European Financial Stability Facility & European Stability Mechanism. July 2015

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1 European Financial Stability Facility & European Stability Mechanism July 2015

2 Contents 1. EFSF & ESM: key features, structure and instruments 2. EFSF & ESM: Lending and Funding activities 3. Why Invest in EFSF & ESM? 4. EFSF & ESM recent transactions & performance 5. Appendix 1

3 Disclaimer IMPORTANT: YOU ARE ADVISED TO READ THE FOLLOWING CAREFULLY BEFORE READING, ACCESSING OR MAKING ANY OTHER USE OF THE MATERIALS THAT FOLLOW. This presentation (the Presentation ) has been prepared by and is the sole responsibility of the European Financial Stability Facility (the EFSF ) & the European Stability Mechanism (the "ESM"), and has not been verified, approved or endorsed by any lead auditor, manager, bookrunner or underwriter retained by EFSF or ESM. The Presentation is provided for information purposes only and does not constitute, or form part of, any offer or invitation to underwrite, subscribe for or otherwise acquire or dispose of, or any solicitation of any offer to underwrite, subscribe for or otherwise acquire or dispose of, any debt or other securities of EFSF or ESM (the Securities ) and is not intended to provide the basis for any credit or any other third party evaluation of Securities. If any such offer or invitation is made, it will be done so pursuant to separate and distinct offering materials (the "Offering Materials") and any decision to purchase or subscribe for any Securities pursuant to such offer or invitation should be made solely on the basis of such Offering Materials and not on the basis of the Presentation. The Presentation should not be considered as a recommendation that any investor should subscribe for or purchase any Securities. Any person who subsequently acquires Securities must rely solely on the final Offering Materials published by EFSF or ESM in connection with such Securities, on the basis of which alone purchases of or subscription for such Securities should be made. In particular, investors should pay special attention to any sections of the final Offering Materials describing any risk factors. The merits or suitability of any Securities or any transaction described in the Presentation to a particular person s situation should be independently determined by such person. Any such determination should involve, inter alia, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of the Securities or such transaction. The Presentation may contain projections and forward-looking statements. Any such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause EFSF s or ESM s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any such forward-looking statements will be based on numerous assumptions regarding EFSF s and ESM s present and future strategies and the environment in which the EFSF or ESM will operate in the future. Further, any forward-looking statements will be based upon assumptions of future events which may not prove to be accurate. Any such forward-looking statements in the Presentation will speak only as at the date of the Presentation and EFSF and ESM assume no obligation to update or provide any additional information in relation to such forward-looking statements. The Presentation must not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of EFSF or ESM. The Presentation is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. EFSF (RCS Luxembourg B153414) and ESM, with their registered office and seat respectively at 6a, Circuit de la Foire Internationale, L-1347 Luxembourg 2

4 Financial Backstops EFSF and ESM Timeline June European Financial Stability Facility (EFSF) was created 28 November Agreement of financial assistance programme for Ireland ( 85bn) May Agreement of financial assistance programme for Portugal ( 78bn) 20 June Agreement by euro zone and EU finance ministers to increase EFSF effective lending capacity to 440bn (and guarantee commitments to 780 bn), widen scope of mandate and finalise terms of permanent stability mechanism, European Stability Mechanism 21 July Euro zone summit, second support package for Greece and increased scope for EFSF/ESM February ESM Treaty signed 14 March Second Greek programme formally approved by Euro Working Group 20 July Eurogroup grants financial assistance to Spain s banking sector 8 October ESM inaugurated 29 November Financial Assistance Facility Agreement with Spain ( 100bn) 1 January All staff now ESM (but also work for EFSF) 8 January ESM launches its short term programme with its 1st bill auction 25 March Eurogroup agrees to grant financial assistance to Cyprus 8 May Financial Assistance Facility Agreement with Cyprus ( 9bn) 1 July EFSF may no longer finance new programmes nor enter into new loan facility agreements 8 October ESM launched its long-term funding programme with a 7 billion 5-year benchmark bond 8 December Ireland successfully exits EFSF financial assistance programme 31 December Spain successfully exits ESM financial assistance programme 3

