2 Financial assistance for Member
States
| (32314)
17361/10
COM(10) 713
| Commission Communication on the European Financial Stabilisation Mechanism
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| Legal base | —
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| Document originated | 30 November 2010
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| Deposited in Parliament | 10 December 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 21 January 2010
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| Previous Committee Report | None
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| Discussion in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | To be debated in European Committee B (together with the legislation establishing the European Financial Stabilisation Mechanism, already recommended for debate, as reported on 8 September 2010)
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Background
2.1 At an extraordinary meeting of the ECOFIN Council on 9
May 2010 agreement was reached for a Regulation, Council Regulation
(EU) No. 407/2010, creating a European Financial Stabilisation
Mechanism (EFSM), as part of a comprehensive package of measures
to preserve financial stability in the EU. The Regulation was
based on Article 122(2) TFEU, which allows EU financial assistance
to be granted to a Member State facing "severe difficulties
caused by natural disasters or exceptional occurrences beyond
its control". It provides for the EU Budget to guarantee
EU borrowing to support Member States in need, up to the level
of €60 billion (£51.64 billon). Support under the EFSM
would be provided in parallel with IMF funding and would be subject
to joint EU/IMF conditionality.
2.2 The Financial Regulation governing EU budgetary
matters allows the Commission, in exceptional or unforeseen circumstances,
to submit Draft Amending Budgets to alter the EU Budget for the
current financial year. Its Draft Amending Budget (DAB) No. 7
to the 2010 EU Budget, propose creation of a new budget line for
the guarantee provided by the EU under the EFSM and a corresponding
article on the revenue side of the EU budget.
2.3 In September 2010 we recommended these two
documents for debate in European Committee B.[8]
We understand the debate is, at last, to take place shortly.
2.4 Council Regulation (EU) No. 407/2010 establishing
the EFSM requires the Commission to prepare a report on implementation
of the Regulation and on the continuation of the exceptional circumstances
that justified its adoption in the first place. The Commission
report was to be completed within the first six months of the
Regulation coming into force and then updated every six months
thereafter.
The document
2.5 This Commission Communication is the first
report on Council Regulation (EU) No. 407/2010 — it is in
to two main sections. The first assesses the EU's performance
in implementing the Regulation and the second outlines the Commission's
assessment of whether or not the circumstances that justify the
continuation of the EFSM persist.
2.6 On implementation of the Regulation the Commission
classifies the action taken by the EU for operation of the EFSM
under two broad categories:
- making the necessary adjustments
to the EU Budget; and
- adjusting the Commission's capacity to raise
funds on financial markets.
In relation to the EU Budget the Commission says
that:
- an appropriate budget structure
has been created for financial assistance operations carried out
under the EFSM;
- this allows the EU Budget to act as a guarantee
should a beneficiary Member State default on its obligations under
the mechanism;
- the Own Resources ceiling has been re-evaluated
using recent economic data; and
- in light of the re-evaluation, with careful management
of repayment schedules, both the EFSM and the Balance of Payments
facility (for non-euro Member States) can be fully accommodated
below this ceiling, as required by the Regulation.
2.7 As for the Commission's capacity to raise
funds it says that:
- its capacity to raise funds
has been improved;
- the Euro Medium-term Note Programme (EMTN)[9]
has been revised to allow for increased borrowing activity under
the EFSM;
- the EMTN has now been increased to €80 billion
(£68.9 billion) and can be further increased to €110
billion (£94.7 billion)[10]
if required;
- major credit rating agencies have re-affirmed
the AAA rating on EU and Euratom notes, with a stable outlook,
following the establishment of the EFSM; and
- this reflects the debt management practices of
the EU, support of Member States and the existing layers of debt-servicing
protection that will continue to underpin the EU's creditworthiness.
2.8 In its assessment of circumstances justifying
continuation of the EFSM the Commission concludes that the market
circumstances that justified the creation of the EFSM persist
and finds that:
- Member States continue to face
significant financing needs;
- conditions for sovereign debt issuance have not
yet normalised; and
- competition for market-based financing will remain
intense.
