slovenia
Slovakia
Finland
Total
Note: As at 13 March 2014

ESM key (%)

Number of shares

Subscribed capital (€ million)

3.4675
27.0716
0.1855
1.5878
2.8089
11.8709
20.3297
17.8643
0.1957
0.2757
0.2497
0.0729
5.7012
2.7757
2.5023
0.4264
0.8217
1.7924
100

243,397
1,900,248
13,020
111,454
197,169
833,259
1,427,013
1,253,959
13,734
19,353
17,528
5,117
400,190
194,838
175,644
29,932
57,680
125,818
7,019,353

24,339.7
190,024.8
1,302.0
11,145.4
19,716.9
83,325.9
142,701.3
125,395.9
1,373.4
1,935.3
1,752.8
511.7
40,0190
19,4838
17,564.4
2,993.2
5,768.0
12,581.8
701,935.3

ESM

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49

Governance structure

Board of Governors
The Board of Governors is the ESM’s
highest decision-making body; it
consists of government representatives
of each ESM Member. The European
Commission and the ECB may
participate in its meetings as observers.
On 11 February 2013,
Jeroen Dijsselbloem
succeeded
Jean-Claude Juncker
as the Chairperson of the
Board of Governors.

Board of Directors
The Board of Directors consists of senior officials from ESM Members who
have high competence in economic and
financial matters. The Board has 18
Directors, and the ECB and EC may
participate in the meetings as observers. The Board of Directors’ meetings
are chaired by the Managing Director.

Board of Auditors
The Board of Auditors is
an independent body
composed of five members. They are appointed
by the Board of
Governors upon proposals of the Chairperson of
the Board of Governors,
the supreme audit institutions of ESM Members
and the European Court
of Auditors.

Klaus Regling
Managing Director,
chairs meetings of the
Board of Directors

Managing Director
Risk Committee
The Risk Committee advises the Board of Directors
on the overall current and
future risk appetite and
strategy. It also assists
the Board of Directors in
ensuring that the risk
management framework
is implemented by the
Managing Director.
It comprises five Directors
elected from among
their peers.

The Managing Director is responsible
for conducting the current business of
the ESM under the direction of the
Board of Directors, which he chairs.
The Managing Director is the legal representative and the chief of staff of the
ESM. The Management Board assists
the Managing Director in conducting
the current business of
the ESM.

Compensation
Committee
The Compensation
Committee advises the
Board of Directors and
the Managing Director in
matters of staff compensation, and performs
periodic revision of the
compensation framework,
annual salary mass and
evolution of salary band
boundaries. It comprises
five Directors elected
from among their peers.

ESM

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Annual meeting of the ESM Board of Governors, 20 June 2013

Board of Governors
Key decisions
The Board of Governors meets at least once a year and whenever the affairs of
the ESM so require.
In 2013, the Board of Governors held six meetings and took the following key
decisions:
• Appointed the new President of the Eurogroup as the chairperson of the

Board of Governors (11 February 2013).
• Approved granting stability support to Cyprus (24 April 2013).
• Approved the 2012 Annual Report (20 June 2013).
• Approved the accession of Latvia to the ESM (23 October 2013).
• Appointed Mr Igors Ludboržs as a new member of the Board of Auditors to

replace Mr Harald Noack (16 December 2013).

ESM

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Members of the Board of Governors
Belgium
Koen Geens
Minister of Finance,
replaced Steven Vanackere, Minister of Finance
on 6 March 2013
Germany
Wolfgang Schäuble
Federal Minister of Finance
Estonia
Jürgen Ligi
Minister of Finance
Ireland
Michael Noonan
Minister of Finance
Greece
Giannis Stournaras
Minister of Finance

Latvia
Andris Vilks
Minister of Finance,
Member of the Board since 13 March 2014
Luxembourg
Pierre Gramegna
Minister of Finance,
replaced Luc Frieden, Minister of Finance
on 4 December 2013
Malta
Edward Scicluna
Minister for Finance,
replaced Tonio Fenech, Minister of Finance
on 13 March 2013
The Netherlands
Jeroen Dijsselbloem
Minister of Finance

Spain
Luis de Guindos
Minister of Finance

Austria
Michael Spindelegger
Federal Minister of Finance,
replaced Maria Fekter, Federal Minister of Finance
on 19 February 2014

France
Michel Sapin
Minister of Finance,
replaced Pierre Moscovici, Minister of Economy,
Finance and Industry on 2 April 2014

Portugal
Maria Luís Albuquerque
Minister of State and Finance, replaced Vítor Gaspar,
Minister of State and Finance
on 2 July 2013

Italy
Pier Carlo Padoan
Minister of Economy and Finance,
replaced Fabrizio Saccomanni, Minister of Economy and
Finance on 22 February 2014,
replaced Vittorio Grilli, Minister of Economy and Finance
on 28 April 2013

Slovenia
Uroš Čufer
Minister of Finance,
replaced Janez Šušteršič, Minister of Finance
on 21 March 2013

Cyprus
Harris Georgiades
Minister of Finance,
replaced Michael Sarris, Minister of Finance
on 3 April 2013,
replaced Vassos Shiarly, Minister of Finance
on 28 February 2013

Slovakia
Peter Kažimír
Deputy Prime Minister and Minister
of Finance
Finland
Jutta Urpilainen
Minister of Finance

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Board of Directors

Members of the Board of Directors

Key decisions
The Board of Directors ensures that the ESM is run in
accordance with its Treaty and By-Laws. It takes decisions as provided for by the ESM Treaty or decisions
delegated to it by the Board of Governors. In 2013, the
Board of Directors held 11 meetings and took the following key decisions:

Belgium
Jozef Kortleven
Counselor General,
Ministry of Finance

• Approved the disbursement of the second tranche

to Spain (28 January 2013).
• Appointed a new member of the Compensation

Committee (21 March 2013).
• Adopted the Terms of Reference and Rules of

Germany
Thomas Steffen
State Secretary,
Federal Ministry of Finance, Member of the
Compensation Committee

Procedure of the Risk Committee of the Board of
Directors (21 March 2013).
• Approved signing of the Financial Assistance Facility

Agreement between the ESM, the Republic of Cyprus
and the Central Bank of Cyprus (3 May 2013).
• Approved the disbursement of the first three

tranches to Cyprus (3 May 2013, 16 September
2013, and 17 December 2013).
• Approved the ESM Risk Policy (16 September

Estonia
Märten Ross
Deputy Secretary General for Financial
Policy and External Relations, Ministry of
Finance, replaced Martin Põder, Deputy
Secretary General for Financial Policy and
External Relations, Ministry of Finance on
21 October 2013

2013).
• Approved the Statute of the Administrative Tribunal

of the ESM (29 October 2013).
• Approved the administrative budget for the financial

year 2014 (28 November 2013).

Ireland
James O’Brien
Second Secretary General, EU and
International Division, Department
of Finance, Member of the Compensation
Committee

• Updated the ESM diversified funding strategy

(28 November 2013).

Key decisions in 2014 (until end of April):

Greece
Paniagiotis Tsakloglou
Chairman of the Council of Economic
Advisors, Ministry of Finance

• Approved the ESM Code of Conduct (12 March

2014).
• Approved the Early Warning System Procedure (24

March 2014).
• Appointed a new member and chairperson of the

Compensation Committee (24 April 2014).
• Approved the disbursement of the fourth tranche

to Cyprus (2 April 2014)

Spain
Iñigo Fernandez de Mesa Vargas
Secretary General of Treasury,
Member of the Compensation Committee

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France
Ramon Fernandez
Director General of the Treasury,
Ministry of Economy, Finance and Industry

The Netherlands
Hans Vijlbrief
Treasurer-general of the Ministry of Finance,
Member of the Board Risk Committee

Italy
Vincenzo La Via
Director General of the Treasury,
Ministry of Economy and Finance,
Chairman of the Board Risk Committee

Austria
Harald Waiglein
Director General for Economic Policy and
Financial Markets of the Federal
Ministry of Finance,
Member of the Board Risk Committee

Cyprus
George Panteli
Senior Economic Officer,
Ministry of Finance,
replaced Andreas Charalambous,
Director, Ministry of Finance
on 29 April 2013

Latvia
Sanita Bajāre
State Secretary,
Ministry of Finance,
Member of the Board since
13 March 2014

Luxembourg
Isabelle Goubin
Director of the Treasury, Ministry of Finance,
Member of Compensation Committee,
replaced Georges Heinrich,
Director of the Treasury, Chairman of the
Compensation Committee,
on 19 March 2014
Malta
Alfred Camilleri
Permanent Secretary,
Ministry of Finance, Chairman of the
Compensation Committee

Portugal
Isabel Castelo Branco
Secretary of State of the Treasury, Member
of the Board Risk Committee, replaced João
Sousa, Chief Economist, Ministry of Finance,
Member of the Board Risk Committee,
on 31 January 2014

Slovenia
Mitja Mavko
State Secretary, Ministry of Finance,
replaced Marko Pogačnik, State Secretary,
Ministry of Finance on 17 April 2013,
replaced Dejan Krušec, State Secretary,
Ministry of Finance, Member of the
Compensation Committee,
on 7 February 2013

Slovakia
Vazil Hudák
State Secretary, Ministry of Finance
Member of the Board Risk Committee

Finland
Tuomas Saarenheimo
Permanent Under-Secretary, Ministry of
Finance, replaced Martti Hetemäki,
Permanent State Under-Secretary,
Ministry of Finance
on 12 September 2013

ESM

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Members of the Board of Auditors

Katarína Kaszasová

Ulrich Graf

Marc Gengler

Igors Ludboržs

Jules Muis

Chairperson
as of 21 March 2014,
former Vice
Chairperson as of
8 October 2012

Vice Chairperson
as of 21 March 2014,
Member since
8 October 2012

Member as of
8 October 2012

Member as of
17 December 2013
replacing Harald Noack

Member as of
8 October 2012

Board of Auditors
The members of the Board of Auditors were initially
appointed on 8 October 2012 for a non-renewable term
of three years, with the exception of Katarína Kaszasová
and Ulrich Graf, whose names were drawn by lot to be
appointed for a non-renewable term of four years to
ensure Board continuity. New members to the Board of
Auditors will be appointed for non-renewable terms of
three years.
The Board of Auditors held 11 meetings in 2013. Additionally,
the Board of Auditors had two internal conference calls
and met once with the Board of Directors as well as with
the Risk Committee of the Board of Directors. During its
monthly meetings, the Board of Auditors was provided
with regular updates on ESM activities, ESM governing
bodies and other relevant issues and developments by
the ESM management and senior staff. The Board of
Auditors was also provided with presentations and written opinions by ESM management as well as external
experts on specific topics requested by the Board of
Auditors. Lastly, the Board of Auditors regularly met with
the internal audit function and monitored the work and
independence of the external auditors.

The Board of Auditors inspects ESM accounts and verifies that the operational accounts and the balance sheet
are in order. Further, it audits the regularity, compliance,
performance and risk management of the ESM in accordance with international auditing standards and monitors
the ESM’s internal and external audit processes and their
results. In fulfilling its role, the Board of Auditors also
reviewed the Financial Statements as at 31 December
2013 and carried out an independent follow-up audit of
the ESM and an independent audit of ESM Risk
Management. The Board of Auditors draws up an annual
report to the Board of Governors which is made accessible to the national parliaments and the supreme audit
institutions of ESM Members, as well as to the European
Court of Auditors and the European Parliament.

ESM

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Internal control
The ESM recognises the importance of effective internal
controls which provide the foundation for the safe and
sound operation of the organisation. In 2013, as part of
the maturing of the institution, the ESM Internal Risk
Committee and Board Risk Committee considered the
existing internal control standards with a view of adopting a best practice framework. The implementation of the
principles of the Basel Committee’s Framework for
Internal Control Systems in Banking Organisations
(1998) was agreed and the ESM achieved significant progress in the implementation of both entity level and process level controls.
Entity level controls have been addressed through the
ESM corporate governance structure, internal policies
and risk management activities. Specific control activities
at process level have also been established, including:

• Availability of internal financial, operational and compli-

ance data as well as external market information that
is relevant to decision making.
• Reliable information systems, which cover all signifi-

cant activities of the organisation. These systems are
robustly configured, continually monitored on an independent basis and supported by adequate contingency
arrangements.
• Any internal control deficiencies identified by business

lines or internal audit are reported in a timely manner
to the appropriate management level and addressed
promptly. Escalation levels are in place to ensure that
material internal control deficiencies are reported to
the Board of Directors via the Board Risk Committee.

• Top level reviews, four eyes checks, segregation of

duties, activity controls, monitoring of compliance with
exposure limits, formal rules requiring approval and
authorisation of transactions over certain limits, verifications and reconciliations.

Marcel Mosch
IT Officer
Joined the ESM in January 2013
Worked in information technology with a focus on human-computer
interaction at KPN Consulting, as a consultant for Cisco Systems and
at ING Investment Management.
The ESM is a great workplace. In my role I’m trying to create the best
user experience possible with state of the art technology. To do that
for such diverse and enthusiastic colleagues is inspiring.

