The European Financial Stability Facility (EFSF)

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␣ A1 – What is the EFSF?
The European Financial Stability Facility (EFSF) is a company which was agreed by the 16 countries that share the euro on May 9th 2010 and incorporated in Luxembourg under Luxembourgish law on June 7th 20101. The EFSF’s objective is to preserve financial stability of Europe’s monetary union by providing temporary financial assistance to euro area Member States in difficulty. In order to reach its objective the EFSF can with the support of the German Debt Management Office (DMO) issue bonds or other debt instruments on the market to raise the funds needed to provide loans to countries in financial difficulties. Issues would be backed by guarantees given by euro area Member States of up to € 440 billion on a pro rata basis, in accordance with their share in the paid-up capital of the European Central Bank (ECB) (see table below).
Country
Kingdom of Belgium Federal Republic of Germany Ireland Kingdom of Spain French Republic Italian Republic Republic of Cyprus Grand Duchy of Luxembourg Republic of Malta Kingdom of the Netherlands Republic of Austria Portuguese Republic Republic of Slovenia Slovak Republic Republic of Finland Hellenic Republic Total Guarantee Commitments
Guarantee Commitments EUR (millions)
15,292.18 119,390.07 7,002.40 52,352.51 89,657.45 78,784.72 863.09 1,101.39 398.44 25,143.58 12,241.43 11,035.38 2,072.92 4,371.54 7,905.20 12,387.70 440,000.00
1 See http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/misc/114977.pdf
␣ A2 – Where is the EFSF headquartered? The EFSF is located at 43 Avenue John F. Kennedy, L-1855 Luxembourg.
␣ A3 – Will the EFSF be a big institution?
The EFSF is a very lean organisation. It will have a maximum staff of about a dozen people. The lean structure is possible because the German DMO (front office) and the European Investment Bank (back office) provide support to the EFSF. Additionally, the European Commission will ensure consistency between EFSF operations and other assistance to euro area Member States.
␣ A4 – Who manages the EFSF?
The Chief Executive Officer is Klaus Regling, a former Director General of the European Commission’s Directorate General for Economic and Financial Affairs who also worked at the International Monetary Fund (IMF) and the German Ministry of Finance and has professional experience of working in financial markets.
␣ A5 – Who will oversee the EFSF?
The board of the EFSF comprises high level representatives of the 16 euro area Member States i.e. Deputy Ministers or Secretaries of State or director generals of national treasuries. The European Commission and the European Central Bank (ECB) each have observers on the EFSF board. The EFSF board is headed by the Chairman of the EU’s Economic and Financial Committee.
␣ A6 – Does the European Parliament have an oversight role? Although there is no specific statutory requirement for accountability to the European
Parliament the EFSF will have a close relationship with the relevant committees.
␣ A7 – Is the EFSF a stand alone solution to support euro area countries?
The European Financial Stability Facility is part of a wider safety net to preserve financial stability within Europe. The means of the EFSF would be combined with loans of up to € 60 billion coming from the European Financial Stabilisation Mechanism (EFSM), i.e. funds raised by the European Commission and guaranteed by the EU budget, and up to € 250 billion from the International Monetary Fund for a financial safety net up to € 750 billion.
␣ A8 – What makes potential EFSF support different from aid for Greece?
The EFSF would provide loans by issuing bonds or other debt instruments guaranteed by euro area Member States. In the Greek package euro area Member States provide bilateral loans which are pooled by the European Commission and then paid out in
tranches to the Greek government. Together with financial aid from the IMF the support for Greece reaches €110 billion.
␣ A9 – Is the EFSF operational?
Yes. All euro area Member States have signed the EFSF Framework Agreement2. Furthermore the EFSF has received 13 commitment confirmations from euro area Member States. Excluding Greece, such confirmations represent 94.9 % of the total guarantee commitments (minimum necessary 90 %). Therefore, according to the Framework Agreement, the obligation of euro area Member States to issue guarantees entered into force on August 4th 20103.
␣ A10 – Will the EFSF be a preferred creditor?