2.9 On financing needs the Commission says that:
- much of the government borrowing
to support EU economies through the crisis has been met by short-term
issuance;
- according to Commission calculations, therefore,
the financing needs of the eurozone are particularly high in 2011,
2012 and 2015; and
- this implies a continued rollover risk for refinancing,
as the effect of fiscal consolidation on government debts will
only feed through gradually.
2.10 Turning to issuing conditions the Commission
says that:
- yield spreads to comparable
German bonds have remained elevated for some Member States;
- they narrowed following the creation of the EFSM,
but have more recently begun to widen again;[11]
- European Central Bank operations underline that
issuing conditions remain unsettled; and
- the Bank has maintained both its covered bonds
purchase programme and enhanced credit support measures and launched
the Securities Markets Programme in May 2010 to ensure depth and
liquidity in dysfunctional market segments.
2.11 In relation to competition for market-based
financing the Commission says that:
- It expects the increased refinancing
need of Member State governments to coincide with similar refinancing
needs in the private banking sector;
- around €1.8 trillion (£1.5 trillion)
of EU bank debt is due to mature over the two years to end-2012;
- at the same time any falls in market risk appetite
could result in high-risk issuers suffering from a flight-to-safety
among investors;
- this would also elevate competition among top-rated
issuers; and
- taking account of financing profiles, competition
for market-based financing is likely to be "particularly
challenging" for the period to the end 2012 and then again
in 2014.
The Government's view
2.12 The Economic Secretary to the Treasury (Justine
Greening) says that as a result of the Commission's assessment
the EFSM will continue to exist until 2013 at the latest. She
tells us that the Government agrees with the Commission assessment
that financial market conditions for sovereign debt issuance have
not yet normalised, as market access continues to remain impaired
for a number of Member States.
2.13 The Minister comments further that:
- the Government believes that
financial problems within the eurozone should be primarily resolved
by eurozone Member States; and
- to that end it secured agreement at the European
Council on 17 December 2010 that the TFEU "should be amended
in order for a permanent mechanism to be established by the Member
States of the euro area to safeguard the financial stability of
the euro area as whole (European Stability Mechanism)" and
that Article 122(2) TFEU (the basis for the EFSM) "will no
longer be needed for such purposes".
2.14 Recalling that under the EFSM Regulation
up to €60 billion of emergency finance could be provided
through the mechanism, the Minister reminds us that:
- if and when the EFSM is called
upon to provide financial assistance to a Member State, the Commission
will raise the money on capital markets, guaranteed by the EU
Budget;
- loans would be granted in parallel with IMF programmes,
and would be subject to policy conditionality; and
- to date €22.5 billion (£19.4 billion)
has been committed from the EFSM — to the financial assistance
package for Ireland.[12]
The Minister continues that:
- only in the event that a beneficiary
Member State defaults on loan repayments would the EU Budget be
called on to meet the cost of that repayment;
- this would require an increase in the Budget
and, in turn, an increase in Member States' contributions;
- as an indicative guide, the UK's GNI-share contribution
to the 2010 Budget is currently estimated at 13.8%; and
- any increase in the UK's contribution would be
within the limits of the Own Resources ceiling already agreed
by Parliament through the European Communities (Finance) Act 2008.
Conclusion
2.15 This document gives a useful overview
of the operation of the European Financial Stabilisation Mechanism
and the Commission's justification for its continuation. So we
recommend that it should be debated in European Committee B together
with the two documents which established the mechanism.
8 (31611) 9606/10 and (31796) 12119/10: see HC 428-i
(2010-11), chapter 7 (8 September 2010). Back
9
This is the programme that enables the Commission to issue notes to finance Balance of Payments loans, macro-financial assistance loans to third countries and Euratom loans. Back
10
€50billion (£43billion) for the Balance of Payments facility and €60billion (£51.6 billion)for the EFSM. Back
11
The Treasury notes that spreads narrowed somewhat after the publication
of the Commission's report. Back
12
(32310) 17210/10 and (32311) 17211/1/10: see HC 428-x (2010-11),
chapter 8 (8 December 2010) and HC 428-xii (2010-11), chapter
19 (12 January 2011). Back
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