ESM

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Organisation
ESM Organisational Structure (as of 31/12/2013)

Member of ESM Management Board

Managing Director

Klaus Regling

Head of Communication
Wolfgang Proissl

General Counsel

Internal Auditor
Leticia Lucas

Deputy General Counsel
David Eatough

Ralf Jansen

Head of Risk and
Compliance
Peter Harlow

Secretary General

Kalin Anev

CFO / Deputy MD

Christophe Frankel

Economics & Policy Strategy

Rolf Strauch

Head of HR
Sofie de Beule
Roloff

Head of IT &
Operations
David Wallace

Head of Investment
& Treasury
Vincent Fleuriet

Head of Funding
Siegfried Ruhl

Head of Economic &
Market Analysis
Agnès Belaisch

Head of Finance &
Control
Thomas Pies

Head of Corporate
Governance &
Internal Policies
Florian Zinoecker

Head of ALM and
Lending
Olivier Robin

Head of Middle &
Back Office
Françoise Blondeel

Head of Strategy &
Inst. Relations
Nicola Giammarioli

Deputy MD - Banking

David Vegara

Head of Banking
Andres Sutt

ESM

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Responsibilities of departments
Finance

Legal

The Finance department is responsible for raising the
funds to enable the ESM to fulfil its mission and to structure, negotiate and implement the Financial Assistance
Facilities. It monitors and manages the structural risks
(e.g. interest rate, liquidity) and performs the cash management function for the institution. The department also
ensures that all ESM financial transactions are being
adequately booked, settled, controlled and reported and
plays a front-end role in monitoring risks, including counterparty, settlement and operational. In addition, the
department manages the paid-in capital and implements
ESM Investment Policy.

The Legal department provides expert legal support and
legal documentation to the ESM and manages the legal
risks arising from the organisation’s unique mandate.
It works closely with all other departments to preserve
the ESM’s interests, provide an effective contribution to
ESM strategy with respect to the integrity of the business, mitigate legal risks that may result from ESM business activities, and provide legal advice regarding ESM
activities and operations. The department also manages
corporate legal structures and corporate aspects/matters, provides transaction support, and is involved in the
approval/review of new products.

Banking

Secretary General

The Banking department plays a key role in preparing the
institution for the implementation of the direct recapitalisation instrument after the 2013 Eurogroup agreement
on the main features of such instrument. It also participates, where appropriate, in the design and implementation of banking-related aspects of financial assistance
where such assistance is used to support financial institutions, and contributes to the evolving debate on the
banking union.

The Secretary General department provides key corporate services to the ESM and to external stakeholders,
and maintains relations with other international financial
institutions and organisations. The department is organised into four areas. Corporate Governance & Internal
Policies provides the secretariat to ESM governance bodies and develops internal policies, internal control framework, procurement, project management and business
continuity. IT & Operations provides information technology services, infrastructure and facilities. Finance &
Control develops and maintains the accounting policies,
prepares reports and accounts, monitors and reports on
the financial position and maintains effective controls.
Human Resources ensures that the ESM is able to
attract and retain excellent staff and fosters an inspiring
work environment.

Economics and Policy Strategy
The Economics and Policy Strategy department develops,
assesses and reviews the ESM’s policy strategy, financial
architecture and financial assistance instruments. It analyses the general macroeconomic environment and the
functioning of the financial markets, specifically in relation
to sovereign debt. In addition, it develops early warning
systems on macroeconomic and credit risks in programme countries, develops and maintains credit risk
assessment for ESM investment strategy, and represents/coordinates the ESM’s activity with euro area and
international institutions.

Internal Audit
Internal Audit is an independent and objective assurance
function that assists the ESM by bringing a systematic
and disciplined approach to evaluating and improving the
ESM’s risk management, internal control and governance processes. All activities, operations and processes
of the ESM may be subjected to internal auditing. Internal
Audit reports directly to the ESM Managing Director and
has its objectives set in the ESM Internal Audit Charter.

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Communication and Press

Tim Eckermann

The task of the Communication and Press department
is to explain to the public, media and all stakeholders
the ESM’s mandate and actions. To accomplish its task,
the department shapes its messages and provides
information through all available communication channels: website, interviews, speeches, press conferences
and other public appearances by the Managing
Director and the other members of the Management
Board, social media, publications and visitor groups. In
coordination with the other institutions of the euro
area and its Member States, the department seeks to
help shape a common political and economic narrative
for the entire currency union.

Human Resources
Senior Officer
Joined the ESM in September
2012
Employed by the World Bank
Group, currently on secondment
to the ESM.
My role involves developing HR
initiatives so the ESM attracts,
retains and develops great people
so that the institution can best
meet its mandate. We strive to
develop an interesting and
attractive work environment,
applying relevant HR practices
that meet the ESM’s current and
future needs.

Risk and Compliance
The Risk function is responsible for acting as a central
independent risk oversight function of the ESM, developing and maintaining a regular inventory of risks, identifying, assessing and proposing mitigating alternatives,
reporting risks in a consistent manner to ESM management and the Board of Directors, setting the limit
framework and escalating any limit breaches, and fostering a risk culture throughout the whole organisation.
The Compliance function seeks to assist the Managing
Director and staff in carrying out the mission of the
ESM in a manner that stands up to the closest public
scrutiny, by implementing a compliance framework
which upholds sound and responsible business practices. The Head of Risk and Compliance, reporting to the
Managing Director and chairing the Internal Risk
Committee, is the Chief Risk Officer.

Human resources
On 31 December 2013, the ESM had 110 staff members. The ESM Board of Directors approved a growth
of up to 165 staff members in 2014. The increase in
headcount supports the ongoing maturing of the
organisation. The ESM staff consists of managerial,
operational and support staff with backgrounds in both
the public and private sectors. Currently, around threequarters of staff are employed on fixed-term contracts
ranging from 2 to 5 years in length. In principle, all staff
starts on a fixed-term contract. Upon renewal indefinite contracts may be offered to staff currently
employed under fixed term contracts, in line with applicable rules. Additionally, non-core functions are outsourced to external public and private institutions
through service level agreements and other contractual arrangements.

Recruitment policy
The decision to recruit is taken by the Management
Board within the overall staff limit set by the Board of
Directors. When evaluating candidates, the ESM takes
every step necessary to ensure fair competition based
on merits and experience of applicants. Additionally,
the ESM aims to achieve a diverse workforce and
ensure equal treatment: that is, not to discriminate on
the grounds of age, culture, ethnic and racial background, family status, gender, nationality, physical ability, religion or sexual orientation; however, the crucial
hiring criteria are individual merit, experience and fit
with the position. Lastly, the ESM introduced a traineeship programme, designed to broaden the profile of
staff and provide students with the opportunity to contribute to the institution and learn from its staff.

Diversity
The ESM recognises that a strong commitment to
diversity and inclusion is not simply good for business,
but is also essential to business success as reflected in
the institution’s core values, including: teamwork,
respect and creativity.
The ESM employed 30 nationalities at the end of 2013.
The organisation recruits staff across the globe and is
not limited to nationals of ESM Members. Of all staff,
77% come from ESM Members, 15% from the remaining EU Member States and 8% from the rest of the
world (Switzerland, Australia, Canada, China, United
States, Brazil, New Zealand and India).

ESM

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The age distribution ranges from 26 to 64 years old, with
the following split: 14% 20–30 years, 46% 31–40 years,
29% 41–50 years, 9% 51-60–years, and 2% above 60
years. To attract young professionals, the ESM has built
relationships with leading universities around the globe,
further extending the organisation’s reach as an employer to different age groups. At the same time, the ESM is
also attracting staff aged above 50 years, which is a challenging age for career change.
The gender split is currently 68% male and 32% female.
The ESM Management Board is committed to achieve
better gender balance. The organisation has analysed
some of the challenges (lack of depth of the local employment market for dual careers, more male graduates and
candidates in financial services, contractual arrangements and relocation of families) and is trying to mitigate
these by providing support to moving spouses, actively
encouraging more women to apply, flexible working
arrangements (such as teleworking and part-time working), diversity working groups and training of management.
The ESM believes that these efforts will further diversify
its staffing profile and bring it closer to the goal of a more
rounded and balanced staff.

Secondment/fellowship programme
The ESM requested submissions from peer organisations and leading corporations in order to recruit highly
motivated and skilled individuals to be seconded to the
ESM for a period of two years, with an option to extend
for an additional year. Expertise in finance, economics,
law and corporate functions were the key areas of focus
for the secondment programme.
The ESM also opened a number of positions through the
Fellowship programme, inviting various institutions/corporations to submit secondee candidates.

Staff learning and development
The ESM places pronounced value on technical and professional skills development to ensure that members of
staff are equipped with the required competencies to
deal with current and future challenges faced by the ESM.
In 2013, the ESM offered a variety of learning and development courses for staff, based on their individual motivation and requirements, and the organisation’s overall
needs.

Box 10. ESM Administrative Tribunal
On 29 October 2013, the Board of Directors established the Administrative Tribunal of the European
Stability Mechanism (ESMAT) and adopted its Statute.
The ESMAT is an independent body which hears and
passes judgment on staff employment matters within
its competence as defined by its Statute.
The establishment of the ESMAT corresponds to the
need to give effect to the human right of access to
justice for ESM members of staff with regards to their
employment conditions. Given that the ESM members
of staff currently do not have access to the jurisdiction
of the Court of Justice of the European Union as the
ESM is a separate legal entity under Public
International Law, it was necessary for the ESM to
establish its own Administrative Tribunal. Further, the
design of the ESMAT complies with the principle of
good administration and cost effectiveness, as the
costs related to the ESMAT will be proportionate to
the number of cases to be dealt with.

The ESMAT is composed of five members, including a
President and a Vice-President. The members are
appointed for a renewable term of office of five years,
although at the inception of the ESMAT, two of the five
members were appointed for a first term of four years.
On 24 March 2014 the Board of Directors took note
the appointment as members of the ESMAT of:
Julian Currall, for a term of 5 years; Celia Goldman, for a
term of 5 years; Virginia Melgar, for a term of 4 years;
Haris Tagaras, for a term of 4 years; and Gerhard Ullrich,
for a term of 5 years.
The ESMAT inaugural meeting took place on 10 March
2014. During the meeting, Virginia Melgar was elected as President and Haris Tagaras as Vice-President.

ESM

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Chapter

4

ESM Financial Report
2013 results

Balance sheet

The ESM is the permanent crisis resolution mechanism
for the euro area. Its purpose is to provide stability support through a number of financial assistance instruments to ESM Members which are experiencing, or are
threatened by severe financial problems. On this basis,
the ESM is not profit-driven and does not provide incentives for speculative exposures of its investment portfolios. The ESM does not aim to reach any budgeted target
in respect of its financial result.

At year-end, the increase in the total assets was due to
the rise in the lending volume and the start of the ESM’s
own funding programme. In this regard, the ESM contributed to the new financial assistance programme for
Cyprus with disbursements of €4.6 billion and disbursed
additional €1.9 billion to Spain in 2013.

The operating income of the ESM is driven mainly by the
interest margin on its lending activity and the return on
the investment of its paid-in capital. The distinct elements
of the total cost of a loan are defined in the ESM Pricing
Policy.

To provide financial assistance to ESM Members, the
ESM relies on its funding activity. In 2013 the total liability
in respect of debts evidenced by certificates issued by
the ESM increased by 52.2% to €60.0 billion.
In 2013 the shareholders contributed additional tranches of paid-in capital totalling €31.4 billion. At year-end
these were invested in ESM assets in the form of cash
and equivalents, deposits with central banks, and debt
securities including fixed-income securities.

ESM

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61
Leticia Lucas
Internal Auditor
Joined the ESM in July 2013
Worked previously at
PricewaterhouseCoopers, Allianz Global
Investors AG and Equens SE.
It is gratifying to think that you are somehow
contributing to shape the future of Europe.
The ESM’s multicultural environment, teamwork orientation, dynamic and friendly
working atmosphere are also important
motivation factors for me.

Part of the proceeds of short term funding instruments
issued by the ESM was invested in short term instruments issued by the EFSF. The Transitional Investment
Portfolio (“TIP”) addresses the transitional aspects related to the emergence of the ESM as a new issuer in the
financial markets together with the continued rollover
activity of the EFSF. The TIP can have a maximum aggregate principal amount outstanding of €25.0 billion and will
expire at the end of 2014. As at 31 December 2013, the
TIP had a value of €9.1 billion (there were no TIP investments as at 31 December 2012).
Unrealised gains or losses resulting from the valuation of
the securities portfolio are recognised in the fair value
reserve within the equity position of the ESM. As at
31 December 2013, an unrealised valuation loss of
€115.7 million was recorded. This compares with an unrealised gain of €19.5 million at the end of 2012. The negative unrealised valuation result was mainly a consequence
of a general increase in yields towards year-end, which in
turn led to a decrease in market values for the existing
ESM portfolio. Due to the very conservative investment
strategy of the ESM, the variation of the fair value is
expected to be limited and the realisation of a loss at maturity or at the time of sale of an investment is highly unlikely.

Profit and loss account
For the financial year 2013, which was the first full year of
operation, the ESM recorded a positive net result of
€253.9 million, compared with a loss of €0.5 million for
the previous period, which was the year of inauguration of
the ESM with only 3 months of activity.

The ESM recorded an interest income of €352.8 million
for 2013. In parallel, the interest charges in relation to
the funding activities amounted to €110.7 million.
In addition to interest income on loans, the investment
income made from the paid-in capital contributed significantly to the result of the ESM. Due to the additional
tranches of paid-in capital of €31.4 billion in 2013, the
ESM recognised an interest income of €81.6 million,
compared with €3.8 million in 2012.
The operating costs, which include general administrative
expenses and depreciation of fixed assets, increased
mainly due to the transfer of staff from the EFSF to the
ESM and the fact that 2013 was the ESM’s first full year
of operation. As the ESM provides administrative services to the EFSF, €17.0 million of the operating costs were
charged to the EFSF and were recognised as other operating income. The ESM continues to focus on budgetary
discipline and effective cost control.