No. Unlike the IMF the EFSF will have the same standing as any other sovereign claim on the country (pari passu). Private investors would be reluctant to provide loans to the country concerned if there were too many preferred creditors.
␣ A11 – Will EFSF bonds be eligible for ECB repo facilities? Yes, in case of issuance EFSF bonds would be eligible as collateral to the ECB.
␣ A12 – What rating does the EFSF have?
All three major credit rating agencies assigned the best possible credit rating – Standard & Poor’s “AAA”; Moody’s “Aaa”; Fitch Ratings “AAA” – to the EFSF. According to the CRAs, the long-term issuer rating as well as the top rating for EFSF’s possible future individual debt issues reflect the strong shareholder support and credit enhancements such as an over-guarantee of the amount borrowed by 120 % and cash buffer which will be deducted from the cash amount remitted to a borrower from each loan. The rating outlook was qualified as stable.
␣ A13 – How would a downgrade of a member country affect EFSF?
There are various credit enhancements used under the Framework Agreement which constitutes the EFSF. Therefore a downgrade of a member country would not necessarily lead to a downgrade of EFSF securities.
2 See http://www.efsf.europa.eu/documents/efsf-framework-agreement.htm 3 See http://www.efsf.europa.eu/press/2010/2010-002-efsf-becomes-fully-operational.htm
␣ A14 – Would the EFSF default if one of its member countries defaults?
The credit enhancement mechanisms under the Framework Agreement are designed to avoid such a situation. If a country were to default on its payments, guarantees would be called in from the guarantors and payments could be made from the cash buffer. If a guarantor did not live up to its obligations, guarantees from others could be called in to cover the shortfall.
␣ A15 – What will happen if several countries ask for assistance? The volume of the EFSF, together with the EFSM and the IMF, is large enough to provide temporary liquidity assistance to several Member States of the euro area.

␣ A16 – Will the EFSF bail out banks?
The EFSF provides loans to countries in financial difficulties. But it could be agreed with a Member State that receives funds to use them partially for financial support to banks in accordance with the agreed country programme.
␣ A17 – What happens if there is no financial operation by the EFSF?
Then the EFSF would close down after three years, on June 30th 2013. If there is a financial operation then the EFSF would exist until its last obligation has been fully repaid.
Section B – questions related to funding
␣ B1 – Will the EFSF do its own funding?
No, the funding will be done by the German DMO (Bundesrepublik Deutschland – Finanzagentur GmbH), but the EFSF is the issuer. The funding strategy is still under discussion and will be decided soon. Funding instruments shall however have in general the same profile as the related loans to the country in difficulty.
␣ B2 – Can EFSF and EFSM be in the market at the same time?
The funding strategy will be closely coordinated between EFSF and EFSM under each country programme which will be agreed upfront by finance ministers. While it is accepted that the EFSM will be in the market first, both mechanisms could raise money at the same time
␣ B3 – Will the EFSF only issue in euro?
Unlike the EFSM which only issues in euro the EFSF does not have any currency limitation for its funding activities. However, it is expected that the majority of funds would be raised in euro.
␣ B4 – Can the EFSF pre-fund? There has been a clear political decision by finance ministers not to access markets
until a euro member has submitted a request for support.
␣ B5 – Will EFSF’s funding reduce liquidity for other borrowers? No. If the EFSF borrows, the country that receives the funds will borrow less. Therefore, net funding needs in the euro area would not go up.

␣ B6 – Can the EFSF invest proceeds to manage excess liquidity?
Funds raised by the EFSF will be provided as loans to the euro area Member States which requested financial support. However the cash buffer, which is retained by the EFSF, will be invested in very safe and liquid assets. Some asset-liability management will therefore be necessary and will be conducted by the German Debt Management Office.
Section C – questions related to lending
␣ C1 – What will activate the lending by EFSF?
The facility can only act after a support request is made by a euro area Member State and a country programme has been negotiated with the European Commission and the IMF and after such a programme has been accepted by the euro area finance ministers and a Memorandum of Understanding (MoU) is signed. This would only occur when the country is unable to borrow on markets at acceptable rates.
␣ C2 – How fast can the EFSF provide financial support?
