• European Union Leaders Sign Financial Stabilization Mechanism
  • June 17, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • On Monday, the Finance Ministers of the Euro-area states signed documentation establishing the European Financial Stability Facility (EFSF) in line with the actions taken by the Economic and Financial Affairs (ECOFIN) Council last month. In conjunction with the International Monetary Fund, the EFSF will issue bonds to fund loans “to cover the financing needs of euro area Member States in difficulty,” with Euro area member states providing guarantees of up to €440 billion on a pro rata basis.

    The finance ministers agreed on a number of measures to enhance the creditworthiness of the debt instruments issued by the EFSF, including “a 120% guarantee of each Member State’s pro rata share for each individual bond issue and the constitution, when loans are made, of a cash reserve to provide an additional cushion or cash buffer for the operation of the EFSF.”

    The European Commission, along with the European Investment Bank, has been tasked with setting up the EFSF, contributing to its operations and negotiating policy conditions attached to loans provided by the EFSF. The European Commission will also “ensure consistency between EFSF operations and other operations of assistance by the European Union.”

    The establishment of the EFSF action is in line with the EU finance ministers’ announcement on Monday of a commitment “to ensure confidence in the sustainability of public finances,” including measures to:

    • Gear national fiscal strategies to stabilizing government debt ratios;

    • Strengthen national budgetary frameworks against agreed benchmarks to underpin the credibility of the budgetary targets; and
    • Pursue structural reforms to ensure the long-term sustainability of public finances and to increase the economy’s resilience to financial crises.