Outlook for 2014
As of 30 April 2014, the ESM has a paid-in capital of €80
billion. The investment of the full paid-in capital will be
reflected in the investment portfolio. To support its financial assistance programmes in 2014, the ESM has a
funding target of €17 billion. The ESM expects its net realised results to remain relatively stable.

ESM

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Financial Statements
31 December 2013

Contents
Balance sheet

63

Off-balance sheet

63

Profit and Loss account

64

Statement of changes in equity

65

Statement of cash flows

66

Notes to the Financial Statements

67

ESM

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63
BALANCE SHEET
As at 31 December 2013
(in €‘000)
Notes

31.12.2013

31.12.2012

Cash in hand, balances with central banks and post office banks
Loans and advances to credit institutions
(a) other loans and advances

5
6

4,968,640

7,675,815

22,976,514
22,976,514

16,501,514
16,501,514

Loans and advances to euro area Member States
Debt securities including fixed-income securities
(a) issued by public bodies
(b) issued by other borrowers

7
8

45,933,000

39,461,824

45,190,785
5,170,990
50,361,775
128
2,944
620,000,000
15,712,416
460,654

8,429,948
366,086
8,796,034
101
3,050
620,000,000
47,137,248
123,909

760,416,071

739,699,495

60,026,441
60,026,441

39,461,824
39,461,824

22,831
229,112

18,867
199,754

60,278,384

39,680,445

700,000,000
(115,716)
(498)
253,901

700,000,000
19,548
(498)

Total shareholders’ equity

700,137,687

700,019,050

Total equity and liabilities

760,416,071

739,699,495

31.12.2013

31.12.2012

4,368,000
4,368,000

60,532,000
60,532,000

ASSETS

Intangible assets
Tangible assets
Subscribed capital unpaid
Subscribed capital called but not paid
Prepayments and accrued income

9
10
2.13/15
2.13/15
11

Total assets
LIABILITIES
Debts evidenced by certificates
(a) debt securities in issue

12

Other liabilities
Accruals and deferred income

13
14

Total liabilities
SHAREHOLDERS’ EQUITY
Subscribed capital
Fair value reserve
Profit/loss brought forward
Profit/loss for the financial year/period

2.13/15
8

The accompanying notes form an integral part of these Financial Statements.

OFF-BALANCE SHEET
As at 31 December 2013
(in €‘000)
Notes
OFF-BALANCE SHEET
Commitments
(a) undisbursed loans to euro area Member States
The accompanying notes form an integral part of these Financial Statements.

22

ESM

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64
PROFIT AND LOSS ACCOUNT
For the financial year ending 31 December 2013
(in €‘000)
Notes

Year from
1 January 2013 to
31 December 2013

Period from
8 October 2012 to
31 December 2012

13,245

471

16

268,979

12,649

Interest receivable and similar income
(a) on loans and advances to credit institutions
(b) on loans and advances to euro area Member States
(c) on debt securities including fixed-income securities

70,600

3,369

352,824

16,489

(110,680)

(4,417)

(110,680)

(4,417)

105

258

(109)

(289)

Interest payable and similar charges
(a) on debts issued
Commissions receivable
Commissions payable
Other operating income

17,010

-

26,093

1,282

(13,965)

(217)

- wages and salaries

(10,292)

(123)

- social security

(3,673)

(94)

17

Net profit on financial operations
General administrative expenses
(a) staff costs

18

of which relating to pension
(b) other administrative expenses
Value adjustments in respect of intangible and tangible assets
Profit/loss for the financial year/period
The accompanying notes form an integral part of these Financial Statements.

19

(3,196)

(91)

(16,876)

(13,558)

(30,841)

(13,775)

(501)

(46)

253,901

(498)

ESM

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65
STATEMENT OF CHANGES IN EQUITY
For the financial year ending 31 December 2013
(in €‘000)

19,548

Profit/loss
brought
forward
-

Profit/loss for
the financial
year
(498)

-

-

(498)

498

Profit for the financial year

-

-

-

253,901

253,901

Fair value reserve

-

(135,264)

-

-

(135,264)

700,000,000

(115,716)

(498)

253,901

700,137,687

Subscribed
capital

Fair value
reserve

At 8 October 2012

-

-

Profit/loss
brought
forward
-

Profit/loss for
the financial
period
-

Subscription of capital

700,000,000

-

-

-

Loss for the financial period

-

-

-

(498)

(498)

Fair value reserve

-

19,548

-

-

19,548

700,000,000

19,548

-

(498)

Subscribed
capital

Fair value
reserve

700,000,000

Allocation of the result of 2012

At 1 January 2013

At 31 December 2013

At 31 December 2012

The accompanying notes form an integral part of these Financial Statements.

Total
700,019,050
-

Total
700,000,000

700,019,050

ESM

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66
STATEMENT OF CASH FLOWS
For the financial year ending 31 December 2013
(in €’000)
Year
from 1 January to
31 December 2013
Cash flows from operating activities:
Profit/loss for the financial year/period
Adjustments for:
Value adjustments in respect of tangible and intangible assets

Period from
8 October 2012 to
31 December 2012

253,901

(498)

501

46

Changes in:
Tangible and intangible assets
Accrued interest and interest received
Prepayments
Accruals and deferred income and interest paid
Other liabilities

(422)
(702,405)
(18,596)
79,744
3,964

(3,197)
(126,646)
(93)
(1,544)
18,867

Interest received

378,080

33,271

Up-front service fee received

32,325

197,340

Interest paid

(70,985)

-

Net cash provided by operating activities

(43,893)

117,546

Cash flows from investing activities
Change in debt securities including fixed-income securities
Change in loans and advances to credit institutions
Loans disbursed during the year

(41,701,005)
(6,475,000)
(6,465,000)

(8,802,969)
(16,501,514)
-

Net cash used in investing activities

(54,641,005)

(25,304,483)

Cash flows from financing activities
Payment of capital
Changes in debt securities in issue

31,424,832
20,552,891

32,862,752
-

Net cash provided by financing activities

51,977,723

32,862,752

Net increase/decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year/period

(2,707,175)
7,675,815

7,675,815
-

Cash and cash equivalents at the end of the year/period

4,968,640

7,675,815

The accompanying notes form an integral part of these Financial Statements.

ESM

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67
Notes to the Financial Statements

•

Commitment fee – the negative cost of carry and
issuance costs, charged for the period from raising
funds by the ESM until disbursement to the
Beneficiary Member State or for the period from the
refinancing of the relevant funding instrument until its
maturity. The commitment fee will be applied ex-post
on the basis of the negative carry actually incurred.

•

Service fee – the source of general revenues and
resources to cover the ESM’s operational costs.
The service fee has two components:

1. General information
The European Stability Mechanism (“ESM” or “the Entity”)
was inaugurated on 8 October 2012 and established as
an international financial institution with its registered
office at 6a, Circuit de la Foire Internationale, L-1347
Luxembourg, Grand Duchy of Luxembourg.
The Treaty establishing the ESM was originally signed by
finance ministers of the 17 euro area countries on 11
July 2011. A modified version of the Treaty, incorporating
amendments aimed at improving the effectiveness of the
mechanism, was signed in Brussels on 2 February 2012.
The ESM Treaty entered into force on 27 September
2012 and the ESM was inaugurated on 8 October 2012
following ratification by all 17 euro area Member States.
The present financial statements cover the period from 1
January 2013 to 31 December 2013. Comparative figures cover the period from the ESM’s inauguration on
8 October 2012 until 31 December 2012, which should
be considered when reading the financial statements.

•

i.

up-front service fee (50 bps) generally deducted
from the drawn amount,

ii.

annual service fee (0.5 bp) paid on the interest
payment date.

Margin – paid on the interest payment date. The
margin charged differs across financial support
instruments.
i.

For loans granted, the margin is 10 bps;

ii.

For primary market support facility, the margin is
10 bps;

On a proposal from the Managing Director, the Board of
Directors adopted the Financial Statements on 24 March
2014 and authorised their submission to the Board of
Governors for approval at their meeting on 19 June 2014.

iii.

For secondary market support facility, the margin
is 5 bps;

iv.

For precautionary financial assistance granted,
the margin is 35 bps;

1.1. General overview of the financial
assistance programmes

v.

For financial assistance provided to an ESM
Member for the recapitalisation of its financial
institutions, the margin is 30 bps.

The ESM is authorised to make use of the following lending instruments for the benefit of its Members, subject to
appropriate conditionality:
•

Grant financial assistance in the form of loans to an
ESM Member (ESM Shareholder) in the framework of
a macroeconomic adjustment programme;

•

Purchase of bonds or other debt securities in the
primary debt market and arrange operations on the
secondary debt market in relation to the bonds of an
ESM Member;

•

Grant precautionary financial assistance to ESM
Members in the form of credit lines;

•

Provide financial assistance for the recapitalisation of
financial institutions through loans to the
governments of ESM Members.

1.2. Overview of the pricing structure of the
financial assistance programmes
The total cost of financial assistance to a beneficiary
Member State is an aggregate of several distinct elements and established in the ESM Pricing Policy:
•

Base rate – the cost of funding incurred by the ESM,
derived by a daily computation of the actual interests
accrued on all of the bonds, bills and other funding
instruments issued by the ESM.

A penalty interest may be applied on overdue amounts,
which corresponds to a charge of 200 bps over the higher of the EURIBOR rate applicable to the relevant period
selected by the ESM and the interest rate which would
have been payable.

1.3. The ESM’s financial assistance to Spain
On 20 July 2012, the Eurogroup (consisting of the finance
ministers of countries whose currency is the euro)
reached political agreement that financial assistance
should be granted to Spain for the recapitalisation of its
banking sector following an official request made by the
Spanish government. The assistance mandated by the
Eurogroup was designed to cover the estimated capital
requirements along with an additional safety margin,
amounting to € 100 billion. The loans were provided to
the Fondo de Restructuración Ordenado Bancaria
(FROB), the bank recapitalisation fund of the Spanish government, and then channelled to the financial institutions
concerned. The assistance was initially committed under
a programme of the European Financial Stability Facility
(“EFSF”). On 28 November 2012 the ESM Board of
Governors decided, pursuant to Article 40(1) and (2) of
the Treaty Establishing the European Stability Mechanism
(the “Treaty”), that commitments of the EFSF to provide
financial assistance to Spain will be assumed by the ESM.

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On 3 December 2012, the Spanish government formally
requested the disbursement of € 39.5 billion of funds. On
5 December 2012, the ESM launched and priced notes,
which were transferred to the FROB on 11 December
2012. This marks the first instance of financial assistance provided by the ESM.
The FROB used these notes for the recapitalisation in the
amount of € 37 billion of the following banks: BFABankia,
Catalunya-Caixa, NCG Banco and Banco de Valencia.
Additionally the FROB provided € 2.5 billion to SAREB, the
asset management company for assets arising from
bank restructuring.
Furthermore on 28 January 2013, the Spanish government formally requested a second disbursement of € 1.8
billion for the recapitalisation of the following banks:
Banco Mare Nostrum, Banco Ceiss, Caja 3 and Liberbank.
The funds were transferred to the FROB in the form of
ESM notes on 5 February 2013.
On 31 December 2013, the ESM financial assistance
programme expired. The ESM disbursed a total of € 41.3
billion to the Spanish government for the recapitalisation
of the banking sector. The remaining undisbursed amount
of the facility was cancelled.
This was the first financial assistance programme carried
out by the ESM. Also it was the first time the instrument
of recapitalising banks through loans granted to a government was used. There were no contributions from other
lenders.

1.4. The ESM’s financial assistance to Cyprus
On 25 June 2012 the Cypriot Government submitted a
request for stability support to the President of the
Eurogroup. The key elements for a macroeconomic
adjustment programme were agreed by the Eurogroup
on 25 March 2013.
The agreement on the macroeconomic adjustment programme opened the way for members of the euro area to
decide on a package of financial assistance for Cyprus of
up to € 10 billion. On 24 April 2013 the ESM Board of
Governors decided to grant stability support to Cyprus.
On 8 May 2013 the ESM Board of Directors approved
the Financial Assistance Facility Agreement (FFA). The
ESM provides up to € 9 billion, and the International
Monetary Fund (IMF) contributes around € 1 billion.
According to the terms of the FFA, the first tranche of
financial assistance was provided to Cyprus in two separate disbursements. The first disbursement of € 2 billion
was transferred on 13 May 2013, and the second disbursement of € 1 billion was transferred on 26 June 2013.
The second tranche of assistance, in the form of € 1.5 billion of ESM floating rate notes, was disbursed on 27
September 2013. The Cypriot government will use the
notes for the recapitalisation of the cooperative banking
sector. Subsequently the third tranche of assistance of €
0.1 billion was disbursed in cash on 19 December 2013.

The financial assistance facility is designed to cover
Cyprus’s financing needs after the inclusion of proceeds
from burden-sharing measures adopted by the Cypriot
government. These needs include budgetary financing,
the redemption of medium and long-term debt, and the
recapitalisation of financial institutions with the exception
of the country’s two largest banks (Bank of Cyprus and
Cyprus Popular Bank, which were subject to restructuring and resolution measures by the Cypriot government).

2. Summary of significant accounting
policies
The principal accounting policies applied in the preparation of these Financial Statements are set out below.

2.1. Basis of presentation
The accompanying Financial Statements are prepared
and presented in accordance with the Directive 86/635/
EEC of the Council of the European Communities of 8
December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions, as
amended by Directive 2001/65/EC of 27 September
2001, by Directive 2003/51/EC of 18 June 2003 and
by Directive 2006/46/EC of 14 June 2006 (the
‘Directives’). Their specific application by the Entity is
described in the subsequent Notes. The Directive
2006/46/EC has been amended by Directive 2013/34/
EU. The ESM applies the same transitional period applicable to the Member States for transposition by 2016.
The Entity prepares an Activity Report (“description of
policies and activities”) which is presented separately
from the Financial Statements.
The preparation of Financial Statements in conformity
with the Directives requires the use of certain critical
accounting estimates. It also requires management1 to
exercise its judgment in the process of applying the
Entity’s accounting policies. Areas involving a higher
degree of judgment or complexity, or areas where
assumptions and estimations are significant to the
Financial Statements are disclosed in Note 2.3.

