The European Stability Mechanism assumes the tasks of the European Financial Stability Facility and the European Financial Stabilisation Mechanism to provide financial assistance to Euro Area Member States. It follows the decision of the heads of government on July 2011 to increase the flexibility of the ESM.
The European Stability Mechanism Act 2012 provides for participation by Ireland in the permanent stability mechanism to assume the task of the EFSF and the EFSM. The fund is exempt from Irish taxation legislation.
With the view to increasing the effectiveness of financial assistance and prevention of financial contingency, heads of state and government in the euro area agreed to increase the flexibility of the ESM linked to appropriate conditionality. Strict observance of the European Union framework integrated macroeconomic surveillance and particularly the Stability and Growth Pact remains the first line of defence against confidence crisis affecting the stability of the euro area.
The heads of government and state of the euro area decided on 9 December 2011 to reinforce a stronger economic union including a fiscal compact and to strengthen the economic policy coordination implemented through the Treaty on Stability Coordination and Governance in the Economic and Monetary Union
ETSCG will help to develop a closer coordination in the euro area with a view to ensuring lasting stand and low-cost management of public finances, addressing one of the main sources of financial instability.
Membership of the ESM is automatic consequence of joining the euro area. The ESM is to cooperate closely with the IMF in providing stability support. The active participation of the IMF would be sought at the technical and financial levels. A Member State requesting financial assistance is expected to address a similar request to the IMF.
Non-euro Member States participating on an ad hoc basis alongside the ESF and its stability support operation will be invited to participate as observers in ESF meetings where stability and support and its monitoring is discussed.
The ESM has a Board of Governors and Directors, as well as a Managing Director. Decisions are taken by mutual agreement, qualified majority or simple majority as specified relative to that type of decision. Each ESM member shall appoint a Governor and alternate Governor.
The Board of Governors is chaired by the President of the Euro Group. The Member of the European Commission in charge of economic and monetary affairs and the President of the ECB, as well as the President of the Euro Group may participate in the meetings of the Board of Governors as observers.
The authorised capital stock of the fund is €700 000 million. ESM states agreed to make mixed contribution. There is provision for calling in authorised unpaid capital. The contribution key/proportions for contributions are specified.
Granting of financial assistance in the framework of new programs under the ESM is conditional on ratification of the Treaty on Stability Coordination and Governance. The ESMA provide stability support on the basis of strict conditionality appropriate to the financial assistance chosen, if it is indispensable to safeguarding the financial stability of the euro area.
The initial maximum lending volume is set at €500 billion including the outstanding EFSF stability support. The adequacy of the consolidated maximum lending volume will subject to reassessment before the Treaty come into a force.
The European Central Bank has been requested to perform certain tasks under the Treaty. In its statement of 28 November 2010, the Euro Group stated that standardised and identical collective action clauses are to be included in such a way as to preserve market liquidity in the terms and conditions for a new euro area government bond. The detail legal arrangements for collective action clauses were finalised by the economic and financial committee.
Like the IMF, the ESM is to provide stability support to an ESM member where regular access to market funding is impaired or is at risk of being impaired. ESF loans enjoyed preferred creditor status in a similar fashion to those of the IMF while accepting preferred creditor status of the IMF over the ESM. The status is effective as of the entry into force of the Treaty.
The Euro Area Member States will provide equivalent creditors status of the ESM and that of other States lending bilaterally in coordination with the ESM. ESM lending conditions for States is subject to macro-economic adjustment program.
It shall cover the financing and operating costs of the ESM and should be consistent with the lending conditions of the financial assistance facility agreement entered with Ireland and Portugal. Disputes on the interpretation and application of the Treaty between the contracting states is subject to the jurisdiction of the Courts of Justice
The procedure for granting stability and support is provided. The ESM may grant precautionary financial assistance. This may be in the form of precautionary condition credit line or in the form of enhanced conditions credit line. Conditionality attached to the ESM precautionary financial assistance are to be detailed in a MoU.