5 Financial Backstops EFSF and ESM Timeline (cont) March Latvia becomes 18 th Member of ESM 30 April ESM reaches target level of 80 billion in paid-in capital 18 May Portugal successfully exits EFSF financial assistance programme 7 July ESM BoD approves Spain s request to make an early repayment of 1.3bn 19 December Technical extension of EFSF financial assistance programme for Greece until 28/02/ February Lithuania becomes 19 th Member of ESM 27 February EFSF Board of Directors extends MFFA for Greece until 30/06/ March ESM BoD approves Spain s second request for make any early repayment ( 1.5bn) 10 March ESM issues first ever negative yield for syndicated euro SSA benchmark 30 June EFSF financial assistance programme for Greece expires 2 July ESM BoD approves Spain s request to make its third early repayment for an amount of 2.5 bn 4

6 EFSF & ESM: overview Legal Structure Private company under Luxembourg law Inter-governmental institution under international law Framework Capital structure Maximum Lending capacity Lending June 2010-June 2013 Funding until 2056 Backed by guarantees of euro area Member States 192bn committed for Ireland, Portugal & Greece Permanent institution Subscribed capital of 704.8bn* 80.55bn in paid-in capital 624.3bn in committed callable capital 500bn Creditor status Pari passu Preferred creditor status (after IMF) ** Credit Rating AA (negative) / Aa1 (stable) / AA (stable) - / Aa1 (stable) / AAA (stable) Risk Weighting / HQLA designation 0% Risk Weighted / High Quality Liquid Asset for LCR*** * The initial subscribed capital of 700 bn has increased since the accession of Latvia in March 2014 and Lithuania in February 2015 ** For the financial assistance for recapitalisation of the Spanish banking sector, pari passu will apply *** Regulation (EU) no. 575/2013 (Capital Requirements Regulation), Article 118. Following a decision published by the Basel Committee on Banking Supervision on 18 March 2014, EFSF & ESM securities will be included in the list of entities receiving a 0% risk weighting under Basel II, as well as received HQLA categorisation for Liquidity Coverage Ratio computation under Basel III 5

7 Eur bn ESM Robust Capital Structure: backed by 704.8* bn subscribed capital ESM s subscribed capital exceeds maximum lending capacity by 40% Minimum 15% ratio of paid-in capital/amount of ESM indebtedness Paid-in Capital / Subscribed Capital = 11.4% Paid-in Capital bn* Not available for on-lending but to protect bondholders Prudent and conservative investment policy high quality liquid assets a short-term and a medium-term tranche Committed Callable Capital bn* Emergency capital call ESM MD can make emergency capital call to avoid default on any ESM payment obligation (to be paid within 7 days of receipt) Capital call to restore level of paid-in capital ESM Board of Directors can make a capital call to restore level of paid-in capital if reduced due to loss absorption General capital call ESM Board of Governors may call in capital at any time * The initial subscribed capital of 700 bn has increased since the accession of Latvia in March 2014 and Lithuania in February

8 ESM and EFSF Lending Capacity EFSF capped at 192 billion (from 440bn) ESM billion EUR billion * Ireland Portugal Greece Remainder - no longer available Recap of Spanish banks - outstanding loan Cyprus Available capacity Ireland Date Agreed: November 2010 Concluded: December 2013 Amount disbursed: 17.7 bn Weighted average maturity: 20.8 years Final maturity: 2042 Portugal Date Agreed: May 2011 Concluded: May 2014 Amount committed by EFSF: 26 bn Amount disbursed: 26 bn Weighted average maturity: 20.8 years Final maturity: 2040 Greece Date Agreed: March 2012 Expired: June 2015 Amount outstanding: bn Weighted average maturity: years Final maturity: 2056 * On 2 July 2015, ESM Board of Directors approved an early repayment of 2.5 billion from Spain Recapitalisation of Spanish banking sector Date Agreed: November 2012 Concluded: December 2013 Amount disbursed: 41.3 bn Amount repaid: 5.6 bn Weighted average maturity: 12.5 years Final maturity: 2027 Programme for Cyprus Date Agreed: March 2013 Duration: Q Q Amount committed: approx 9 bn Amount disbursed: 5.8 bn Weighted average maturity: years Final maturity: *

9 EFSF and ESM: mission and scope of activity Mission : to safeguard financial stability in Europe by providing financial assistance to euro area Member States Instruments only Loans Primary Market Purchases Secondary Market Purchases Precautionary Programme Bank recapitalisations through loans to governments Direct bank recapitalisation All assistance is linked to appropriate conditionality EFSF and ESM finance their activity by issuing bonds or other debt instruments 8