2.2. Basis of measurement
The accompanying Financial Statements are prepared on
a historical cost basis, except for the loans and advances
to euro area Member States and the debts evidenced by
certificates which are measured at amortised cost, and
the paid-in capital and reserve fund investments which
are measured at fair value with gains and losses being
recognised in the fair value reserve.
1

As per Article 7 (5) of the ESM Treaty the Managing Director shall conduct, under the direction of the Board of Directors, the current business
of the ESM; as per Article 21 (1) of the ESM By-Laws the Board of
Directors shall keep the accounts of the ESM and draw up its annual
accounts.

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2.3. Use of estimates
In preparing the Financial Statements, the management
is required to make estimates and assumptions that
affect reported income, expenses, assets, liabilities and
disclosure of contingent assets and liabilities. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the
future could differ from such estimates and the resulting
differences may be material to the Financial Statements.
Any revision to accounting estimates is recognised prospectively in current and future periods.
As described in the Note 1.2 concerning the overview of
the pricing structure of the financial assistance programmes, the ESM is entitled to charge 50 bps of upfront service and 0.5 bps annual service fee to cover the
ESM’s operational cost. The ESM recognises the up-front
service fees over a seven year period, to reflect to the
best the economy of the business and to match to the
best the occurrences of the expenses aimed to cover.
ESM reviews its loans and advances to euro area
Member States at each reporting date to assess whether a value adjustment should be recorded in light of the
ESM´s purpose as being a permanent crisis resolution
mechanism aiming to accompany beneficiary Member
States to return to public financial stability. In particular,
judgement by management and the ESM governing bodies is required in the estimation of the level of value adjustment, by determining the amount and timing of future
cash flows. No value adjustment has been required as at
31 December 2013 and 2012, and thus none has been
recognised.

2.4. Foreign currency translation
The ESM uses the euro (€), the single currency of the
Member States participating in the third stage of
Economic and Monetary Union, as the unit of measure for
the capital accounts of Member States and for presenting its Financial Statements.
Foreign currency transactions are recorded at the rates
of exchange prevailing on the date of the transaction.
Exchange differences, if any, arising out of transactions
settled during the year are recognised in the profit and
loss account as net profit or loss on financial operations.
Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated at
the closing exchange rates on that date.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the
exchange rates at the dates of the initial transactions.
Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the
date when the fair value was determined.
The exchange differences, if any, are recognised in the
profit and loss account and related assets and liabilities
are accordingly revalued in the balance sheet.

2.5. Cash in hand, balances with central banks
and post office banks
Cash in hand, balances with central banks and post office
banks include cash in hand, demand deposits and other
short-term highly liquid investments with original maturities of three months or less. Bank overdrafts, if any, are
shown within borrowings in current liabilities on the balance sheet.

2.6. Debt securities including fixed-income
securities
With a view to clarifying management of its financial
assets, the ESM has established the following portfolio
categories:

2.6.1. Paid-in capital and reserve fund investments
The provisions on the capital of the ESM are laid down in
Chapter 3 of the ESM Treaty. The initial aggregate nominal value of paid-in shares is € 80 billion. Moreover in
accordance with Chapter 5 of the ESM Treaty, the net
income generated by the ESM operations and the proceeds of the financial sanctions received from the ESM
Members under the multilateral surveillance procedure,
the excessive deficit procedure and the macro-economic
imbalances procedure established under the Treaty on
the Functioning of the European Union (TFEU) are put
aside in a reserve fund.
The proceeds of the paid-in capital and reserve fund are
invested in accordance with the Investment Policy approved
by the Board of Directors. The main objective of such investments is to ensure that the maximum lending volume is
always readily available, and to absorb potential losses.
The paid-in capital and reserve fund investments are segregated into separate portfolios (investment tranches).
The characteristics and relative size of each tranche are
described below:
Short-term tranche
The tranche with the highest requirements on liquidity
of investments is the Short-term tranche. The main
objective of the Short-term tranche is to allow the ESM
to face any temporary disbursement to cover any
shortfall due to a non-payment by a beneficiary country.
This tranche is invested in liquid investment instruments with a capital preservation objective at a oneyear horizon, with a high level of confidence.
Medium/Long-term tranche
The Medium/Long-term tranche has the main objective of ensuring the financial strength of the ESM.
This tranche is managed to enhance the return of
the Investment Portfolios subject to the constraints
specified in the Investment objectives as well as the
asset eligibility criteria. This tranche is also mainly
invested in liquid investment instruments, and could
also be monetised.

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The paid-in capital and reserve fund investments are initially recognised at fair value including any transaction
costs, and measured subsequently at fair value with gains
and losses being recognised in the fair value reserve,
except for impairment losses and foreign exchange gains
and losses, until the financial asset is derecognised.
Unrealised gains or losses are being accumulated in the
fair value reserve until such investment is sold, collected
or otherwise disposed of, or until such investment is
determined to be impaired.
If such financial asset is determined to be impaired, the
cumulative gain or loss previously recognised in the fair
value reserve is recognised in the profit and loss account.
However, interest is recognised on a straight line basis.

2.6.2. Liquidity buffer investments
The ESM’s borrowing strategy has to pursue several
objectives and principles to comply with the purpose
established in Article 3 of the Treaty. First, the market
environment under which the ESM operates is volatile.
The general borrowing strategy must therefore offer the
possibility to react rapidly to unexpected market developments, including through the building up of liquidity buffers
during episodes of systemic risk, and ensure market
access even in a difficult market environment with a high
degree of uncertainty.
The proceeds of the liquidity buffer are invested in accordance with the investment guidelines agreed for the shortterm tranche of the paid-in capital and reserve funds’
investments described in Note 2.6.1.

2.6.3. Transitional Investment Portfolio
The transitional investment portfolio comprises short
term notes issued by the EFSF. The aim of this purchase
is to provide intermediate short term financing to the
EFSF due to the transfer of the bill programme from the
EFSF to ESM. This portfolio will allow the EFSF to roll the
short term funding of the former EFSF bill programme
into long term funding. The portfolio is of temporary
nature and will expire at the end of 2014.
The securities of this portfolio are initially recognised at
fair value including any transaction costs, and measured
subsequently at fair value with gains and losses being recognised in the fair value reserve, except for impairment
losses and foreign exchange gains and losses, until the
financial asset is derecognised. Unrealised gains or losses are accumulated in the fair value reserve until such
investment is sold, collected or otherwise disposed of, or
until such investment is determined to be impaired.

2.6.4. Determination of fair value
For financial instruments traded in active markets, the
determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer
price quotations.

A financial instrument is regarded as traded in an active
market if quoted prices are readily and regularly available
from an exchange, dealer, broker, industry group, pricing
service or regulatory agency, and those prices represent
actual and regularly occurring market transactions on an
arm’s length basis.
Where the fair values of financial instruments recorded
on the balance sheet cannot be derived from active markets, they are determined using valuation techniques that
incorporate factors that market participants would take
into account in pricing a transaction.

2.7. Loans and advances to credit institutions
and to euro area Member States
Loans and advances are non-derivative financial assets
with fixed or determinable payments that are not traded
in an active market. Loans and advances are initially recognised at their net disbursement amounts, and subsequently measured at amortised cost.
Transaction costs and premiums/discounts are amortised in the profit and loss account through Interest
receivable and similar income. Interest income on loans
and advances to credit institutions and to euro area
Member States is also included in Interest receivable and
similar income in the profit and loss account.
Specific value adjustments are presenting risks of nonrecovery of all or part of their amounts. Value adjustments are accounted for in the profit and loss account as
value adjustments in respect of loans and advances and
are deducted from the appropriate asset items on the
balance sheet.

2.8. Intangible assets
Intangible assets are recorded in the balance sheet at
their acquisition cost, less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the
estimated life of each item purchased. Intangible assets
comprise computer software that are amortised within
3 years.

2.9. Tangible assets
Tangible assets are recorded in the balance sheet at their
acquisition cost, less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the
estimated life of each item purchased, as set out below:
•

Permanent equipment, fixtures and fittings: 9 years
or until the end of building rent period

•

Furniture and office equipment: 5 years

•

IT equipment: 3 years

If works performed on leased properties are capitalised
(as fixture and fittings) then the estimated life of those
assets should not exceed the duration of the lease
agreement.

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2.10. Prepayments and accrued income

2.15. Interest receivable and payable

Prepayments and accrued income are related to invoices
received and paid in advance as the underlying expense is
not or not exclusively related to the reporting period
together with any income which, though relating to the
financial year in question, but will be received only in the
course of a subsequent financial year.

Interest income and expense for all interest-bearing financial instruments are recognised within interest receivable and interest payable in the profit and loss account on
an accrual basis.

2.11. Debts evidenced by certificates
Debts evidenced by certificates are presented at their
amortised cost. Transaction costs and premiums/discounts are amortised in the profit and loss account
through Interest payable and similar charges. Interest
expenses on debt instruments are also included in
Interest payable and similar charges in the profit and loss
account.

Once a financial asset or a group of similar financial
assets has been written down as a result of an impairment loss, interest income is recognised using the rate of
interest used to discount the future cash flows for the
purpose of measuring the impairment loss.
On the balance sheet, accrued interest is included in
‘Prepayments and accrued income’ under assets and
‘Accruals and deferred income’ under liabilities.

2.16. Employee benefits
(a) Pension obligation

2.12. Provisions
Provisions are intended to cover liabilities for which the
nature is clearly defined and which at the date of the balance sheet are either likely to be incurred, or certain to be
incurred but uncertain as to the amount or as to the date
on which they will arise.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is
determined by considering the class of obligations as a
whole.

2.13. Subscribed capital
As at 31 December 2013 the ESM’s shareholders are
the 17 euro area Member States. In accordance with
Article 8 of the ESM Treaty, the initial authorised capital is
€ 700 billion, which is divided into seven million shares,
having a nominal value of € 100,000 each. The initial
authorised capital was subscribed by the shareholders
according to the initial contribution key provided in Article
11 and calculated in Annex I of the ESM Treaty. The
authorised capital was divided into paid-in shares and callable shares, where the initial total aggregate nominal value of paid-in shares was € 80 billion.
In accordance with Article 4 of the Directive 86/635/
EEC as amended, the initial authorised capital stock of €
700 billion is recognised in Equity as subscribed capital.
The callable shares are presented as subscribed capital
unpaid on the asset side of the balance sheet. Called capital not yet paid by the shareholders is recognised on the
asset side of the balance sheet as subscribed capital
called but not paid.

2.14. Accruals and deferred income
Accruals and deferred income are related to income
received before the balance sheet date but which are not
or not exclusively related to the reporting period, together with any charges which, though relating to the financial
year in question, will be paid only in the course of a subsequent financial year.

For a transition period from 1 January until 30 April
2013, the ESM was affiliated to the Luxembourg national
social security system on a voluntary basis. As a complementary insurance, a defined contribution plan was operated which was funded through payments from the ESM
(employer) as well as from the employees to insurance
companies. The contributions were recognised as
employee benefit expense when they were due.
With effect of 1 May 2013, the ESM has discontinued the
previous arrangements described and has set up a pension plan with defined contribution characteristics funded
through payments to an external insurance service provider. This scheme also covers the risk of death and disability via insurance agreements.
The pension plan is funded by contributions from the ESM
(employer) as well as from the employees. Accordingly,
the plan is accounted for as defined contribution plan and
corresponding payments are recognised as employee
benefit expense as they fall due.

(b) Termination benefits
Upon termination of employment on certain conditions, a
re-settlement allowance is payable to members of staff.
Such termination benefits could not be reliably estimated.
As further described in Note 18, therefore no provision is
recognised as at 31 December 2013.

2.17. Taxation
By Article 36 of the ESM Treaty, within the scope of its
official activities, the ESM, its assets, income, property
and its operations and transactions authorised by the
ESM Treaty, shall be exempt from all direct taxes. ESM
Members have agreed to remit or refund all indirect taxation, subject to certain exceptions, by virtue of the same
provision of the ESM Treaty.

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3. Risk management
This section presents information about the ESM’s exposure to and its management and control of risks, in particular the primary risks associated with its use of financial instruments. These are:
•

Credit risk

•

Market risk

•

Liquidity and funding risk

•

Operational risk

Given the nature of the ESM’s mandate, where credit risk
from lending arises as a result of activities performed in
support of beneficiary Member States under a Financial
Assistance Facility Agreement, the credit risk in the
ESM’s lending exposure has to be accepted.

To support the implementation of the ESM’s risk policies,
an Internal Risk Committee has been created. The
Internal Risk Committee translates the risk appetite into
the internal limit structure, which is described in the Risk
Policy approved by the Board of Directors. The Internal
Risk Committee assists the Board of Directors in ensuring the adequacy of the ESM’s internal limit structure and
limit setting, providing recommendations on changes of
the internal limit structure, on the identification of relevant risks, and on the suitability of methods to monitor
and manage them. The Internal Risk Committee will conduct on a periodical basis a risk self-assessment and
reports the result to the Managing Director. It has authority to suggest to the Managing Director to undertake
investigations on risk management (including outsourced
activities) through either internal or external audit teams.

