Tuesday 8 June 2010

European Financial Stability Facility EFSF

Monday, 7 June 2010 the finance ministers of the eurozone countries, meeting in Luxembourg, issued a press release on the establishment of the € 440 billion European Financial Stability Facility (EFSF), which is meant to defend the stability of the euro area.

Here is a link to the press release from the Euro Group and the text in full, with a few explanatory notes inserted:

Terms of reference of the Eurogroup European Financial Stability Facility (Luxembourg, 7 June 2010)

In line with the decisions taken on 9 May within the framework of the Ecofin Council to safeguard financial stability in Europe, Ministers have established the European Financial Stability Facility as a limited liability company under Luxembourg law (Société Anonyme). To this end, they have agreed on the Articles of Association of the EFSF and on the Framework Agreement between euro area Member States and the EFSF.

The objective of the EFSF is to collect funds and provide loans in conjunction with the IMF [International Monetary Fund] to cover the financing needs of euro area Member States in difficulty, subject to strict policy conditionality. Euro area Member States will provide guarantees for EFSF issuance up to a total of € 440 billion on a pro rata basis [proportionately].

While the EFSF has been incorporated with Luxembourg as its sole shareholder to expedite its creation, all Member States of the euro area reconfirm their commitment to enter the capital of the EFSF as soon as possible. National legal procedures to participate in the Facility are well on track. The shareholding of each Member State in the EFSF will correspond to its respective share in the paid-up capital of the ECB [European Central Bank].

The obligation of euro-area Member States to issue guarantees for the EFSF debt instruments will enter into force as soon as a critical mass of Member States, representing 90% of shareholding, has completed the relevant national parliamentary procedures. The European Financial Stability Mechanism [See: Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism; OJEU 12.5.2010 L 118/1] managed by the Commission is already available to cover urgent financing needs, if necessary.

Ministers have agreed on a number of measures to ensure the best possible credit quality and rating for the debt instruments issued by EFSF, such as a 120% guarantee of each Member State's pro rata share for each individual bond issue and the constitution, when loans are made, of a cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF. Member States have agreed that other mechanisms would be adopted if needed to further enhance the creditworthiness of the bonds or debt securities issued by the EFSF.

Ministers have also agreed to nominate their Eurogroup Working Group member (full or alternate) as director in the EFSF board to ensure close coordination between EFSF and the Eurogroup. A CEO will be appointed shortly.

The EIB [European Investment Bank] has confirmed its willingness to provide treasury management services and administrative support to the EFSF through a service level contract.

Ministers have also confirmed that the Commission is tasked to support, together with the EIB, the setting up of the EFSF and to contribute to its functioning. The Commission will ensure consistency between EFSF operations and other operations of assistance to euro area Member States. The Commission, in liaison with the ECB. is also tasked to negotiate the policy conditions attached to any loans provided by the EFSF and to assess compliance with these conditions.


Every sign of progress in the stabilisation of the euro area is to be welcomed. The finance ministers have agreed on the name of the Special Purpose Vehicle, which has become the European Financial Stability Facility (EFSF), on its establishment, its Articles of Association and on an undisclosed Framework Agreement, as well as some practical management measures.

However, we have been promised a European Union which functions according to certain standards of government and governance (Article 1 TEU):

This Treaty marks a new stage in the process of creating an ever closer union among the peoples of Europe, in which decisions are taken as openly as possible and as closely as possible to the citizen.

The founding values of the EU include freedom, democracy and the rule of law (Article 2 TEU).

How does this government by press releases after the fact by an unofficial group of finance ministers fulfil the standards of democratic and transparent government?

Ralf Grahn

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