10 ESM instrument: direct bank recapitalisation On 8 December 2014, ESM Board of Governors adopted the ESM direct recapitalisation instrument for euro area financial institutions. Requisites for Eligibility Member State Unable to rescue without adverse effects on fiscal sustainability and market access Assistance must be indispensable to protect financial stability of euro area or its Member States Bank Is or likely to be in breach of capital requirements Viability depends on capital injection & restructuring Unable to attract sufficient capital from private sources Systemic or pose threat to financial stability Due diligence and thorough economic valuation are pre-requisites Limit: 60 billion is the max. amount for direct recapitalisation by the ESM Conditionality: bank-specific rules and policy conditions for the requesting Member State Potential retroactive application: Decided on a case-by-case basis under unanimity rule 9

11 Both issuers present in debt markets for many years to come After completion of the programmes, EFSF and ESM will continue to issue in order to roll over the existing debt Both EFSF and ESM funding programmes will also roll over the cashless bond transactions issued so far Once outstanding debt and loans have been repaid (loans maturing up to 2056), EFSF will close down EFSF & ESM Funding / Lending Profiles * Source: ESM at 12/06/2015 * Annual funding programme 10

12 2 EFSF & ESM: Lending & Funding 11

13 EFSF/ESM lending programme as of July 1st, 2015 Countries Total programme Programme funded by EFSF Current outstanding under EFSF* Remaining Amount Ireland* E F S F Portugal* Greece ** Budget. financing (Cash) Bank Recap (Cashless) PSI Sweetener (Cashless) Accr. Interests (Cashless) Debt Buy Back (Cashless) Total * Figures do mention the net disbursed amount for PT & IE, being the net loan amount minus the upfront fees and issuance costs paid by the beneficiary MS to the EFSF at inception of the loan. Both are conventions for these countries. The net loan amount lent to IE and PT set in total Eur 2 bn higher. Contrarily the facility refers to the net loan amount for GR. ** The initial programme amount for Greece was EUR bln. This final amount is derived by excluding the undisbursed amount of EUR 0.95 bln of the PSI facility as well as EUR bln "Bank Recapitalisation Installment" and EUR 1.81 bln installment of the MFFA, whose availability periods have ended and are therefore no longer available. Countries Total programme *** Programme funded by ESM *** Current outstanding under ESM **** Remaining Amount E S M Spain** (Bank Recap) Cyprus Budget. financing and Bank Recap (Cash) 4.20 Bank Recap (Cashless) 1.50 ** Disbursements were made in-kind. Subsequently 27.5bn were exchanged for cash *** Initial programme amount for SP was 100 billion out of which 41,3 was disbursed during Availability Period. Availability period has ended on 31/12/2013. **** SP has voluntarily prepaid 1.3 billion on 08/07/2014 and 1.5 billion on 17/03/2015 and made a scheduled repayment of 0.3 billion on 23/07/

14 EFSF / ESM Funding programme as of July 1st, 2015 E F S F billion Q Q Q Q Total Total Lending Program of which Cash Transactions Redemptions (excl. regular bills) Funding needs (excl. regular bills) [Cash transactions + Redemptions] Funding Programme (excl. regular bills) Outstanding debt (as of end of the year) billion Q Q Q Q Total Please note that figures are based on estimates and may vary depending upon market conditions. These figures do not include any cashless operations. Negative gaps between Lending requirements and Long Term Funding will be covered by the Bill Programme. Total lending requirements for future periods are based on current disbursement schedule. Total Lending Program of which Cash Transactions E S M Redemptions (excl. regular bills) Funding needs (excl. regular bills) [Cash transactions + Redemptions] Funding Programme (excl. regular bills) ST Funding outstanding (end of period) Outstanding debt (as of end of the year)

15 EFSF & ESM Funding Strategy EFSF and ESM have the same funding strategy and same funding team but act as different entities Providing beneficiary countries with funding at best conditions with priority given to mitigating ESM liquidity and interest rate risk proposing the best balance between costs and maturities Funding strategy Short term funding Regular bill programme (ESM only) Unsecured money market Long term funding Highly liquid benchmark bonds Up to 30 year Taps possible Via syndications, auctions Private placements Non euro currencies allowed Cashless transactions Issue & Repurchase Process Fund pool Funds are not attributed to one country but pooled One unique rate for all countries Diversified Funding Strategy 14

