EFSF

Establishment

On 9 May 2010, a comprehensive package of measures was decided including Council regulation establishing the European Financial Stabilisation Mechanism based on the Treaty on the functioning of the European Union and the European Financial Stability Facility in order to finance and support Euro Area Member States in difficulties caused by exceptional circumstances beyond their control.  It was envisaged that the support would be provided to Euro Area Member States in conjunction with the IMF.

The European Financial Stability Facility Act 2010 provides for participation by the State in the European Financial Stability Facility mechanism.  The facility is a public limited company incorporated under the laws of Luxembourg.  It is subject to the framework agreement between the members of the European Union including the State.  The 2010 Act provided for a contribution of €7.5 million by the State towards the capital and cost of the company.

The EFSF is to have a board of directors consistent with the number of shareholders.  Each shareholder is to nominate a director.. There is provision for the corporate governance of the EFSF group.  Certain decisions must be made unanimously by the guarantors.  Certain matters may be taken on a two thirds majority.

Purpose

The purpose of EFSF is to make stability support loans to Euro Area Member States up to a total of €440 billion within a certain time.  The availability of the loans is conditional on the State entering into a Memorandum of Understanding with the European Commission acting on behalf of the States in relation to budgetary discipline and economic policy guidelines and compliance with the same.

The EFSF is to finance loans, bonds, notes and commercial paper which are backed by the irrevocable unconditional guarantees of Euro Area Member States which act as guarantors in respect of the funding instrument under the terms of the agreement.  The guarantors are comprised of each Euro Area Member State.  Political decision was taken by all Euro Area Member States to provide guarantee commitments in accordance with the agreement.

Loan Facilities for States

The States agree that in the event of a request by a Euro Area Member States to the other states for a stability support loan, the Commission in liaison with the ECB and IMF where authorised to negotiate an MoU (Memorandum of Understanding) with the relevant borrower consistent with the decision of the Council under Article 136 of the Treaty.

The Commission in liaison with the ECB is to make a proposal to the working group on the main terms of the loan facility agreement.  The Commission in liaison with the ECB shall make a proposal to the euro working group for the main terms of the loan facility to be proposed by the borrower based on the assessment of the market conditions.

The detailed technical terms are negotiated.  The EFSF is authorised to structure and  negotiate the terms on which it may issue funding instruments on a stand-alone basis or pursuant to a debt issuance program, to finance the making of loans to borrowers.  The funding instruments are to have the same formats or profiles as the related loans subject to certain exceptions and notwithstanding the liability of the guarantor States to pay.

Supporting EFSF

The recourse of investors against the EFSF is limited to it assets, notwithstanding the liability of each guarantor to pay amounts of interest and principal due but unpaid under the funding instrument.

Each guarantor is required to provide an unconditional guarantee in the format approved in the proportions agreed.  The guarantees are to guarantee funding instruments issued under the relevant program.  The guarantees are to irrevocably and unconditionally guarantee the due repayment and scheduled payments of interest and principal due on the funding instruments issued by the EFSF.  The guarantees may be issued to a bond trustee or other representative of creditors.

If a state encounters financial difficulty such that it makes a demand for a facility support loan, provision is made for adjusting the guarantee. There is provision for a service fee of 50 basis points on the aggregate principal amount of each loan to be charged to the borrower and deducted from the cash amount to be remitted to the borrower in respect of each loan.

In addition, the net present value calculated on the basis of the internal rate of return of the funding instruments financing such loan shall be deducted from the cash amount to be remitted to the borrower in respect of the loan.

Advancing Loan

The service fee and net present value of the anticipated margin together with such other amount as it decides to retain as additional cash buffer, are deducted from the cash given to the borrower in respect of each loan.

Before each disbursement of loan under the facility, the Commission in liaison with the ECB is to present a report to the euro working group and in relation to compliance by the borrower with the terms and conditions in the MoU and in the relevant Council decision.  Guarantor shall evaluate compliance and will unanimously decide on whether to commit disbursement.

The cash enhancement of the program includes the guarantee which are made on the basis of adjusted contributions. The guarantee by each guarantor is for 120% of the adjusted contribution.  There is to be a cash reserve to act as a buffer.  This is to be invested in high quality liquid debt instrument.

Failures to Comply

If there is a delay or failure to pay by a borrower of a payment under a loan and accordingly a shortfall, in funds available to meet a scheduled payments of interest under a funding instrument. There is provision for making demands from the guarantees pro rata to the respective contribution percentages for the amount due unpaid. Provision for release of an amount from the cash reserve to cover shortfalls if any above.

If the EFSF becomes aware it has not received a scheduled payment in full and the shortfall gives rise to a shortfall of available funds to pay funding instruments issued by the EFSF, a guarantee demand may be made.  Guarantors must remit the relevant payments by the guarantee payment date.

There is provision for contribution between guarantors to equalise their contributions in the relevant percentages.  There is a provision for guarantors stepping out if they themselves encounter severe financial difficulties and request a stability support loan.