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Agreed financial assistence measures for stabilizing the Eurozone
First assistence package: Emergency plan for Greece
Provisional. A 3 year program agreed May 2010.
Maximally €80 billiona
were approved as bilateral credit
from the Eurozone members for Greece, as well as €30 billion from the IMF.
But shortly after this agreement the Greek bond interest rates of Greece increased strongly.
Not agreed proposals
The proposals of Angela Merkel to exclude over-debted countries from the Eurozone, and to establish an ordered national insolvency scheme was not accepted.
The ECB buys bonds
The buys bonds of over-debted Eurozone countries either
- directly from these countries at an interest rate that is affordable for these countries, and/or
- on the open market, i.e buys at the normal market price in order to reduce the price level by increasing demand.
Second assistance package: EFSM-EFSF-IMF1 5
Provisional. Signed May 2010, in force until mid 2013.
Credits for the state in distress, including those destined for banking rescue (recapitalization). Credits totalling maximally €750 billion were agreed. This sum consists of:
- €60 billionb from the existing EU emergency fund, referred to as EFSM (Eur. Financial Stability Mechanism) when applied in the context fo the Eurozone.
- (After an augmentation in July 2010) €780 billion in guarantee commitment for the Euro members2 with an effective lending capacity of €440 billionc via a newly created special-purpose vehicle EFSF (Eur. Financial Stability Facility) that purchases new bonds on the free (primary) market at lower interest rates than is applicable for the distressed country.
In July 2011 the EFSF was expanded to include bond purchases also on the secondary market.
- €250 billion from the IMF (in which Eurozone members but also the USA are proportionally involved).
European Stability Mechanism 1
Permanent. Signed February 2012; to come into effect July 2012 or thereafter, depending on the national ratification status. In Germany pending a decision of the Constitutional Court. The Treaty requires the transfer of certain areas of national souvereignty to Brussels. Exists in parallel to the EFSM and replaces this agreement from mid 2013.
Prerequisite for receiving aid is that the country concerned has additionally ratified the
. Five support variants are foreseen:
- Direct credit as with the predecessor EFSF.
- Allocation of a maximal credit sum, up to which credit can be drawn as needed (intended to improve money market trust for countries that are not too distressed).
- Credit for a country earmarked for the purpose of saving banks from insolvency3.
- Acquisition4 of bonds issued by Euro countries for the purpose of increasing demand in order to reduce interest rate - both new bonds (primary market), and
- . . . already circulating bonds (secondary market).
Support wil be given when the access to normal market financing is impaired.
ESM credits have the status of a preferred creditor below the IMF. In case an assistence program already exists, the ESM has the same status as all other loans except the IMF.
A participation of private investors (banks) is only foreseen in exceptional cases
in which the country has to fulfill a macro-economic adjustment programm.
Maximal lending volume of the ESM: €700 billion (= €500 billion + €200 billion EFSF)
Of this, €80 Milliarden serves as security and as means to obtain top ratings - to be paid to the ESM in 5 steps by 2014. The existence of this capital stock sets the ESM apart from the EFSF. It is expected to facilitate credits of up to €500 billion.
The rest sum of €620 billion serves as back-up. Included
in this are €200 billion of the EFSF support already allocated to Ireland, Portugal and Greece.
1) Legal considerations:
The TFEU (treaty on the Functioning of the EU) included in Article 125 a no-bailout clause ruling out liability of other EU members.
To get around this, Article 122 was cited to justify the (temporary) EFSM: ~ "Where an EU member is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council .. may grant .. financial assistence .."
For the (permanent) ESM, Article 136 was amended with the addition: ~ "The Eurozone members may establish a stability mechanism to be activated if indispensable to safeguard the stability of the Euro area as a whole. The granting of any required financial assistence ... will be made subject to strict conditionality"
2a) In proportion to (population + GNP).
2) The over guarantee in order to obtain top ratings.
3) A 2011 EU agreement requires that banks secure their operations with more core capital from mid 2012 onward.
4) Usually by raising capital on the free market with security supplied by the participating Euro countries.
5) In March 2012 Greece carried out a massive "voluntary" debt restructuring for privately held bonds. Thereafter "second economic adjustment program for Greece" using EFSF+IMF means was agreed, totalling €102 billion from the Eurozone + €28 billion from the IMF. Payment of a first installment (€39 billion) depends on Greek reform progress.
a) Status 2012: €53 billion (+ €20 billion from the IMF) allocated to Greece.
b) Status 2012: €49 billion allocated to Ireland, Portugal, Greece.
c) Status 2012: €200 billion allocated.