16 2 Why invest in EFSF & ESM? 15

17 The advantage of EFSF & ESM: government-style strategic funding ESM Regular bill programme announced in advance for each quarter Large benchmark transactions targeted final outstanding amount Taps of existing bonds Use of syndications and auctions High transparency of funding activity auctions and possible execution weeks announced in our newsletter in advance for each quarter => differentiates us from other SSA issuers => offers an alternative to government bonds 16

18 % The advantage of EFSF & ESM: liquidity ESM and EFSF bonds are highly liquid and supported by our market group of 39 banks Total EUR SAS* trading volume 2012 Q (EUR Bn) Total trading volume EFSF (EUR Bn) Total trading volume ESM (EUR Bn) EFSF & ESM market share ** 17% Total SAS (incl. EFSF & ESM) EFSF ESM EFSF & ESM % of market share Volume (EUR Bn) % of Total SAS market share % of Total SAS market share Q Q Q Q Q Q Q Q Q Source : Tradeweb, as of 30 June 2015 * Only European Supranational and Agencies ** ESM bonds included since Q (inauguration in October 2013) 20 Q Q Q Q Q Q % 2012-Q % 2012-Q % 2012-Q % 2013-Q % 2013-Q % 2013-Q % 2013-Q % 3% 2014-Q % 1% 2014-Q % 2% 2014-Q % 4% 2014-Q % 7% 2015-Q % 4% 2015-Q % 2%

19 Yield (%) Yield Diff (bp) Yield (%) Yield Diff (bp) The advantage of EFSF: performance EFSF s issuances are fully guaranteed by highly rated sovereigns through the over-guarantee structure. The EFSF performance can be then compared with a synthetic average yield basket of the 6 highly-rated guarantors. The graphs show that EFSF has performed very well over the past years and the spread performance reveals that EFSF is now a well established issuer. The current trading level evidence that EFSF credit is perceived by the market participants as good as its main guarantors. EFSF vs Core Guarantors - 5YR Yield Levels Core guarantors Adjusted Cont. Key Over-guaranteed Cont. Key Germany 29.13% 46.74% France 21.88% 35.10% The Netherlands 6.13% 9.84% Austria 2.99% 4.79% Finland 1.93% 3.09% Luxembourg 0.27% 0.43% EFSF vs Core Guarantors - 10YR Yield Levels 100% Diff (EFSF vs Basket) 5YR Core Guarantors Basket EFSF 5Yr Generic 18 Diff (EFSF vs Basket) 10YR Core Guarantors Basket EFSF 10Yr Generic

20 Mid Asset Swap Spread EFSF & ESM vs France and Germany Bond Curves EFSF, ESM and France Bond Curve Jan-15 Oct-17 Jun-20 Mar-23 Dec-25 Sep-28 Jun-31 Mar-34 Dec-36 Aug-39 May-42 Feb EFSF France ESM Germany Source: Bloomberg, 2 July

21 EFSF: solid and diversified investor base Over 1200 investors have participated in EFSF syndicated bond issues* Geographical breakdown Breakdown by investor type 2% 1% 16% 5% 20% Asia Euro area 7% 30% Central Banks/Govt/SWFs Fund managers Rest of Europe Banks 6% UK&Switzerland 39% Pension funds/ins 51% Middle East & Africa Americas 23% Other *Total breakdown includes all EFSF syndicated bond issues at time of issue. Placements by auction are not included. As at 28/05/

22 ESM: already a mature investor base Geographical breakdown Breakdown by investor type 3% 3% 2% Central Banks/Govt/Sov. Wealth fund 7% 18% 47% 25% Asia Euro area Rest of Europe UK&Switzerland Other 42% 17% 36% Fund managers Banks Pension funds/insurance/ Corporates Others *Total breakdown includes all ESM syndicated bond issues at time of issue. Placements by auction are not included. As at 10/03/

23 EFSF: annual investor breakdown 100% 90% 80% 70% Geographical breakdown in % % 90% 80% 70% 24 Investor type in % % 50% 40% % 50% 40% % 30% 20% 10% % 10% % % Asia Rest of Europe Middle East & Africa Euro area UK+CH Americas CB/Govt/SWF Asset Managers Banks Pensions/Ins./Corp. Others 22

24 ESM: annual investor breakdown 100% 90% Geographical breakdown in % % 90% Investor type in % % 70% % 70% % 60% 50% % 20 40% 30% 40% 30% 13 20% 10% % 10% % % Asia Rest of Europe Middle East & Africa Euro area UK+CH Americas CB/Govt/SWF Asset managers Banks Pensions/Ins./Corp. Others 23

