An extraordinary ministerial meeting yesterday hammered out the technicalities of the new permanent fund, called the European Stability Mechanism (ESM), which will effectively be able to lend up to €500 billion to distressed euro area members.
The fund will be operational as from mid-2013 and will replace the existing temporary facility – the European Financial Stability Facility (EFSF) – put in place to bail out Ireland and Greece.
By June 2011, ministers will have to decide how to increase the effective lending capacity of the EFSF from its current €250 billion to €440 billion, as pledged by eurozone leaders on 11 March.
But in the meantime, agreement has been reached on the composition of the ESM, which by 2016 will rely on €80 billion directly provided by member states. €40 billion will have to be made available by July 2013, "with the remaining share being phased in over the three following years," reads the text agreed by EU finance ministers.
Germany will contribute the lion's share of this amount, making transfers of around €21.6 billion. France and Italy will contribute €16.2 billion and €14.3 billion respectively.
The payments are calculated on the basis of a contribution key that governs the relationship between each member country and the European Central Bank (ECB). To address the concerns of Eastern European countries, which have complained about the contribution key, ministers agreed to establish a 12-year period during which countries whose GDP is below the EU average will pay less.
The remaining €620 billion in the ESM will be provided by callable capital and guarantees, and the proportion contributed by these two instruments will be flexible. Member states will have to pledge these amounts when necessary.
A key feature of the new fund is that financial support provided by member states will not impact on their debt levels, unless they raise the money on capital markets.
This move is particularly welcome at a time when public debt is coming under increasing scrutiny in Brussels.
Indeed, reform of the stability and growth pact for the euro zone envisages sanctions and fines for member states that fail to sufficiently reduce their debt when it rises above 60% of GDP.
The activation of the ESM will be triggered at the request of a member state. Once the loan is provided, a charge of 200 basis points will be applied. This will be increased by 100 bps for the part of the loan not reimbursed after three years.