The Board may grant financial assistance through loans to an ESM Member for specific purpose of re-capitalising financial institutions of that State. The conditionality is to be detailed in the MoU. The Board of Directors shall adopt detailed guidelines on the modalities for implementing financial assistance for recapitalisation of financial institutions.
The Board may arrange for purchase of bonds of an ESM State on the primary market, with the objective of maximising the cost efficiency of financial assistance. Decisions on the interventions in the secondary market to address contagion shall be taken on the basis of an analysis of the ECB recognising the existence of exceptional financial market circumstances and risks to financial stability.
Conditionality attached to secondary market support shall be detailed in the MoU. The terms and conditions under which secondary market operations are to be conducted are to be specified in a Financial Assistance Facility Agreement. The Board of Directors is to adopt detailed guidelines on the modalities of implementing the same.
When granting stability support, the ESM will aim to cover its financing and operating costs and include an appropriate margin. Pricing will be detailed in the pricing guideline adopted by the Board of Directors, which may be reviewed from time to time.
ESM & EFSM
The ESM may borrow on the capital markets from banks, financial institutions and others for the performance of its functions. The modalities of borrowing are to be determined in accordance with detailed guidelines adopted by the Board of Directors.
The EFSF and EFSM handled transfers and programs for bailouts to Ireland, Portugal and Greece. The EFSF and EFSM were intended as temporary measures to expire in 2013, in part due to the lack of legal basis in the treaties.
The ESM is an intergovernmental organisation based in Luxembourg. Members applying for assistance, loan facility must have ratified the European Fiscal Compact. When applying for support, the country in question is analysed and evaluated on relevant stability matters by the European Commission, ECB, and IMF troika.
There are five different types of support that may be offered, a stability support loan within the macro economic adjustment program. This is to be granted if it is no longer sustainable for the state to draw monies on capital markets to cover the State’s financial needs. The conditional MoU agreement focuses on requirements for fiscal consolidation and structural reforms to improve solvent financial stability.
Bank capitalisation program. This may be granted if the roots of a crisis are primarily located in the financial sector rather than related to fiscal or structural policies at State level. The State seeking the finance and recapitalisation at sustainable borrowing cost. The ESM will only offer a bank recapitalisation support package if neither the private market nor the Member State will be able to undertake recapitalisation without increased financial stress or instability. The size of the market capitalisation is determined by a stress test calculating the amount needed to complete a financial sector appear to eliminate vulnerabilities.
Precautionary financial assistance may be offered to states who are currently sound enough to maintain access but are in fragile conditions and is requiring an adequate safety net by way of financial guarantee.
The primary market support facility, bond purchase operations in the primary market may be made by the ESM complementing regular loans under a macroeconomic adjustment program. The instance is used towards the end of an adjustment program to facilitate return to the markets and reduce the risk of a field by adoption. The intention is that the private market subscribe 50% of the bond auction while the ESM covers the remaining 50%.
The Secondary Market Support Facility
The Secondary Market Support Facility seeks to support functioning of the government debt markets in exceptional circumstances where lack of liquidity, threatens financial stability, with a view to pushing sovereign interest rates to unsustainable levels and creating refinancing problems for the banking system.
A secondary market intervention is intended to enable market making that would ensure debt market liquidity and incentivise investors to participate in the financing of the members of the ESM. The instrument may be offered as a standalone support or in combination with one of the other, above instruments.
No additional MoU agreement is required for those already receiving a Sovereign bailout loan or precautionary program. A non-program country is required to sign out an MoU agreement with policy conditions determined by the EU and ECB/agreed.
In order to further assist financial ability, the ECB decided on 6 September 2012 to run a free unlimited amount of yield lowering bond purchases. The OMT support programs for all EU States involved in sovereign State bailouts or precautionary programs from the EFSM or ESF for as long as the country is bound to suffer from stressed bond yields at excessive levels.
This is only allowed at the point of time where the country possesses or regains a complete market funding access and only if the country shall comply with all terms of the MoU. Countries receiving precautionary program other than a sovereign bailout have complete market access and qualify for OMT.