25 EFSF & ESM widely recognised as Level 1 Asset International Regulatory Framework Basel III & Basel II In Mar-2014 the Basel Committee on Banking Supervision* designated EFSF & ESM securities as Level 1 High Quality Liquid Assets under LCR in Basel III. EFSF & ESM securities will therefore be included in the list of entities receiving a 0% risk weighting under Basel II (*) European Regulatory Framework CRR / CRD IV In Dec-2013 the EBA, under its role in providing assessment on uniform definition on LCR, recommended the EFSF and ESM notes to be considered as Extremely High Quality Liquid Assets (**) Following the EBA recommendation, the European Commission adopted on 10 th October a Delegated Act with regard to Liquidity Coverage Requirement (LCR), by which recognizes EFSF and ESM as Level 1 assets (***) * Basel Committee newsletter March 2014: click here ** EBA report on appropriate uniform definitions of extremely HQLA and HQLA and on operational requirements for liquid assets under Article 509(34) and (5) CRR: click here *** EU press release on adoption of delegated acts under the Solvency II Directive and Capital Requirements Regulation (CRR) click here For more information on the European regulatory procedure (CRR/CRD IV), please refer to the EC Q&A section here 24

26 EFSF & ESM as a reference EFSF & ESM are included in the major SSA and government bond indices Provider Index EFSF weighting* ESM weighting* BoA ML EMU Broad Market index 1.60% 0.31% J.P. Morgan JPM Maggie Euro Credit Index 6.97% 1.38% iboxx EUR Sub-sovereigns index 13.14% 2.52% Citigroup World Broad investment Grade index Euro Broad Investment Grade index 0.50% 1.70% 0.07% 0.24% Barclays Euro Aggregate index Global Aggregate index 1.63% 0.31% 0.40% 0.08% * Weighting at 30/06/

27 2 EFSF & ESM transactions 26

28 EFSF places 2.25 billion 4.5-year bond On 27 May 2015, EFSF placed an 2.25 billion 4.5-year bond. It priced at MS -13bp. Amount placed 2.25 billion Maturity 4 November 2019 Coupon 0.125% Reoffer yield 0.175% Reoffer price 99.78% Settlement date 3 June 2015 Lead managers Barclays, Credit Agricole CIB and SG CIB Geographical breakdown 7% 19% 18% 8% 48% Breakdown by investor type 1% 40% 43% Asia Euro area Rest of Europe UK & Switzerland Middle East & Africa Central Banks/Govt/SWFs Fund managers Banks Pension funds/insurance 16%

29 EFSF 2 billion tap of Oct 2017 bond On 13 May 2015, EFSF tapped a 3 year bond initially issued on 11/06/2014 bringing the total size to 5bn. Amount placed 2 billion Maturity 18/10/2017 Coupon 0.25% Reoffer yield 0.00% Reoffer price % Settlement date 20/05/2015 Lead managers Goldman Sachs, HSBC, JP Morgan Geographical breakdown 3% Euro Area 39% Rest of Europe 46% UK & Switzerland Middle East & Africa 12% Breakdown by investor type 12% Central Banks/Govt/SWFs 21% Banks Fund managers 67%

30 EFSF 0.75 billion tap of Feb 2045 bond On 13 May 2015, EFSF tapped a 30 year bond initially issued on 10/02/2015 bringing the total size to 2.25bn. Geographical breakdown 34% Euro Area Amount placed 0.75 billion Maturity 17/02/2045 Coupon 1.20% Reoffer yield 1.484% Reoffer price % Settlement date 20/05/2015 Lead managers Goldman Sachs, HSBC, JP Morgan Rest of Europe 59% UK & Switzerland 7% Breakdown by investor type 2% 7% Central Banks/Govt/SWFs Banks 49% Fund managers 42% Pension funds/insurance

31 EFSF places 3 billion 10-year bond On 21 April 2015, EFSF placed an 3 billion 10-year bond. It priced at MS -22bp. Amount placed 3 billion Maturity 28 April 2025 Coupon 0.20% Reoffer yield 0.239% Reoffer price % Settlement date 28 April 2015 Lead managers BNP Paribas, Deutsche Bank and Natixis Geographical breakdown 28% 2% 9% 7% 33% 21% Breakdown by investor type 2% 3% 30% Asia Euro area Rest of Europe UK & Switzerland Middle East & Africa Others Central Banks/Official Institutions Fund managers Banks 39% Insurance/Pension funds Others 26%