3.2. Credit risk
3.1. Risk management organisation
The ESM follows a prudent approach to risk-taking in
order to limit potential losses and to ensure continuity in
fulfilling its mandate and meeting its commitments.
According to the High Level Principles for Risk
Management of the ESM the targeted risk appetite shall
preserve the ESM’s funding capacity, ensure the highest
creditworthiness and avoid unexpected capital calls. The
risk appetite is described in the Risk Policy and is set in
the form of a global risk budget quantifying the maximum
tolerable potential loss over a defined time horizon with
an agreed probability. It covers all financial and non-financial risks of the ESM, and both on- and (if applicable) offbalance sheet items. The risk profile is defined by a set of
limits applicable to curtail all types of risks within risk
appetite. The ESM does not aim to generate profit on
financial support granted to beneficiary Member States
and does not provide incentives for speculative exposures
in its investment portfolio.
Departments and business functions assume direct
responsibility for the day-to-day management of risk. All
staff are responsible for ensuring that risks relating to
their operations are identified, followed up and reported
to the Risk Department. The Risk Department exercises
central oversight of risk and ensures a comprehensive
and consistent implementation of the risk management
framework by all business functions.
The Managing Director bears full accountability for the
implementation and functioning of the risk management
framework, adequate reporting to the Board of Directors
and for further developing the Risk Policy.
The head of the Risk Department (“Head of Risk”) is a
direct report to the Managing Director. The Head of Risk
is responsible and accountable for informing the
Managing Director on all risks to ensure enforcement
and oversight. The Managing Director, as Chairman of the
Board of Directors, reports the enforcement and oversight related information to the Board of Directors, principally through the Board Risk Committee.

Credit risk is defined as the potential for loss arising from
the inability of a counterparty, issuer, insurer or other obligor to fulfil its contractual obligations for full value when
due. Counterparty risk is considered a particular form of
credit risk which derives from the investment of paid-in
capital, placement of possible excess liquidity, and hedging operations. Issuer risk is also a particular form of
credit risk which derives from investment in securities of
the paid-in capital and excess liquidity.
The inherent risk of non-payment of any beneficiary
Member State in relation to loans to euro area Member
States is not managed or mitigated by the Risk function of
the ESM. We therefore refer to Note 4 below which further describes the treatment of loans to euro area
Member States.

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3.2.1. Maximum exposure to credit risk without taking into account of any collateral and other credit
enhancements
The following table shows the maximum exposure to credit risk for the components of the balance sheet without taking
into account of any collateral and other credit enhancements. For on-balance-sheet positions, the exposures set out
hereafter are based on net carrying amounts as reported in the balance sheet.
Maximum exposure

Maximum exposure

In €‘000

31.12.2013

31.12.2012

Cash in hand, balances with central banks and post office banks

4,968,640

7,675,815

Loans and advances to credit institutions

22,976,514

16,501,514

Debt securities including fixed-income securities

50,361,775

8,796,034

On balance sheet credit risk exposure

78,306,929

32,973,363

Off balance sheet items
Maximum credit risk exposure

-

-

78,306,929

32,973,363

3.2.2. Risk profile of counterparties and issuers
The following tables show the breakdown of the financial assets per credit rating. In respect of debt securities including
fixed-income securities, the credit ratings of individual issuances (or in the case of short-term securities their long-term
rating equivalents) are presented. In case the ratings of issuances are not available the issuers rating is presented. For
other financial assets the credit ratings of the counterparties are presented.
In €’000

Credit rating*

Clean carrying value as
at 31.12.2013

Cash in hand, balances with central banks and post office banks

not rated**

4,966,086

AA+
Loans and advances to credit institutions

not rated**

2,554
22,975,000

AA+
Debt securities including fixed-income securities

1,514

AAA

23,051,756

AA+

20,231,283

AA

7,026,189

AA-

52,547

Total

78,306,929

* Based on the worst rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale as used by Fitch.
** “ Not rated” means balances placed with Eurosystem central banks, which do not have ratings.

In €’000

Credit rating*

Clean carrying value as
at 31.12.2012

Cash in hand, balances with central banks and post office banks

not rated**

7,675,557

AA+

258

not rated**

16,500,000

AA+

1,514

Loans and advances to credit institutions

Debt securities including fixed-income securities
Total

AAA

6,256,136

AA+

2,539,898
32,973,363

* Based on the worst rating provided by the major rating agencies (Moody’s, Standard & Poor’s or Fitch) presented based on the rating scale as used by Fitch.
** “Not rated” means balances placed with Eurosystem central banks, which do not have ratings. In the financial statements of 2012 the rating of the country was considered,
therefore comparatives have been amended to align the presentation.

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This table does not include the breakdown of the loans
and advances to euro area Member States, as the inherent risk of non-payment of the beneficiary Member States
is not managed by the Risk function of the ESM, as
described in Note 3.2.

3.2.3. Credit risk on debt securities including fixedincome securities
The ESM invests in assets that fulfil the high credit risk
standards as required by the Investment Policy Guideline.
In order to mitigate the credit risk on its investments, the
ESM has also established a detailed structure of credit
limits. The measurement of credit exposures and monitoring of limit compliance is performed daily.

3.3. Market risk
Market risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of
changes in market prices. Market risks could arise from
open positions in interest rate and currency products, all
of which are exposed to general and specific market
movements and changes in the level of volatility of market
rates such as interest rates and foreign exchange rates.

3.3.1. Interest rate risk
Interest rate risk is defined as potential for loss arising
from adverse movements in interest rates. Main sources
of interest rate risk include asset or liability re-pricing,
triggered by covenants or market movements, yield curve
shifts, and changes in the funding or lending spread. This
risk applies to the paid-in capital investments and may in
the future be minimised using interest rate swap and forward rate agreements.
Structural interest rate risk is defined as the risk of a mismatch between the interest rate re-pricing of assets and
liabilities on the balance sheet. The current pricing policy
for the ESM passes through the cost of funding to beneficiary Member States.

3.3.2. Currency risk
All debt securities issued, and loans and receivables
granted to the programme countries as well the paid-in
capital investments are denominated in euro. The Entity
does not therefore face any currency risk.

3.4. Liquidity risk
The ESM will honour its obligations under its issued debt
securities from proceeds that stem from its support programmes, supported by its capital. The ESM monitors its
liquidity position on a daily basis in respect of its funding
liquidity risk, market liquidity risk and liquidity concentration risk.

Funding liquidity risk is defined as inability to raise money
in a timely manner. Due to this, the ESM could be unable
to settle obligations in a timely fashion and be held in
breach of obligations. Funding liquidity risk is managed by
maintaining multiple credit lines and investing capital in
high credit quality liquid assets, that can be used to raise
cash to meet obligations as they fall due.
Market liquidity risk is defined as the potential for loss
arising from a position that cannot easily be unwound or
offset at short notice without significantly negatively influencing the market price because of inadequate market
depth or market disruption. Market liquidity risk is minimised by investing capital in high credit quality liquid
assets, ensuring the ESM does not hold a significant proportion of a security issuance and adopting adequate
measurements that allow the timely detection of liquidity
deteriorations.
Liquidity concentration risk is defined as the potential loss
arising from concentrations in assets and liabilities as
major sources of liquidity. A concentration in assets can
disrupt an institution’s ability to generate cash in times of
illiquidity or reduced market liquidity for certain asset
classes. A liability concentration (or funding concentration) exists when the funding structure of the institution
makes the ESM vulnerable to a single event or a single
factor, such as a significant and sudden withdrawal of
funds or inadequate access to new funding. Liquidity concentration risk is minimised by securing credit lines and
adopting a diversified funding strategy.
The table hereafter analyses the financial assets and liabilities and the shareholders’ equity of the Entity by maturity on the basis of the period remaining between the balance sheet date and the contractual maturity date.

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As at 31 December 2013
in €‘000

Less than three
months

From 3 months
to 1 year

From 1 to 5
years

More than 5
years

Total

ASSETS
Cash in hand, balances with central
banks and post office banks

4,968,640

-

-

-

4,968,640

Loans and advances to credit
institutions

11,226,514

11,750,000

-

-

22,976,514

-

-

-

45,933,000

45,933,000

Debt securities including fixedincome securities

8,805,165

13,028,663

26,974,414

1,553,533

50,361,775

Prepayments and accrued income

178,530

282,124

-

-

460,654

25,178,849

25,060,787

26,974,414

47,486,533

124,700,583

Debt securities in issue
Other liabilities
Accruals and deferred income

11,778,544
21,898
10,046

22,943,538
933
54,677

22,344,768
131,271

2,959,591
33,118

60,026,441
22,831
229,112

Total financial liabilities

11,810,488

22,999,148

22,476,039

2,992,709

60,278,384

Shareholders’ equity*

-

-

-

64,425,271

64,425,271

64,425,271

64,425,271

Loans and advances to euro area
Member States

Total financial assets
LIABILITIES

Total shareholders’ equity**
Net of financial position

13,368,361

2,061,639

4,498,375

(19,931,447)

(3,072)

As at 31 December 2012
in €‘000

Less than three
months

From 3 months
to 1 year

From 1 to 5
years

More than 5
years

Total

ASSETS
Cash in hand, balances with central
banks and post office banks

7,675,815

-

-

-

7,675,815

13,650,000

2,850,000

-

1,514

16,501,514

-

-

-

39,461,824

39,461,824

3,037

753,934

8,039,063

-

8,796,034

123,909

-

-

-

123,909

21,452,761

3,603,934

8,039,063

39,463,338

72,559,096

Debt securities in issue
Other liabilities
Accruals and deferred income

2,499,942
18,867
199,754

6,461,882
-

30,500,000
-

-

39,461,824
18,867
199,754

Total financial liabilities

2,718,563

6,461,882

30,500,000

-

39,680,445

Shareholders’ equity*

-

-

-

32,881,802

32,881,802

32,881,802

32,881,802

6,581,536

(3,151)

Loans and advances to credit
institutions
Loans and advances to euro area
Member States
Debt securities including fixedincome securities
Prepayments and accrued income
Total financial assets
LIABILITIES

Total shareholders’ equity**
Net of financial position

18,734,198

(2,857,948)

* Excluding subscribed capital unpaid and subscribed capital called but not paid.
** The shareholder’s equity has no defined maturity.

(22,460,937)

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3.5. Operational risk
Operational risk is defined as the potential loss and/or
the inability of the ESM to fulfil its mandate resulting from
inadequate or failed internal processes, people and systems or from external events. Operational risks are categorised in line with the guidance by the Basel Committee
on Banking Supervision, as follows:
•

Execution, delivery and process management;

•

Counterparts, products and business practices;

•

Fraud;

•

Business continuity and system failures;

•

Employment practices and workplace safety;

•

Damage to physical assets.

Management has no tolerance for material operational
risks, including those originated through third party/vendor engagements, which may result in the inability of the
ESM to effectively fulfil its mandate, or in significant loss
and/or reputational damage. No actual operational risk
losses were identified in 2013.
All departments are responsible for proactive mitigation
of operational risks and for the robustness of the controls
in their processes. In case specific operational risk events
occur, these are reported to an internal operational risk
register. Formal escalation procedures have been established involving the Internal Risk Committee and the
Board Risk Committee in order to ensure active involvement of senior management and, where necessary, the
Board of Directors in addressing operational risk issues.
All departments, with support from the Operational Risk
function, perform a root-cause analysis of the operational
risk events and implement improvements in the underlying processes and controls in order to reduce the probability of re-occurrence. This approach is complemented
with an annual self-assessment of the top operational
risks of the Entity (based on likelihood and potential
impact), which are reviewed and monitored by the Internal
Risk Committee.

4. Credit risk in relation to loans to
euro area Member States
The ESM applies elements of its High Level Principles for
Risk Management, as defined by the Board of Directors
and its Risk Policy to the provision of financial support to
ESM Members to the extent that they do not cover counterparty risk when extending financial assistance to beneficiary euro area Member States. As such, financial
assistance in line with the purpose of the ESM is granted
to euro area Member States experiencing severe financial problems, if indispensable to safeguard the financial
stability of the euro area as a whole and of its members.
Therefore, the assistance aims to provide financial support according to rules that differ from those of financial

markets, meaning the overall aim is to accompany the
beneficiary Member State to a return to public financial
stability.
The determination of debt sustainability and the close
monitoring and conditionality attached to all financial
assistance to beneficiary Member States, as negotiated
with the European Commission in liaison with the ECB and
whenever possible the IMF, addresses and mitigates
credit risk. Moreover, it is the mutual understanding of
the ESM Members that ESM loans enjoy preferred creditor status in a similar fashion to those of the IMF, while
accepting preferred creditor status of the IMF over the
ESM. This does, however, not apply to financial assistance
in the form of ESM loans following a European financial
assistance programme existing at the time of the signature of the ESM Treaty (as at 31 December 2013 this
applies to the financial assistance granted to Spain).
Moreover, ESM has implemented an early warning procedure as requested by the ESM Treaty to monitor the ability of
the beneficiary Member State to repay its obligations.
The ESM has provided financial assistance to Spain for
the recapitalisation of its financial sector (which, by the
terms of the relevant loans must be repaid by 2027), and
is providing financial assistance to Cyprus, which is implementing a macroeconomic adjustment programme. A
breakdown of all disbursed amounts as well as the movements during the period is provided in Note 7.
From an investor’s point of view, the capital structure and
the capital calls address the risk arising from the nonpayment of the beneficiary Member States and potential
losses from other risks. In accordance with Article 9 of
the ESM Treaty, there are two different instances when a
capital call can be made to cover losses or avert
non-payment:
i. A capital call under Article 9(2) of the ESM Treaty
to replenish paid-in capital could happen for two
reasons:
- to cover a shortfall due to a non-payment by a beneficiary country and,
- if losses occurring due to other factors which lead
to the reduction in the countervalue of the paid-in
capital below the threshold of 15% of the maximum
lending volume of the ESM.
The Managing Director would make a proposal to
the Board of Directors, which would specify the
losses incurred and the underlying reasons. A simple majority of the Board of Directors is required to
agree to call in capital under these circumstances.
If any ESM member fails to meet the required capital call, one or more revised increased capital calls
would be made to all ESM Members by increasing
the contribution rate of the remaining ESM
Members on a pro-rata basis. When the ESM
Member which failed to contribute settles its debt
to the ESM, the excess capital is returned to the
other ESM Members.

