On July 12, 2015, the euro-area member states agreed in principle to start negotiating a third loan package with Greece. The loan will be provided by the European Stability Mechanism (ESM), which was set up in 2012 by the euro-area member states.
Yesterday I looked at the structure and legal status of the ESM rescue mechanism, its capital structure, the decision making process and the procedure for a loan request. In today’s post, I look at mechanisms put in place to ensure compliance with the terms of an ESM loan agreement, the difference between the ESM and its predecessor the European Financial Stability Facility (EFSF), previous financial assistance facility agreements with Greece, and the relationship between the ESM and the International Monetary Fund (IMF).
1. How is compliance with the terms of the Financial Assistance Facility Agreement ensured?
As I noted yesterday, ESM loan agreements are subject to the conditions set out in a memorandum of understanding (MoU) negotiated between the European Commission, the European Central Bank (ECB), and the ESM member state applying for financial assistance. Monitoring of the compliance with the conditionality attached to the financial assistance facility is entrusted to the European Commission and the ECB and, wherever possible, the IMF. (ESM Treaty, art. 13, para. 7.) The country receiving the stability support needs to provide all the necessary information to these institutions.
If the monitoring reveals that a country receiving financial assistance deviates from the terms of the agreement, the Board of Directors can decide to withhold the disbursement of the next tranche of the loan. (Id. art. 16, para. 5.)
The ESM treaty also requires the ESM to 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. (Id. art. 13, para. 6.) The Early Warning System is supposed to detect repayment risks and allow for corrective actions.
2. What is the difference between the ESM and its predecessor the EFSF?
The European Financial Stability Facility (EFSF) was the predecessor of the ESM. In May 2010, the euro-area member states agreed to set up the EFSF to provide financial assistance to euro-area member states. The EFSF was organized as a limited liability company incorporated under Luxembourg law, whereas the ESM was established as an intergovernmental organization under public international law.
The EFSF did not have paid-in capital like the ESM. Instead, the EFSF member countries guaranteed the issuance of EFSF bills and bonds in an amount equal to their contribution key. (EFSF Framework Agreement, art. 2, para. 3.) In the event that the EFSF does not have the necessary liquidity to repay its bonds, guarantees are called and the EFSF members have to provide cash.
Unlike the ESM, the EFSF was structured as a temporary crisis resolution mechanism only. The EFSF framework agreement provided that the EFSF would be liquidated on the earliest date after June 30, 2013, on which there is no longer financial assistance outstanding to a euro-area member state. (EFSF Framework Agreement, art. 11, para. 2.)
The EFSF can no longer engage in new financing programs or enter into new loan facility agreements. It was agreed that the existing financial assistance programs for Ireland, Portugal, and Greece would continue to run parallel to the ESM programs until the countries exit the program. Ireland exited the EFSF financial assistance program on December 8, 2013, and Portugal exited on May 18, 2014. The EFSF program for Greece expired on June 30, 2015.
3. How were previous Financial Assistance Facility Agreements with Greece structured?
In April 2010, the first financial support program for Greece (the “Economic Adjustment Programme for Greece”) was launched. It involved bilateral loans from euro-area member states amounting to €80 billion, and a €30 billion loan from the IMF. It did not involve the EFSF or the ESM.
The decision to extend a second financial assistance program to Greece was agreed upon by euro zone heads of state or government on February 21, 2012. It was financed by the EFSF and started on February 21, 2012. The total of the second program amounted to €109 billion to be paid out in several tranches until the end of 2014. The IMF agreed to provide Greece with €28 billion to be disbursed in equal tranches over a four-year period.
The EFSF program was extended on December 19, 2014, and again on February 27, 2015, but ultimately expired on June 30, 2015, because the Greek government abandoned further negotiations. The last tranche of the loan in an amount of €1.8 billion was therefore not disbursed.
4. What is the relationship between the ESM and the IMF?
The ESM Treaty provides that the ESM must cooperate very closely with the IMF at a technical and financial level in providing financial assistance. A euro-area member state requesting financial assistance from the ESM is expected to address, wherever possible, a similar request to the IMF. (ESM Treaty, recital 8.) Addressing a request for financial assistance to the IMF was one of the preconditions for the euro-area member states to agree to start negotiating a third financial assistance agreement with Greece. The IMF has also been involved in the first and second financial assistance programs for Greece with loans of €30 billion and €28 billion respectively.
In addition, after a request for stability support has been received by the ESM, the assessment of whether public debt is sustainable is conducted by the European Commission and the ECB together with the IMF. (Id. art. 13, par. 1(b).)
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