32 ESM places 2.5-year bond On 10 March 2015, ESM placed its first 2.5- year bond. Geographical breakdown Amount placed 3 billion Maturity 17 October 2017 Coupon 0.00% Reoffer yield -0.07% Reoffer price % Settlement date 17 March 2015 Lead managers BofAML, HSBC, Unicredit Breakdown by investor type 21% 34% Central Banks/Gov/Sov Wealth Fund Banks Asset managers 45%

33 EFSF places 1.5 billion 30-year bond On 10 February 2015, EFSF placed an 1.5 billion 30-year bond. It priced at MS+4bp. Geographical breakdown Amount placed 1.5 billion Maturity 17/02/2045 Coupon 1.20% Reoffer yield 1.229% Reoffer price % Settlement date 17/02/2015 Lead managers DZ Bank, Goldman Sachs International, RBS Breakdown by investor type

34 EFSF places 30-year bond On 22 July 2014, EFSF placed a 30-year syndicated bond. Geographical breakdown Awarded Global Capital Deal of the Year in the Euro-supranational/agency category Amount placed 4 billion Maturity 29 July 2044 Coupon 2.35% Reoffer yield 2.392% Reoffer price % Settlement date 29 July 2014 Lead managers Commerzbank, Goldman Sachs International and Royal Bank of Scotland 27

35 Contacts Christophe Frankel CFO and Deputy Managing Director Siegfried Ruhl Head of Funding Bloomberg: ESM <GO> ; EFST<GO> 34

36 2 Appendix 35

37 EFSF shareholder contribution Member States Credit rating (S&P/Moodys/Fitch) EFSF max. guarantee Commitments ( m) EFSF contribution key (%) New EFSF maximum guarantee commitments* In case a country steps out, contribution keys would be readjusted among remaining guarantors and the guarantee committee amount would decrease accordingly. Effective lending capacity is 440 billion which corresponds to the guarantee commitments of triple A member states. New EFSF contribution key in %* Austria (AA+/Aaa/AA+) 21, , Belgium (AA/Aa3/AA) 27, , Cyprus (B+/B3/B-) 1, Estonia (AA-/A1/A+) 1, , Finland (AA+/Aaa/AAA) 13, , France (AA/Aa1/AA) 158, , Germany (AAA/Aaa/AAA) 211, , Greece (CCC-/Caa3/CC) 21, Ireland (A+/Baa1/A-) 12, Italy (BBB-/Baa2/BBB+) 139, , Luxembourg (AAA/Aaa/AAA) 1, , Malta (BBB+/A3/A) Netherlands (AA+/Aaa/AAA) 44, , Portugal (BB/Ba1/BB+) 19, Slovakia (A/A2/A+) 7, , Slovenia (A-/Baa3/BBB+) 3, , Spain (BBB/Baa2/BBB+) 92, , Total 779, , * Amended following stepping out of Portugal, Greece, Ireland and Cyprus 36

38 Principal + Interest EFSF: solid over-guarantee structure In the case of a missed payment by a borrower, EFSF would be in charge of ensuring that each Guarantor remits its share of the shortfall to the EFSF The shortfall would be covered by the: 1. Guarantees 2. Grossing up of guarantees (up to 165% overcollateralisation) If a payment is missed by a borrower, the country programme could be interrupted and subsequently reviewed and the MoU renegotiated but the conditionality would still exist All guarantors rank equally and pari passu amongst themselves 100% guaranteed by EFSF required rating Credit enhancement of up to 165% over-guarantee to cover payments in case of any payment default from a borrower. The guarantees cover both principal and interest. Credit enhancement structure Up to 165% overguarantee Over collateral -isation Interest 37

39 ESM shareholder contributions Member States Credit rating (S&P/Moodys/Fitch) ESM contribution key (%) Capital subscription ( bn) Paid-in capital Austria (AA+/Aaa/AA+) Belgium (AA/Aa3/AA) Cyprus (B+/B3/B-) Estonia (AA-/A1/A+) Finland (AA+/Aaa/AAA) ( bn) France (AA/Aa1/AA) Germany (AAA/Aaa/AAA) Greece (CCC-/Caa3/CC) Ireland (A+/Baa1/A-) Italy (BBB-/Baa2/BBB+) Latvia* (A-/A3/A-) Lithuania** (A-/A3/A-) Luxembourg (AAA/Aaa/AAA) Malta (BBB+/A3/A) Netherlands (AA+/Aaa/AAA) Portugal (BB/Ba1/BB+) Slovakia (A/A2/A+) Slovenia (A-/Baa3/BBB+) Spain (BBB/Baa2/BBB+) Total 100% * 13 March 2014 Latvia joined the ESM. ** 03 February 2015 Lithuania joined the ESM. 38