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ii.

An emergency capital call under Article 9(3) of the ESM Treaty to avoid default of an ESM payment obligation to
its creditors.
The Managing Director has the responsibility to make such a capital call to ESM shareholders if there were
such a risk of default. As stated in the ESM Treaty, the ESM shareholders have irrevocably and unconditionally
undertaken to pay on demand such a capital within seven days of receipt of the demand. However, if any ESM
Member fails to meet the required capital call, the same procedure would apply as for capital calls to replenish
paid-in capital.

This mechanism provides the strongest possible assurance to ESM debt securities that they will always be serviced and
repaid.

5. Cash in hand, balances with central banks and post office banks (in €‘000)
The composition of cash in hand, balances with central banks and post office banks is as follows:
31.12.2013

31.12.2012

Current account balances with central banks

4,966,086

7,675,557

Current account balances with other banks

2,554

258

4,968,640

7,675,815

Total cash in hand, balances with central banks and post office banks

6. Loans and advances to credit institutions (in €‘000)
The following table shows the breakdown of the other loans and advances to credit institutions:

Money market deposits
Other deposits
Total cash

31.12.2013

31.12.2012

22,975,000

16,500,000

1,514

1,514

22,976,514

16,501,514

At the balance sheet date the money market deposits contain exclusively money market deposits with central banks of
the Eurozone.
Other deposits entirely consist of the lease guarantee deposit in relation to the ESM rental agreement.

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7. Loans to euro area Member States (in €‘000)
The following table shows the geographical breakdown of loans per financial assistance programme and by borrowing
country:
Nr. of loans

Nominal amount

Clean carrying value as at
31 December 2013

- to Spain

6

41,333,000

41,333,000

- to Cyprus

4

4,600,000

4,600,000

Total

10

45,933,000

45,933,000

Nr. of loans

Nominal amount

Clean carrying value as at
31 December 2012

- to Spain

5

39,468,000

39,461,824

Total

5

39,468,000

39,461,824

Loans to euro area Member States

Loans to euro area Member States

The following table shows the movements of the loans to euro area Member States during the period:
Balance as at 8 October 2012

-

New disbursements

39,461,366

- to Spain

39,461,366

Premiums/discounts amortisation

458

Balance as at 31 December 2012

39,461,824

Balance as at 1 January 2013

39,461,824

New disbursements

6,465,000

- to Spain

1,865,000

- to Cyprus

4,600,000

Premiums/discounts amortisation

6,176

Balance as at 31 December 2013

45,933,000

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8. Debt securities including fixed-income securities (in €‘000)
The following table shows the details of the debt securities valuation and their classification as at 31 December 2013:
Clean amortised cost
41,412,128

Unrealised losses
(110,983)

Clean fair (carrying) value
41,301,145

Nominal amount
40,298,126

Transitional investment portfolio

9,065,363

(4,733)

9,060,630

9,066,900

Total

50,477,491

(115,716)

50,361,775

49,365,026

Paid-in capital portfolio

The following table shows the details of the debt securities valuation and their classification as at 31 December 2012:
Paid-in capital portfolio
Total

Clean amortised cost
8,776,486

Unrealised gains
19,548

Clean fair (carrying) value
8,796,034

Nominal amount
8,336,935

8,776,486

19,548

8,796,034

8,336,935

As at 31 December 2013, the clean amortised cost of the debt securities is €’000 50,477,491 (31 December 2012:
€’000 8,776,486), against a clean market value of €’000 50,361,775 (31 December 2012: €‘000 8,796,034). The difference represents the unrealised result and is recognised directly in the equity within the fair value reserve.
In respect of the paid-in capital portfolio within debt securities including fixed-income securities, the ESM has an established investment policy which sets strict investment guidelines that focus on issuers with highest credit standing in euro
and included a limit structure to mitigate the maximum exposure per counterparty. Regarding the transitional investment portfolio we refer to Note 2.6.3.
All debt securities including fixed income securities of the paid-in capital investments are listed on regulated markets and
the fair values of all these assets are determined based on quoted market prices.

9. Intangible assets (in €‘000)
The following table shows the movements of the intangible assets during 2013:
Software

Total intangible assets

Balance as at 1 January 2013

107

107

Additions

79

79

Balance as at 31 December 2013

186

186

Balance as at 1 January 2013

(6)

(6)

Depreciation

(52)

(52)

Balance as at 31 December 2013

(58)

(58)

Balance as at 31 December 2013

128

128

Balance as at 31 December 2012

101

101

Historical cost

Accumulated depreciation

Net book value

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10. Tangible assets (in €‘000)
The following table shows the movements of the tangible assets during 2013:
Fixtures and fittings

Furniture and office
equipments

Total tangible assets

2,025

1,065

3,090

192

150

342

2,217

1,215

3,432

Balance as at 1 January 2013

(18)

(22)

(40)

Depreciation

(230)

(218)

(448)

Balance as at 31 December 2013

(248)

(240)

(488)

Balance as at 31 December 2013

1,969

975

2,944

Balance as at 31 December 2012

2,007

1,043

3,050

Historical cost
Balance as at 1 January 2013
Additions
Balance as at 31 December 2013
Accumulated depreciation

Net book value

11. Prepayments and accrued income (in €‘000)
The following table shows the breakdown of the prepayments and accrued income:
31.12.2013

31.12.2012

Interest receivable on:
- Debt securities including fixed-income securities
- Loans and advances to euro area Member States
- Loans and advances to credit institutions
Amounts charged to EFSF for administrative services (Note 17)
Commitment fee receivable
Prepayments

404,035
31,732
6,199
17,009
1,184
495

112,700
10,646
471
92

Total prepayments and accrued income

460,654

123,909

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81
12. Debts evidenced by certificates (in €‘000)
The table below discloses the details of debt securities in issue outstanding as at 31 December 2013, together with the
coupon rates and due dates.
Financial assistance
programme
Cyprus
Spain
Spain
Spain
Spain
Long-term funding
Long-term funding
Short-term funding
Short-term funding
Short-term funding
Short-term funding
Short-term funding
Short-term funding
Short-term funding
Short-term funding

ISIN code

Nominal amount

Issue date

Maturity date

Coupon

EU000A1U98Y4
EU000A1U98X6
EU000A1U98U2
EU000A1U98V0
EU000A1U98W8
EU000A1U9803
EU000A1U98Z1
EU000A1U9720
EU000A1U9712
EU000A1U9704
EU000A1U97Z3
EU000A1U97Y6
EU000A1U97X8
EU000A1U97V2
EU000A1U97T6

1,500,000
1,865,000
6,500,000
12,000,000
12,000,000
3,000,000
7,000,000
1,996,650
1,983,600
1,972,300
2,461,000
1,989,700
2,442,100
1,441,800
1,937,000

27/09/2013
05/02/2013
11/12/2012
11/12/2012
11/12/2012
20/11/2013
15/10/2013
05/12/2013
21/11/2013
07/11/2013
24/10/2013
03/10/2013
19/09/2013
22/08/2013
25/07/2013

27/03/2015
05/08/2015
11/06/2014
11/12/2014
11/12/2015
20/11/2023
15/10/2018
06/03/2014
22/05/2014
06/02/2014
24/04/2014
09/01/2014
20/03/2014
20/02/2014
23/01/2014

6M Euribor - 21 bp
6M Euribor - 15 bp
6M Euribor - 12 bp
6M Euribor - 12 bp
6M Euribor - 6 bp
2.125%
1.25%
N/A*
N/A*
N/A*
N/A*
N/A*
N/A*
N/A*
N/A*

Total

60,089,150

* Zero-coupon bond

The table below discloses the details of debt securities in issue outstanding as at 31 December 2012, together with the
coupon rates and due dates.
Financial assistance
programme
Spain
Spain
Spain
Spain
Spain

ISIN code

Nominal amount

Issue date

Maturity date

Coupon

EU000A1U97C2
EU000A1U97D0
EU000A1U98U2
EU000A1U98V0
EU000A1U98W8

2,500,000
6,468,000
6,500,000
12,000,000
12,000,000

11/12/2012
11/12/2012
11/12/2012
11/12/2012
11/12/2012

11/02/2013
11/10/2013
11/06/2014
11/12/2014
11/12/2015

N/A*
N/A*
6M Euribor - 12 bp
6M Euribor - 12 bp
6M Euribor - 6 bp

Total

39,468,000

* Zero-coupon bond

The following table shows the movements of the debt securities in issue during 2013 and 2012:
Balance as at 8 October 2012
Issuance during the period
Premiums/discounts amortisation

2012
39,461,366
458

Balance as at 31 December 2012

39,461,824

Balance as at 1 January 2013
Issuance during the year
Maturities during the year
Premiums/discounts amortisation

2013
39,461,824
63,400,091
(42,847,200)
11,726

Balance as at 31 December 2013

60,026,441

All debt securities in issue as at 31 December 2012 and 31 December 2013 are issued under English law as the governing law.

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13. Other liabilities (in €000)
As at 31 December 2013, the other liabilities are entirely composed of supplier’s invoices which are not yet settled
amounting to €’000 22,831 (31 December 2012: €’000 18,867), from which €’000 14,806 (31 December 2012:
€’000 16,040) is against EFSF.

14. Accruals and deferred income (in €‘000)
The following table shows the breakdown of the accruals and deferred income:
Interest payable on debts evidenced by certificates
Deferred income on up-front service fee

31.12.2013
31,928
197,184

31.12.2012
3,958
195,796

229,112

199,754

Total accruals and deferred income

As explained in 2.3.1., the amortisation of the up-front service fee is recognised in the profit and loss account on a linear
basis under Interest receivable and similar income on loans to euro area Member States.

15. Subscribed capital (in €’000)
Subscribed capital

Uncalled capital

Subscribed, called capital

At 8 October 2012
Subscription to the authorised capital
Authorised capital calls

700,000,000
-

- 700,000,000
80,000,000

80,000,000

At 31 December 2012

700,000,000

- 620,000,000

80,000,000

Subscribed capital
700,000,000
-

Uncalled capital
- 620,000,000
- 700,000,000
80,000,000

Subscribed, called capital
80,000,000
80,000,000

700,000,000

- 620,000,000

80,000,000

At 1 January 2013
Subscription to the authorised capital
Authorised capital calls
At 31 December 2013

As of 31 December 2013 the ESM’s shareholders were the 17 euro area Member States. Subsequently on 13 March
2014 they have been joined by Latvia. The contribution key for subscribing to the ESM authorised capital is based on the
key for subscription, by the national central banks of the ESM Members, of the European Central Bank’s (ECB) capital.
This contribution key will be also updated as a result of Latvia joining the ESM. The authorised capital is € 700 billion,
divided into 7,000,000 shares, with a par value of € 100,000 each, and is split according to the contribution key. Out of
the total authorised capital, € 620 billion is uncalled. As at 31 December 2013, the called subscribed capital amounts to
€ 80 billion, out of which € 64.3 billion is paid.

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83

ESM Key (%)

Number of shares

Subscribed capital
(in €’000)

Federal Republic of Germany

27.1464

1,900,248

190,024,800

Subscribed capital
called and paid
(in €’000)
17,373,696

French Republic

20.3859

1,427,013

142,701,300

13,046,976

Italian Republic

17.9137

1,253,959

125,395,900

11,464,768

Kingdom of Spain

11.9037

833,259

83,325,900

7,618,368

Kingdom of the Netherlands

5.7170

400,190

40,019,000

3,658,880

ESM Members
as of 31 December 2013

Kingdom of Belgium

3.4771

243,397

24,339,700

2,225,344

Hellenic Republic

2.8167

197,169

19,716,900

1,802,688

Republic of Austria

2.7834

194,838

19,483,800

1,781,376

Portuguese Republic

2.5092

175,644

17,564,400

1,605,888

Republic of Finland

1.7974

125,818

12,581,800

1,437,920

Ireland

1.5922

111,454

11,145,400

1,019,008

Slovak Republic

0.8240

57,680

5,768,000

527,360

Republic of Slovenia

0.4276

29,932

2,993,200

273,664

Grand Duchy of Luxembourg

0.2504

17,528

1,752,800

160,256

Republic of Cyprus

0.1962

13,734

1,373,400

125,568

Republic of Estonia

0.1860

13,020

1,302,000

119,040

Malta

0.0731

5,117

511,700

46,784

Total

100.00

7,000,000

700,000,000

64,287,584

As at 31 December 2013 the subscribed capital called but not paid amounts to €’000 15,712,416 (31 December
2012: €’000 47,137,248).
In accordance with Article 9 of the ESM Treaty, there are three different instances when a capital call can be made. A
general capital call concerns payment of the initial capital and an increase of paid-in capital which could be necessary, for
example, to raise the lending capacity. To initiate such a call, the Managing Director of the ESM, would make a proposal
to the Board of Governors outlining the objective of such a call, the amounts and contributions for each shareholder and
a proposed payment schedule. The Board of Governors, with mutual agreement, may call in authorised capital at any
time.
Moreover as described in Note 4, a capital call to replenish paid-in capital could happen to cover any losses in paid-in capital due to a non-payment by a beneficiary Member and if losses occurring due to other factors which lead to the reduction in the countervalue of the paid-in capital below the threshold of 15% of the maximum lending volume of the ESM.
Finally, an emergency capital call would be used for the acceleration of the paid-in capital during the ramp-up period to
comply with the requested capital ratio and to avoid default of an ESM payment obligation to its creditors.

