Documents considered by the Committee on 26 January 2011 - European Scrutiny Committee Contents

2   Financial assistance for Member States



COM(10) 713

Commission Communication on the European Financial Stabilisation Mechanism

Legal base
Document originated30 November 2010
Deposited in Parliament10 December 2010
DepartmentHM Treasury
Basis of considerationEM of 21 January 2010
Previous Committee ReportNone
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionTo 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)


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.


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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