40 ESM: procedure for granting stability support Application for support Country makes formal request to Chairperson of ESM Board of Governors ( BoG ) Assessment European Commission ( EC ), in liaison with ECB assesses the following: risk to country s financial stability, whether country s public debt is sustainable (wherever appropriate together with IMF) actual or potential financing needs of country Proposal Based on assessment, ESM BoG decides whether to grant (in principle) support in the form of a financial assistance facility following which the ESM Managing Director makes proposal for adoption by BoG for a FFA including the terms and conditions and the choice of instruments Approval of support terms A common Memorandum of Understanding of policy conditionality is established between the EC, the IMF (where applicable) and beneficiary country and approved by BoG. ESM MD prepares a Financial Assistance Facility Agreement (FFA). The FFA establishes the financial terms of the support in compliance with the policy conditions. It is adopted by ESM Board of Directors ( BoD ). Financial support After ensuring compliance with policy conditions, ESM makes support available to country, upon approval by BoD Timeframe from application to disbursement of funds depends upon individual country case and instrument requested 39

41 EFSF & ESM instruments Loans Objective: assist MS that have significant financing needs but have lost access to market financing MoU (negotiated by EC, in liaison with ECB and where possible IMF) details conditionality Primary market purchases Objective: allow MS to maintain or restore market access For use by MS under macro-economic adjustment programme or under precautionary programme Limit: no more than 50% of final issued amount. ESM can hold / sell back to country / resell on market / use for repos Secondary market purchases Objective: support functioning of debt markets and appropriate price formation in government bonds For use by programme and non-programme countries, with conditionality. Subject to ECB report identifying risk to euro area and assessing need for intervention Precautionary programme Objective: prevent crisis situations by assistance before MS face difficulties in raising funds and avoid negative connotation of being a programme country Precautionary conditioned credit line (PCCL) and Enhanced conditions credit line (ECCL). Country placed under enhanced surveillance by EC during availability period Bank recapitalisation through loans to governments Objective: help remove the risk of contagion from the financial sector to the sovereign Instrument of last resort when other instruments, including the bail-in mechanism, are not sufficient For countries not under a macro-economic adjustment programme. Eligible if 1) lack of alternatives via private sector 2) inability of country to recapitalise banks without experiencing adverse effects on its financial stability and 3) ability to reimburse the loan. Conditionality applies. 40

42 Direct recapitalisation of banks by ESM: main features Bail-in and resolution / restructuring Private Capital Appropriate level of write-down/ conversion of debt in line with EU state aid rules and BRRD* * A bail-in equivalent to at least 8% of a bank s total liabilities and own funds must be imposed before any resolution fund is tapped. Single Resolution Mechanism From January 2015 onwards Up to 5% of a bank s total liabilities Direct Bank Recapitalisation Instrument Member State Reach 4.5% Tier 1 Requesting Member State injects capital to reach a minimum threshold of 4.5% CET 1 ESM Reach adequate capital level ESM injects capital once 4.5% CET1 is reached Requesting Member State still contributes: 20% in first 2 years and 10% afterwards 41

43 Single Resolution Fund financing During transition phase, SFR is composed of national compartments H Compartment A Mutualised compartment will grow over the years until transition period is over G B F C E D Transition period = 8 years Total final funding : 55 billion 42

44 EFSF: Financial assistance programme for Ireland (concluded on 8 December 2013) On 8 December 2013, Ireland exited the EFSF financial assistance programme. It made a total of 10 loan disbursements between February 2011 and December The loans provided by the EFSF have supported Ireland in the implementation of an economic adjustment programme, whose main goals were: restoring fiscal sustainability; structural reforms focusing on competitiveness and job creation; downsizing, restructuring and recapitalisation of the banking sector. Financing The total 85 billion of the programme was financed as follows: 17.5bn contribution from Ireland (Treasury and NPRF*) 67.5bn external support 22.5bn from IMF 22.5bn from EFSM 17.7bn from EFSF** + bilateral loans from the UK ( 3.8bn), Denmark ( 0.4bn) and Sweden ( 0.6bn) * National Pension Reserve Fund 43