The OMT is the Outright Monetary Transactions program of the ECB under which the bank ECB purchases in the secondary sovereign bond markets and under certain conditions bonds issued by Eurozone State. The purpose is to safeguard appropriate monetary policy transmission and singleness of the monetary policy.
OMT is considered by the Central Bank once a Eurozone country government asked for assistance. The access to OMT requires the bond issuing countries to agree certain domestic measures/conditionality. The purpose is to bring bond yields then to levels that lower bonding costs for countries facing problem selling debt.
The OMT is not quantitative easing as it does not involve purchase by Central Banks of bonds thereby directly injecting liquidity. The ECB has declared that there would be full sterilisation so that the bank will be reabsorbing money pumped into the systems by any means necessary.
This 2014 legislation has two purposes. The first purpose is to make provision for the introduction by the ESM Board of Governors, through Article 19 of the ESM Treaty, of the ESM’s Direct Recapitalisation Instrument as one of the financial instruments envisaged under Articles 14 to 18 of the Treaty. Also through allowing for the creation of subsidiary bodies which will implement the Direct Recapitalisation Instrument.
The second purpose is to incorporate the ESM Treaty as amended following the accession of Latvia to the ESM on 13 March 2014, into the European Stability Mechanism Act 2012 (No. 20 of 2012) referred to in the Act as the ‘‘Principal Act’’.
The powers contained in the 2012 Act and the Treaty include those arising from the granting of a direct recapitalisation instrument and from the establishment by the ESM of subsidiary bodies or sub-entities which may be used by the ESM to effect a direct recapitalisation.
The purpose of the 2021 Act is to ratify Amending Agreements to the European Stability Mechanism (ESM) Treaty and Single Resolution Fund (SRF) Intergovernmental Agreement (IGA). Ratification is required in order to implement the Eurogroup agreement of 30 November 2020 regarding ESM Treaty reform, and to facilitate the early introduction of the Common Backstop to the Single Resolution Fund in January 2022, two years ahead of schedule. In addition, some technical amendments to existing legislation will update relevant definitions in order to extend the scope of existing national measures to Amending Agreements.
- Approval of terms of the Amending Agreement”, provides for the approval of the ratification of the Agreement amending the Treaty establishing the European Stability Mechanism by the Oireachtas.
- ‘‘Amendment of the Act of 2012”, provides for amendments to the ESM Act 2012; that the definition of “Treaty” provides that references to “Treaty” mean the Treaty establishing the European Stability Mechanism done at Brussels on 2 February 2012 between the Euro Area Member States of the European Union, as amended following the accession of Latvia on 13 March 2014, and as further adapted in consequence of the Republic of Lithuania to it on 3 February 2015, as amended by the “Amending Agreement”.
- This section also provides for an update of Ireland’s paid-in capital following the end of the temporary correction period of Slovakia on 1 January 2021. As set out in the ESM Treaty, the contribution key for the subscription of ESM authorised capital stock is adjusted when an ESM Member’s correction period Authorised capital stock and paid-in capital are transferred among ESM Members to reflect the adjusted ESM capital contribution key, and as such has been repaid to Central Fund.
2020 Amendments of Later Acts
- “Amendment of the Act of 2014” provides for amendments to the ESM (Amendment) Act 2014
- Approval of terms of Intergovernmental Agreement”, provides for the approval of the ratification of the SRF IGA Amending Agreement by the Oireachtas. This section also provides that the Minister shall publish notice of the coming into operation of the Intergovernmental Agreement, when this Agreement comes into effect.
- “Amendment of Act of 2015” provides for amendments to the Finance (Miscellaneous Provisions) Act 2015, as required by the SRF IGA Amending Agreement, and the substitution of the following definition for the definition of “Agreement”: The “ ‘Agreement’ means the Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund done at Brussels on 21 May 2014 as amended by the Agreement amending the Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund done at Brussels on 27 January 2021 and on 8 February 2021”.