What is the European Stability Mechanism (ESM)?

Published by Thomas Herold in Banking, Economics, Laws & Regulations

'European Stability Mechanism (ESM)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The European Stability Mechanism is a significant part of the financial stability and safeguard mechanisms in the Euro Zone area. It replaced the EFSF European Financial Stability Facility in 2013. This original EFSF was never intended to be permanent. Instead it was designed as a temporary solution to financial problems within the EU.

The European Stability Mechanism that took over for it was better established to deliver financial help to those Eurozone member countries that found themselves either threatened by or actually experiencing financial difficulties.

These two financial facilities ran concurrently from October of 2012 through June of 2013. Beginning in July of 2013 the EFSF could no longer begin new programs for financial support or help. The program still exists to manage and collect repayments of debts that are outstanding.

Once all of the existing loans that the EFSF program made have been repaid and all funding instruments and guarantors have received full payment for their contributions, then the EFSF will cease to exist entirely. This makes the replacing ESM the only and ongoing internal means for delivering aid in response to new calls for financial assistance from Eurozone member nations.

The European Stability Mechanism proves to be the principal means of resolving crises for nations which participate in the Euro. It obtains its money by issuing debt obligations. This permits it to fund financial aid and loans to the member countries of the Euro area. The European Council actually created the ESM in December of 2010. Participating Euro member states came together and signed a treaty between the governments on February 2 of 2012. October 8 of 2012 was the day they inaugurated the new ESM.

This ESM has great flexibility in funding its distressed member states. As various conditions are met, it is able to deliver loans as part of a program for macroeconomic adjustment. The mechanism is also able to buy member countries’ debt in either the secondary or primary markets.

It can help to recapitalize banks of member states by loaning the governments money for this purpose. It can also deliver credit lines as a means of providing financial help as a precaution. In worst case and last resort conditions, the facility is allowed to recapitalize banks and other financial institutions directly. This is limited to times when resolution funds and bail ins are not enough to make the bank financially viable again.

The resources of the ESM are considerable. It has a capital base that has been subscribed in the amount of €704.8 billion. Of this amount, €80.5 billion has been paid in to the facility. The remaining €624.3 billion is classified as callable capital when it is needed. The fund is able to loan out a maximum total of €500 billion.

The ESM is based in Luxembourg. It is governed by public international law as an intergovernmental organization. It has only government shareholders making up its ownership. These are the 19 member countries that make up the Euro area. In 2016, 153 staff members worked under the direction of Klaus Regling the managing director.

European countries which are in trouble have other outside recourses for help besides the ESM. The principal other provider of assistance is the International Monetary Fund. The EU has supported having its own ESM, along with the predecessors the EFSF and the European Financial Stabilization Mechanism because it feared the consequences of some of its member states’ problems with debt. Not all of the EZ countries suffered from debt issues. One EZ country failing could have contagious effects and widespread repercussions on the other national economies’ health.

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The term 'European Stability Mechanism (ESM)' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.