45 % of GDP EFSF: Financial assistance programme for Portugal (concluded on 18 May 2014) Objectives of the programme Restore fiscal sustainability through ambitious fiscal adjustment GDP deficit reduction objectives Enhance growth and competitiveness via reforms and measures, i.e. Freeze govt. sector wages until 2013, reduce pensions over 1500 Reform unemployment benefits and reduce tax deductions Execute an ambitious privatisation programme (TAP, Caixa Seguros ) Improve liquidity and solvency of financial sector Banking support scheme of up to 12 billion to provide necessary capital for banks to bring Tier 1 capital ratios to 10% by end 2012 in case market solutions cannot be found Financing The total 78 billion of the programme financed as follows: 26 billion from IMF 26 billion from the EU (EFSM) 26 billion from EFSF Maximum average loan maturity of 22 years* * Following decision of EFSF Board of Directors to extend loan maturities to Ireland and Portugal on 24 June

46 EFSF: Financial assistance package for Greece (extension expired on 30 June 2015) Following the successful completion of the Private Sector Involvement offer by the Greek government, the second assistance package for Greece was approved PSI Sweetener ( 29.7bn) Objective: enable Greece to finance the debt exchange. As part of the debt exchange, bond holders received 1 to 2 year EFSF bonds with a face amount equal to 15% of the face amount of the exchanged bonds. Accrued Interest ( 4.8bn) Objective: enable Greece to pay the accrued interest under Outstanding Greek bonds including in the PSI. Investors have received EFSF 6-month bills to cover interest due under outstanding bonds Bank recapitalization ( 48.2bn*) Objective: preserve the financial stability of the Greek banking system EFSF disbursed funds to the Hellenic Financial Stability Fund (HFSF) in order to Recapitalise the Greek banking sector 45

47 ESM: Recapitalisation of the Spanish financial sector (concluded on 31 December 2013) Objectives of the programme Recapitalise the Spanish banking sector and restore market confidence in Spain Financing 41.3 bn disbursed to cover shortfall in capital requirements Loan maturities will be up to 15 years with an average of 12½ years Committed under EFSF and then transferred to ESM (without seniority status) Spanish government Spanish Banks/AMC* Conditions Applied to individual financial institutions Compliance with agreed EU surveillance recommendations Repo to ECB or Market Reforms targeting the financial sector as a whole, restructuring plans in line with EU state aid rules Reinforcement of regulatory and supervisory framework in Spain * AMC= Asset management company 46

48 ESM: Financial assistance for Cyprus On 25 March 2013 the Eurogroup reached an agreement with Cyprus on the key elements of a macroeconomic adjustment programme The programme consists of three key components: Restructuring and downsizing the Cypriot banking sector Fiscal consolidation strategy Structural reform agenda Total financial assistance for Cyprus amounts to 10 bn, provided by: ESM (around 9 bn*) IMF ( 1 bn) * 5.35 bn out of 9 bn is already disbursed 47

49 Disbursements in kind: an innovative solution Used for the recapitalisation of the banking sector Allows EFSF/ESM to raise large amounts in a short space of time Bills / FRNs may be used as repos either in the market or at the ECB Greece EFSF provided 35 bn in bonds as collateral to Eurosystem during Greece s selected default. Bonds cancelled in August 2012 As part of PSI participation, EFSF provided 29.7bn as PSI sweetener and 4.9bn in accrued interest For recapitalisation of Greek banks, EFSF provided 25bn in FRNs in April 2012, 16bn* in Dec 2012 and 7.2bn* in May 2013 In December 2012, EFSF provided 11.3bn in 6-month bills to enable Greek to finance the debt buy back Bn EFSF and ESM Disbursements in Kind Spain ESM provided 2 bills and 3 FRNS totalling 39.5bn in December 2012 In February 2013, ESM provided a FRN of 1.8bn Cyprus ESM provided a FRN of 1.5bn to Cyprus Repaid/Returned Rolled over to pool Outstanding * On 27 February 2015, in accordance with the amended Master Financial Facility Agreement for Greece, 10.9 bn in bonds held by the Hellenic Financial Stability Facility were returned to the EFSF. Following the expiry of the programme for Greece on 30 June 2015, these bonds were cancelled. 48

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