What is... | May 21, 2010

What is the European stabilisation mechanism?

The phrase “European stabilisation mechanism” was a €500 billion financial aid package put together to help debt-troubled parts of Europe in 2010, such as Greece and Spain.

Given the size and importance of the aid package, eZonomics has put together a simple guide to the 2010 bailout.

The bailout basics
The European Union, European Central Bank and International Monetary Fund combined efforts on the weekend of 8 and 9 May to provide a financial aid package for European countries facing difficulty in financial markets. Altogether, €750 billion was made available. The European Union put in €60 billion, while the 16 countries in the Eurozone put in €440 billion in the form of guarantees. Together, these two amounts formed the European stabilisation mechanism. A further €250 billion was made available from the International Monetary Fund. None of the money had been called on at the time of writing.

The aim was to improve the confidence of investors that they will be repaid
This package aimed to assure people and institutions lending money to countries that used the euro as a common currency that government loans – and interest – would be paid back. There was a fear that slow growth and weakened financial conditions in some countries could make them unable to repay their loans. The promise of financial support and the actions of the European Central Bank reassured investors their money was safe.

More details about the support that has been made available
The initial €60 billion fund followed the example of an existing scheme that supported European Union countries outside the Eurozone. In this programme, the EU used its AAA credit rating to borrow in international markets. The money was then passed on to countries in need. From 2008-2010, Latvia, Romania and Hungary used this facility. Once established, the additional €440 billion fund from Eurozone countries could attract market funding in a “special purpose vehicle” to borrow loans to Eurozone countries in need. This fund existed until 2013. The financial stabilisation mechanism can only be activated in cases of extreme emergency and only under a joint EU/IMF programme.

Additional measures provided by the European Central Bank
The European Central Bank had also begun to buy government bonds of countries facing financial difficulties. This lowered the interest rate these countries faced. The ECB was taking separate measures to ensure that the activity did not increase the money supply. It was the first time the ECB purchased government debt - a turnaround from an earlier explicit stance not to buy government debt.

Actions taken by countries in difficulty
At the time of writing, there were no definite rules countries had to meet to obtain loans from the mechanism but the European Union said it “will urgently start working on the necessary reforms to complement the existing framework to ensure fiscal sustainability in the euro area". Greece and Spain responded by announcing widespread cuts in government spending and increases in taxes. These moves aimed to reduce budget deficits.



eZonomics team
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