16. Interest receivable and similar income on loans and advances to euro area
Member States
Interest receivable and similar income on loans and advances to euro area Member States are detailed as follows:
Interest on loans (*)
Amortisation up-front service fee
Commitment fee

2013
236,859
30,936
1,184

2012
11,105
1,544
-

Total interest and similar income

268,979

12,649

(*) The interest on loans comprises base rate interest representing the cost of funding of the ESM, the margin and the annual service fee as they are all defined in the ESM Pricing
Policy.

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84
17. Other operating income
The EFSF has asked the ESM to provide certain administrative services and other support services in order to assist
EFSF in performing its activities. To formalise such cooperation ESM and EFSF entered into a Service Level Agreement
with the commencement date of 1 January 2013.
Under the terms of the Agreement, the ESM is entitled to charge Service Fees to EFSF which are calculated with the
objective to achieve a fair cost-sharing between ESM and EFSF. For the services provided during the financial year 2013,
the ESM charged € 17.0 million to EFSF. The amount comprises staff costs (€ 8.4 million) and other administrative
expenses (€ 8.6 million). The amount has not been paid yet at balance sheet date (refer to Note 11).

18. Staff costs
The transfer of staff from the EFSF to the ESM was concluded in the first quarter of 2013 and as at 31 December 2013
no staff remained in EFSF.
Staff costs are detailed as follows:
Salaries and allowances
Social security costs
Pension costs

2013
10,292
477
3,196

2012
123
3
91

Total staff costs

13,965

217

The number of persons employed by ESM is 102 as at 31 December 2013 (1 as at 31 December 2012).
In addition to the cost of ESM employees, ESM has expenses in relation with employees seconded from other International
Financial Institutions and in relation with interim and temporary staff used. The related cost amounts to €’000 1,239 for
the financial year 2013 (2012: €’000 25) and are accounted for as other administrative expenditures (refer to Note 19).
As described in Note 2.16. upon termination of employment, re-settlement allowance may be paid and the payment of
such benefit is subject of conditionality of several criteria. Taking into account the complex structure of those termination
benefits and the fact that the Entity has no historical data to estimate the occurrence of such events, no provision is
recognised as at 31 December 2013 and 31 December 2012.

19. Other administrative expenditures (in €‘000)
Other administrative expenditures consist of fees paid for professional services and miscellaneous operating expenses
and are detailed as follows:
Advisory services
Outsourced services (mainly IT, HR and accounting services)
Treasury related services
Interim and secondment fees (Note 18)
Rental and related services
Legal services
Rating agencies fees
Other miscellaneous expenses

2013
5,033
4,008
1,752
1,239
1,104
908
814
2,018

2012
7,586
2,178
24
110
2,070
1,528
62

Total administrative expenditures

16,876

13,558

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85
20. Related - party transactions

21. Audit fee (in €‘000)

Key Management

The total fees accrued are presented as follows:

The ESM has identified members of the Board of
Governors, Board of Directors and the Management
Board as key management personnel.

Audit fees

2013
261

2012
30

Total Audit fees

261

30

The members of the Board of Governors, Board of
Directors were not entitled to remuneration during the
period.
Transactions with shareholders

22. Off-balance sheet items

As disclosed in more detail in Note 7, the ESM granted
loans to Spain and Cyprus which are also shareholders of
the Entity. Moreover in the course of its investment activity, the ESM purchases debt securities issued by its
shareholders. Such securities are reported as Debt securities including fixed-income securities in the balance
sheet.

As at 31 December 2013, the off-balance sheet items
represent the undisbursed part of the up to 9 billion financial assistance programme to Cyprus, amounting to €
4.4 billion.

Transactions with European Financial Stability Facility

As at 31 December 2012 the off-balance sheet items
represented the undisbursed part of the € 100 billion
financial assistance programme to Spain, amounting to €
60.5 billion. On 31 December 2013, the ESM financial
assistance programme to Spain expired and as a result
any remaining undisbursed funds were automatically
cancelled.

The European Financial Stability Facility (EFSF) is a public
limited liability company (Société Anonyme) which was
incorporated in the Grand Duchy of Luxembourg under
Luxembourg law on 7 June 2010 pursuant to decisions
taken by the euro area Member States on 9 May 2010
within the framework of the Ecofin Council. The EFSF’s
mandate is to safeguard financial stability in Europe by
providing financial assistance to euro area Member
States within the framework of a macro-economic adjustment programme.
The EFSF was created as a temporary rescue mechanism. In accordance with its Articles of Association, the
EFSF will be dissolved and liquidated when all financial
assistance provided to euro area Member States and all
funding instruments issued by EFSF have been repaid in
full. As of 1 July 2013, the EFSF may no longer engage in
new financing programmes or enter into new loan facility
agreements.
External expenses incurred by the EFSF in relation to setting up and running the ESM were recharged by the EFSF
to the ESM together with other non-expense related
items. The total amount of items recharged to the ESM,
and recognised as expense in 2012, in an amount of €
14.8 million has not been paid yet at balance sheet date
(refer to Note 13).
The EFSF has asked the ESM to provide certain administrative services and other support services in order to
assist EFSF in performing its activities. To formalise such
cooperation the ESM and EFSF entered into a Service
Level Agreement. Under the terms of the Agreement the
ESM charged € 17.0 million to the EFSF for the financial
year 2013, which has not been paid yet at balance sheet
date (refer to Note 11). The ESM recognised the amount
as other operating income in the profit and loss account.
As disclosed in Note 2.6.3. and in Note 8 the ESM invests
on a temporary basis in short term notes issued by the
EFSF.

Any further disbursement is subject to conditionality pursuant to the Memorandum of Understanding attached to
the Financial Assistance Facility Agreement.

23. Events after the reporting period
Except for those included in the Notes to the financial
statements, there have been no material post balance
sheet events which could require disclosure or adjustment to the 31 December 2013 financial statements.

ESM

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86

Chapter

5

External Auditor’s Report
on the Financial
Statements

ESM

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Report

2013

87

To the Board of Governors of European Stability Mechanism

We have audited the accompanying financial statements
of European Stability Mechanism, which comprise the balance sheet as at 31 December 2013, the profit and loss
account, the statement of changes in equity and the
statement of cash flows for the year then ended and a
summary of significant accounting policies and other
explanatory information.

Board of Directors’ responsibility for the financial
statements
The Board of Directors is responsible for the preparation
and fair presentation of these financial statements in
accordance with the general principles of the Directive
86/635/EEC of the Council of the European
Communities of 8 December 1986 on the annual
accounts and consolidated accounts of banks and other
financial institutions, as amended by Directive 2001/65/
EC of 27 September 2001, by Directive 2003/51/EC of
18 June 2003 and by Directive 2006/46/EC of 14 June
2006 (“the Directives”), and for such internal control as
the Board of Directors determines is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.

Responsibility of the “Réviseur d’entreprises agréé”
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our
audit in accordance with International Standards on
Auditing as adopted for Luxembourg by the “Commission
de Surveillance du Secteur Financier”. Those standards
require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance whether the financial statements are free from
material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the
judgment of the “Réviseur d’entreprises agréé” including
the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error.
In making those risk assessments, the “Réviseur
d’entreprises agréé” considers internal control relevant
to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates
made by the Board of Directors, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.

Opinion
In our opinion, the financial statements give a true and fair
view of the financial position of European Stability
Mechanism as of 31 December 2013, and of the results
of its operations and its cash flows for the year then ended in accordance with the general principles of the
Directives.
PricewaterhouseCoopers, Société coopérative
Luxembourg, 3 April 2014
Represented by
Pierre Krier

ESM

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Report

2013

88

Chapter

6

Board of Auditors’ Report
on the Financial
Statements

ESM

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Report

2013

89

Luxembourg, 3 April 2014

The Board of Auditors of the European Stability Mechanism (ESM) was set up pursuant to Article
30 of the Treaty establishing the ESM and Article 24 of the ESM By-Laws. The Board of Auditors
is independent from the Board of Directors and its members are appointed directly by the Board
of Governors.
The Board of Auditors carries out independent audits of regularity, compliance, performance
and risk management of the ESM, inspects the ESM accounts, and monitors and reviews the
ESM’s internal and external audit processes and results. Information on the audit work of the
Board of Auditors, its audit findings, conclusions and recommendations for the year ended 31
December 2013 are included in the annual report, which has been prepared in accordance
with Article 24(6) of the ESM By-Laws and submitted to the Board of Governors.
This Board of Auditors´ report on the financial statements is addressed to the Board of Governors
in accordance with Article 23(2)(d) of the ESM By-Laws. It is delivered in respect of the financial
statements of the ESM for the year ended 31 December 2013.
Having examined the first full year of the ESM, the Board of Auditors observes, as detailed in its
Annual Report for the year ended 31 December 2013, that the institution has made progress in
design and in implementation of internal, operational and managerial controls. The ESM controls
framework is still evolving and, against the background of rapidly changing operational and external
demands, continues to face challenges in reaching standard practice. The Board of Auditors
notes that, to the best of its judgment, no other material matters have come to its attention that
would prevent it from recommending that the Board of Governors approve the ESM financial
statements for the year ended 31 December 2013.

On behalf of the Board of Auditors
Katarína Kaszasová
Chairperson

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Glossary
(ESM) Annual Report
A report drawn up annually by the Managing Director and
approved by the Board of Governors containing a description of the policies and activities of the ESM, the corresponding Financial Statements of the preceding financial
year, a report of the external auditors in respect of their
audit concerning these Financial Statements, and a
report of the Board of Auditors in respect of these financial statements. The ESM Annual Report is published on
the ESM’s website following approval by the Board of
Governors.
Authorised unpaid capital
The portion of the ESM’s authorised capital stock consisting of callable shares. These shares may be called in
accordance with the terms set in the ESM Treaty (see
“capital call”). Following the payment of paid-in capital of
over €80 billion the total aggregate nominal value of callable shares is currently €621.9 billion.
Benchmark bond
There are two major definitions for a ‘Benchmark bond’: a
bond that provides a standard against which the performance of other bonds can be measured; a bond which
delivers a certain size, liquidity and reputation: For EFSF/
ESM, benchmark size is generally meant to be at least €3
billion for maturities up to 10 years and at least €1 billion
for maturities above 10 years.
Board of Auditors
An independent body of the ESM mandated to inspect the
organisation’s accounts and verify that the ESM’s operational accounts and balance sheet are in order. The Board
of Auditors may inform the ESM Board of Directors at
any time of its findings and draws up a report, on an annual basis, to the Board of Governors. This report also
becomes accessible to the European and national parliaments, the supreme audit institutions of the ESM
Members and to the European Court of Auditors.
Board of Directors
A body in the ESM governance structure with the task to
take decisions as provided for in the ESM Treaty or delegated to it by the Board of Governors and to ensure that
the ESM is run in accordance with the ESM Treaty and
By-Laws adopted by the Board of Governors (for example,
the Board of Directors decides on disbursements of
assistance to a beneficiary ESM Member). Each Governor
appoints one Director and one alternate Director from
among people of high competence in economic and financial
matters. The European Commission and ECB may each
appoint a (non-voting) observer.

Board of Governors
The Board of Governors is the highest governing body of
the ESM and comprises Ministers of Finance of the euro
area Member States (as voting members). The ECB
President and European Commissioner for Economic and
Monetary Affairs and the Euro may participate in meetings of the Board of Governors as (non-voting) observers.
Bond/Bill auction
A method of selling bonds and bills on the primary market
by national governments and sovereign, supranational
and agency (SSA) issuers, where financial institutions
place bids on the yield or price of the bond or bill being
offered.
Borrowing costs
The costs of obtaining financing on financial markets by
the issuance of debt securities (bills, bonds or other funding instruments).
Capital call
The ESM Treaty specifies three types of capital calls: (i)
general capital calls to accelerate or increase the payment of paid-in capital, which may be enacted at any time
by the Board of Governors; (ii) capital calls to restore the
level of paid-in capital, if the amount is reduced by the
absorption of losses, which may be made by the Board of
Directors; and (iii) emergency capital calls to avoid a
default of any payment obligation due to ESM creditors,
which may be made by the Managing Director.
Conditionality
Policy conditions that ESM Members receiving financial
assistance from the ESM are required to meet before
receiving support. These conditions can, for instance,
relate to policy measures to be implemented by the beneficiary ESM Member aimed at lowering tax evasion. The
policy conditions that a beneficiary ESM Member needs
to meet are agreed in a Memorandum of Understanding
with the beneficiary ESM Member, which is approved by
the Board of Governors of the ESM.
Credit line
Precautionary financial support made available by the
ESM to a beneficiary ESM Member establishing a balance that the beneficiary ESM Member is allowed to
draw, subject to certain conditions. The ESM offers two
types of credit lines: the Precautionary Conditioned
Credit Line (PCCL) and the Enhanced Conditions Credit
Line (ECCL).
Debt management office (DMO)
A government agency that is responsible for the issue of
debt securities and the management of a country’s debt.