If there is a request from a euro area Member State for financial assistance, it will take three to four weeks to draw up a support programme including sending experts from the Commission, the IMF and the ECB to the country in difficulty. Once euro area finance ministers have approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.
␣ C3 – Will EFSF’s support be linked to conditions?
Yes, any financial assistance to a country in need would be linked to very strict policy conditions which would be set out in a Memorandum of Understanding (MoU) between the country in need and the European Commission. Decisions about the maximum amount of a loan, its price and duration, and the number of instalments to be disbursed would have to be taken by the finance ministers of the 16 euro area Member States unanimously.
␣ C4 – What happens if a country in difficulty fails to meet the conditions?
The loan disbursements and the country programme could be interrupted until the review of the country programme and the MoU is renegotiated. In such cases the conditionality still exists.
␣ C5 – What will be the lending capacity of the EFSF?
The EFSF has received the best possible credit rating off all major rating agencies (Standard & Poor’s “AAA”; Moody’s “Aaa”; Fitch Ratings “AAA”). This was achieved through credit enhancements foreseen in the agreement between the participants (framework agreement): an over-guarantee of 120 per cent on each bond. an up-front cash reserve which equals the net present value of the margin of the EFSF loan. a loan specific cash buffer
Together these credit enhancements ensure that all loans provided by the EFSF are backed by guarantees of the highest quality and sufficient liquid resource buffers. The available liquidity will be invested in securities of the best quality.
The extent to which such credit enhancements affect the maximum lending capacity depends on a number of variables, and cannot be exactly calculated up front. The structure of guarantors, interest rates, maturities and other loan conditions will determine the lending capacity. Further options of credit enhancement, which could expand the margin of available lending, are currently discussed and could be specified for individual loans. Calculations of lending capacity and specific credit enhancements will be fully transparent to investors and markets once a country programme is concluded and loan terms and conditions for each country will be defined.
Euro area Member States will provide guarantees for EFSF issuances up to a total of € 440 billion allocated pro rata according to their participation in the capital of the ECB. The available amounts under the EFSF will be complemented by those of the European Financial Stability Mechanism (€ 60 billion) and of the IMF. They are sufficient to deal with possible needs.
␣ C6 – What will be the maturity of EFSF loans and bonds?
The Framework Agreement does not contain any maturity limitations for the loans nor for the funding instruments. However, in line with the experience under the Greek program, loans and bonds are envisaged to have an average maturity of three to five years.
␣ C7 – What would be the interest rate of EFSF loans?
The blueprint for EFSF support – although not binding – is the financial aid package to Greece where, for variable-rate loans, the basis is three-month Euribor, while fixed- rate loans are based upon the rates corresponding to swap rates for the relevant maturities. In addition there is a charge of 300 basis points for maturities up to three years and an extra 100 basis points per year for loans longer than three years. A one time service fee of 50 basis points is charged to cover operational costs.
␣ C8 – Will non-euro area Member States participate in EFSF support activities?
There is no binding agreement with Member States outside the euro area. However two non-euro Member States, Poland and Sweden, have indicated that they are prepared to consider to contribute additional financial resources on a voluntary basis, in parallel to the EFSF.
␣ C9 – Will the EFSF support countries outside the euro area?
No. For Member States outside the euro area other European Union support mechanisms exist. For Member States that are not members of the euro area there is the Balance of Payments facility4; for countries outside the EU there is the Macro- Financial Assistance programme5. Furthermore, the EFSM could support all European Union Member States.
␣ C10 – Can the EFSF enter into precautionary standby arrangements?
No. The concept of precautionary credit lines does not fit with the approach of the EFSF. Finance ministers decided that the EFSF will only provide financial support if a euro area member loses access to markets.
␣ C11 – Would Greece be eligible to draw money from the EFSF? Greece has its own rescue package. Therefore it is not envisaged that Greece could expect support by the EFSF.
4 See http://ec.europa.eu/economy_finance/financial_operations/balance/index_en.htm. 5 See http://ec.europa.eu/economy_finance/financial_operations/market/third_countries/index_en.htm.