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Direct Recapitalisation Instrument (DRI)
In June 2012, the Heads of State or Government of the
euro area stated that a decision could be taken to allow
the ESM to recapitalise banks directly when an effective
single supervisory mechanism is established for banks in
the euro area. In June 2013 the Eurogroup agreed on the
key elements of the ESM direct bank recapitalisation
instrument, the operating framework is currently being
finalised. Activation of the instrument will require a unanimous decision of all euro area Member States.
Diversified funding (strategy)
A strategy that uses a variety of financial instruments
and maturities to ensure the efficiency of funding. One
feature of this strategy is that funds raised through various instruments are not attributed to a particular beneficiary country. The funds are pooled and then disbursed to
programme countries. The size and maturity of the bonds
and bills issued therefore do not need to match exactly
the size and maturity of the disbursements to a beneficiary country.
Emergency voting procedure
A voting procedure to be used when the European
Commission and the ECB both conclude that a failure to
urgently adopt a decision to grant or implement financial
assistance, as defined in Articles 13 to 18 of the ESM
Treaty, would threaten the economic and financial sustainability of the euro area. The adoption of a decision by
the Board of Governors to grant stability support under
the emergency procedure requires a qualified majority of
85% of the votes cast.
Enhanced Conditions Credit Line (ECCL)
A credit line open to all ESM Members whose general
economic and financial situation remains sound but do
not comply with some of the eligibility criteria for accessing a Precautionary Conditioned Credit Line (PCCL). The
beneficiary ESM Member will be obliged to adopt corrective measures aimed at addressing such weaknesses
and avoiding any future difficulties in respect of access to
market financing.
ESM Treaty
An intergovernmental treaty signed in Brussels on 2
February 2012 by the 17 EU Member States whose currency is the euro, establishing the European Stability
Mechanism. The ESM Treaty entered into force on 27
September 2012 and was amended in March 2014 upon
Latvia’s accession to the ESM.
Eurogroup
The informal gathering of the Finance Ministers of the
euro area Member States. Meetings of the Eurogroup
are aimed at enhancing economic policy coordination
within the euro area. The Eurogroup is also attended by
the EU Commissioner for Economic and Monetary Affairs,
the President of the European Central Bank, and the
Chairman of the Eurogroup Working Group presenting

the preparatory work done in that Group. The Managing
Director of the ESM is regularly invited to Eurogroup
meetings. The Eurogroup is chaired by a President,
appointed for two and a half years (currently Jeroen
Dijsselbloem from the Netherlands).
European Semester
A six-month period each year when EU Member States’
budgetary, macroeconomic and structural policies are
coordinated so as to allow these countries to translate
EU considerations into their national budgetary processes and into other aspects of their economic policy-making.
European Supervisory Authorities (ESAs)
Three EU authorities — the European Banking Authority
(EBA), European Insurance and Occupational Pensions
Authority (EIOPA) and European Securities and Markets
Authority (ESMA) — are responsible for developing guidelines and recommendations for national supervisory
authorities, and to draft technical standards (formally
adopted by the European Commission as EU law) contributing to the harmonisation of rules applicable to financial
institutions.
Financial Assistance Facility Agreement (FFA)
An agreement between the ESM and a beneficiary country, specifying the financial terms and conditions of the
stability support instrument provided to the beneficiary
country.
Financial assistance instruments
The ESM offers five financial assistance instruments to
its Members (all subject to appropriate policy conditionality reflecting the circumstances of the beneficiary ESM
Member): precautionary financial assistance (the ECCL
and the PCCL), financial assistance for the recapitalisation of financial institutions of an ESM Member, primary
market support facility, secondary market support facility,
and ESM loans. Financial assistance in the form of ESM
loans is subject to a macroeconomic adjustment programme and is intended to assist ESM Members that
have significant financing needs but have to a large extent
lost access to market financing and have severe problems in their general economic and fiscal situation.
Fiscal Compact (Treaty on Stability, Coordination and
Governance in the Economic and Monetary Union)
The Fiscal Compact is an intergovernmental treaty signed
by 25 EU Member States on 2 March 2012. It entered
into force on 1 January 2013. The Compact requires
national budgets to be in balance or in surplus. This
means the annual structural government deficit must not
exceed 0.5% of GDP. This balanced budget rule must be
incorporated into the Member States’ national legal systems, through permanent, binding provisions (preferably
of a constitutional character) within one year following
the entry into force of the Treaty.

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Funding
Issuing debt securities or other financial instruments in
order to finance loans and other forms of financial assistance to ESM Members.
Intergovernmental organisation
An organisation, such as the European Stability Mechanism,
which is established by and composed of sovereign
Member States. An intergovernmental organisation
should be distinguished from a supranational organisation (such as the European Union) to which Member
States cede some sovereign decision-making power in
selected policy areas.
Lead manager
The bank(s) mandated by an issuer to arrange the raising
of money via a bond, a loan or a share issue. The lead
managers form a syndicate which negotiates with the
issuer, assesses market conditions and works together
with the issuer’s funding team on the transaction of raising money.
Lending capacity
The maximum total amount of funds (€500 billion) that
the ESM may lend to its Members, as specified in the
ESM Treaty.
Macroeconomic adjustment programme
An extensive programme of policy reforms aimed at
addressing problems in an ESM Member’s general economic and fiscal situation. A macroeconomic adjustment
programme is negotiated between the Troika and the
beneficiary ESM Member. The implementation of policy
reforms set out in the macroeconomic adjustment programme is a precondition for receiving disbursements of
ESM loans.
Managing Director
The top executive officer and legal representative of the
ESM, who is responsible for conducting its current business. The Managing Director is appointed by the Board of
Governors for five years and may be reappointed once.
The current Managing Director is Klaus Regling.
Memorandum of Understanding (MoU)
A document concluded by the European Commission, in
liaison with the ECB, the IMF (where applicable) and an
ESM/EFSF Member, detailing the policy conditions
attached to the stability support instrument provided.
Money markets
A segment of financial markets where short-term financial instruments are traded. These include government
bills, commercial papers (CPs), certificates of deposits
(CDs), repurchase agreements (repos) and also derivatives (such as EONIA swaps) with maturities ranging from
one day to one year.

Paid-in capital
The portion of the ESM’s authorised capital stock paid in
by ESM Members. The payment of paid-in capital was
made in five instalments and completed in April 2014.
The amount of paid-in capital is approximately €80 billion.
Paid-in capital is invested in high quality liquid assets and
serves as loss-absorbing capital.
Precautionary financial assistance
A credit line granted to an ESM Member whose general
economic and financial situation remains sound. Its aim is
to prevent crisis situations by allowing such an ESM
Member to secure the possibility to access ESM assistance before it experiences difficulties raising funds in
capital markets. Two types of credit line are available: a
Precautionary Conditioned Credit Line (PCCL) and an
Enhanced Conditions Credit Line (ECCL). Both credit lines
can be drawn via a loan or primary market purchase and
have an initial availability period of one year and are renewable twice, each time for six months. When precautionary financial assistance is granted, an MoU is concluded
with the beneficiary ESM Member.
Primary market support facility
The purchase of bonds or other debt instruments by the
ESM issued by Member States via auctions or syndicated
transactions. The main objective of primary market support is to allow the ESM Members to maintain or restore
their access to financial markets.
Recapitalisation of financial institutions
Financial assistance to ESM Members for the recapitalisation of financial institutions provided in the form of a
loan from the ESM to the beneficiary ESM Member. The
support is channelled to the beneficiary institution by the
ESM Member in accordance with EU state aid provisions.
The institution(s) concerned should be of systemic relevance or pose a serious threat to the financial stability of
the euro area as a whole or of its Member States.
Secondary market support facility
The purchase of bonds or other debt instruments by the
ESM or EFSF issued by Member States on the secondary
debt market. The aim of EFSF/ESM secondary market
intervention is to support the good functioning of the government debt markets of ESM Members in exceptional
circumstances where the lack of market liquidity threatens financial stability.

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Seniority
Seniority refers to the order of repayment of debt in the
event of a sale or bankruptcy of a borrower/issuer. ESM
loans to its Members enjoy preferred creditor status in a
similar fashion to those of the IMF, while accepting preferred creditor status of the IMF over the ESM. This does,
however, not apply to ESM loans granted to countries
under an EFSF programme existing at the time of the signature of the ESM Treaty. By contrast, EFSF loans to
Member States are pari passu, that is each creditor has
a right to be paid pro rata in accordance with the amount
of its claim.
Single Supervisory Mechanism (SSM)
A new system of financial supervision adopted in October
2013. In the SSM ultimate responsibility for the supervision of systemic euro area banks will lie with the European
Central Bank (ECB), while national supervisors will continue to play an important role in day-to-day supervision and
in preparing and implementing ECB decisions. The ECB
will assume its supervisory responsibilities in November
2014.
Six-Pack
A set of six legislative acts adopted in 2011, enhancing
procedures for the surveillance of the EU Member States’
fiscal policies (strengthening the Stability and Growth
Pact) and macroeconomic policies (with a new
Macroeconomic Imbalances Procedure).
In addition to the rules set in the so-called Fiscal Treaty,
the Six-Pack creates a formal framework for monitoring
macroeconomic imbalances, including an early warning
system and mechanisms for correcting imbalances, and
lays down minimum requirements for national budgetary
frameworks.
Spread
The positive/negative difference between an asset and a
benchmark (for example, compared with Germany’s debt
instruments, the Bund spread, SSA spread). Spreads are
commonly quoted in basis points (1 basis point is equal to
0.01%).
Stability and Growth Pact (SGP)
A set of EU budgetary rules agreed in 1997, reformed in
2005 underpinning the Economic and Monetary Union
(EMU) and reinforced in 2011 with the Six-Pack. The main
aim of the Stability and Growth Pact is to prevent the
occurrence of excessive budget deficits, defined as more
than 3% of gross domestic product (GDP). Member
States are also required to have a level of total public
debt of no more than 60% of GDP or be taking steps to
reduce it to that level. The SGP requires EU Member
States to promptly implement an excessive deficit procedure if it is found to be in serious breach of the rules. The
procedure requires a Member State to correct the budget deficit below 3% of GDP within a certain timeframe.

Sovereign, Supranational, and Agency (SSA)
A sector of the bond market which comprises sovereign,
supranational and agency issuers. The ESM and EFSF
both belong to this category.
Syndication
A method of issuing bonds where a syndicate of several
banks underwrite the bonds issued (that is buy the whole
issue) and resell the bonds to institutional investors.
Tap (“tapping a bond”)
A procedure that allows issuers to sell additional bonds
from past issues. The bonds are issued at their original
face value, maturity and coupon rate, but sold at the current market price. Increasing issues using a tap to allow
an organisation to increase the liquidity of existing bonds.
TARGET2
An electronic payment system owned and operated by
the Eurosystem. It enables the speedy and final settlement of national and cross-border payments handled in
euros using a single technical platform. The transactions
are settled one by one on a continuous basis, in central
bank money with immediate finality.
Troika
An informal, collective name for the three institutions
(European Commission, European Central Bank and
International Monetary Fund) that work together to negotiate policy conditionality for euro area Member States
that have applied for financial assistance from the ESM/
EFSF (and IMF). Assistance is provided on the condition
that the beneficiary Member State implements a package of policy reforms typically involving fiscal adjustment
and structural reforms to boost potential growth, create
jobs and improve competitiveness. The policy reforms
are specified in an MoU, and afterwards the Troika is
responsible for monitoring compliance with the policy
conditionality.
Two-Pack
Building on the so-called Six-Pack, the EU adopted in
2013 a new set of provisions for enhanced monitoring of
euro area Member States’ budgetary policies. Euro area
Member States are required to submit annually (by 15
October) to the European Commission and the Eurogroup
their draft budgetary plans for the next year. Closer monitoring applies to euro area Member States in an excessive deficit procedure to enable the European Commission
to better assess whether there exists a risk of non-compliance with the deadline to correct the excessive deficit.

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Acronyms and abbreviations

ALM

Asset and Liability Management

Bps

Basis points

BRRD

Bank Recovery and Resolution Directive

CDS

Credit default swap

CoCos

(bonds that may be converted into equity
“contingent” on a specified event)

FROB

(the Spanish fund for orderly bank
restructuring)

GDP

Gross domestic product

HICP

Harmonised Index of Consumer Prices

HQLA

High Quality Liquid Assets

IMF

International Monetary Fund

COFOG Categories by function of government

IRC

Internal Risk Committee

CRD

Capital Requirements Directive

LTROs

Longer-Term Refinancing Operations

CRR

Capital Requirements Regulation

MoU

Memorandum of Understanding

DMOs

Debt management offices

MTO

Medium-term budgetary objectives

DRI

Direct Recapitalisation Instrument

NPL

Non-Performing Loans

EBA

European Banking Authority

OECD

EBS

(Deutsche Bundesbank’s) ESM Bidding System

Organisation for Economic Co-operation and
Development

EC

European Commission

OMTs

Outright Monetary Transactions

ECB

European Central Bank

PCCL

Precautionary Conditioned Credit Line

ECCL

Enhanced Conditions Credit Line

EFSF

European Financial Stability Facility

EIOPA

European Insurance and Occupational
Pensions Authority

EMU

Economic and Monetary Union

ESM

European Stability Mechanism

ESMA

European Securities and Markets Authority

ESMAT Administrative Tribunal of the European
Stability Mechanism

SAREB (the Spanish asset management company)
SGP

Stability and Growth Pact

SLEs

Subordinated liabilities exercises

SMEs

Small and medium-sized enterprises

SSA

Sovereign, supranational and agency (bond
issuers)

SSM

Single Supervisory Mechanism

SRB

Single Resolution Board

SRF

Single Resolution Fund

ESRB

European Systemic Risk Board

VaR

Value at Risk

EU

European Union

WAM

Weighted-average maturity

EWS

Early Warning System

FFA

Financial Assistance Facility Agreement

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