It seems every week there are new acronyms or catchy-phrases for Europe's Rescue and Fiscal Progress decisions. Goldman Sachs provides a quick primer on everything from ELA to EFSM and from Two-Pack (not Tupac) to the Four Presidents' Report.
European Financial Stability Facility. A temporary special purpose vehicle financed by members of the euro area to address the European sovereign debt crisis by providing financial assistance to euro area states in economic difficulty. The ESFS can issue bonds or other debt instruments in the market to raise funds needed to provide loans to euro area countries under financial stress, recapitalize banks (through loans to governments) or buy sovereign debt; these bonds are guaranteed by the Euro area member states. Euro area member states’ capital guarantees total €780 billion and the facility has a lending capacity of €440 billion. Since it began operations in August 2010, money has been lent to Ireland, Portugal, and Greece and is in the process of being lent to Spain and Cyprus.
European Financial Stabilization Mechanism. An emergency funding program for EU member states in economic difficulty, which is reliant on funds raised in the financial markets and guaranteed by the European Commission (EC) using the budget of the European Union as collateral. The fund has the authority to raise up to €60 billion and has made loans to Ireland and Portugal (in conjunction with the European Financial Stability Facility (EFSF) since its May 2010 inception.
European Stability Mechanism. This is a so-called “bailout fund” that will manage a permanent rescue funding program for EU states, replacing the temporary European Financial Stability Facility (EFSF)/European Financial Stabilization Mechanism (EFSM) rescue funds. The ESM is increasingly envisioned to be used flexibly in order to stabilize financial markets and support vulnerable sovereigns. In addition to lending to governments under strict conditionality, the June 28-29 summit discussed using the mechanism with less stringent conditionality, allowing ESM funds to directly recapitalize banks (e.g. rather than via governments) and using ESM funds to buy government bonds in an attempt to lower borrowing costs for nations in difficulty. It is expected to be launched shortly, following the ratification of the treaty by Member States representing 90% of the capital commitments. The ESM capital guarantees will be €700 billion, with a lending capacity of €500 billion.
Troika. The tri-party committee comprising the European Commission (EC), International Monetary Fund (IMF) and European Central Bank (ECB) that organized loans to the governments of Greece, Ireland and Portugal.
Emergency Liquidity Assistance. The provision of emergency liquidity assistance (ELA) to individual banks is part of the infrastructure of the European System of Central Banks (ESCB). Under ELA, the national central bank rather than the European Central Bank (ECB ) sets the collateral requirements for Euro loans and thus can accept lesser quality assets than would the ECB. The risk of the loans is borne by the national central bank rather than by the Euro system. In contrast, with ECB loans, any losses would be shared across the Euro system.
Securities Markets Program. A program introduced by the European Central Bank (ECB) in May 2010, under which it and the 17 Euro area national central banks can buy government bonds of financially strained Euro area nations to reduce their funding costs. The bonds are purchased on the secondary market from banks and other bond holders rather than from the governments to avoid claims that the ECB is directly funding governments, which is not permitted. As of the first week of July, the value of the program totaled €210.5 bn, with no purchases made by the program since March 2012. This is a “non-standard measure” as is 3-yr LTRO (see below).
Long-term Refinancing Operation. An ECB initiative to lend money at cheap rates and for an extended period to Euro area banks. The operation took place in two tranches on December 21, 2011 and February 29, 2012 and lent more than €1 trillion to at least 800 banks for a term of up to three years. The hope was that this injection of cheap money would help avoid a repeat of the “liquidity crisis” that occurred in the autumn of 2008 when concerns about the ability of debtors to repay loans led lenders to cut off credit and borrowing costs to soar.
Trans-European Automated Real-time Gross Settlement Express Transfer (2nd generation). A clearing system that facilitates money transfers across the Euro area. It is used for the cross-country transfer of money between national central banks, the need for which arises as commercial banks engage in cross-country flows.
Economic and Monetary Union. EMU is an umbrella term for the group of policies aimed at converging the economies of members of the EU and ultimately adopting a single currency, the Euro, through a three-stage process, with the final stage – the creation and adoption of the Euro – commencing on January 1, 1999. All EU member states are expected to be part of the EMU and all states except for Denmark and the UK have committed themselves by treaty to join EMU. 17 member states of the European Union have adopted the Euro (from 11 at inception). Denmark, Latvia and Lithuania are currently participating in the European Exchange Rate Mechanism (ERM II), in which candidate currencies demonstrate convergence by maintaining limited deviation from their target rate against the Euro before being permitted to adopt the Euro. The UK and Sweden are not currently participating in ERM II and five additional EU member states have yet to achieve sufficient convergence to participate. On net, ten EU countries continue to use their own currencies and therefore are part of the EU, but not the “Euro area”.
Growth compact. A bid to stimulate European growth, investment, employment and competitiveness, largely through liberalizing product and service markets and spending on infrastructure. Financing of pan-European infrastructure projects would come from “project bonds” guaranteed by the European Investment Bank and by a more efficient use of the EU Budget. The compact was primarily a response to a backlash against the austerity programs being forced on struggling economies in exchange for bail outs. The compact was finalized at the June 28-29 summit with the capacity for fiscal stimulus equivalent to around €100bn, or 1% of Euro area GDP.
Fiscal union. Under fiscal union, decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. Currently, the 17 member states of the Euro area participate in a monetary union, but fiscal decisions are primarily made independently at the national level. Although the Stability and Growth Pact (SGP) intended to coordinate the fiscal policies of member states, it has not been enforceable in practice. As a result, a series of new legislation aimed at strengthening fiscal coordination and monitoring has been adopted or introduced, including the “Six Pack”, the Fiscal Compact and the “Two Pack”.
Stability and Growth Pact. An agreement among the Member states of the EU to facilitate and maintain the stability of the EMU through fiscal monitoring and sanctions. The pact was adopted in 1997, requiring that member states in the Euro area: 1) have an annual public budget deficit no higher than 3% of GDP and 2) have a national debt lower than 60% of GDP or approaching that value. If the budget deficit rises above 3% of GDP, the country may face an “excessive deficit procedure” whereby a path towards compliance would be set and, should it not be followed, fines of up to 0.2% of GDP could be levied. The pact has not been enforced in practice.
Six Pack. A set of European legislative measures implemented in December 2011 that reformed the Stability and Growth Pact (SGP) and introduced new macroeconomic surveillance. The legislation tightens the “excess deficit procedure” laid out in the SGP and institutes the potential to open up such a procedure if a country is not reducing its debt-to-GDP ratio sufficiently quickly, defined by a predetermined rate of improvement (in the SGP, the excess deficit procedure just applied to violation of the deficit criteria, not the debt-to-GDP criteria). The legislation also limits public expenditure growth if the country is not moving quickly enough towards a balanced budget. An early warning system for excessive macroeconomic imbalances and a correction mechanism were also introduced.
Fiscal compact. The fiscal compact builds on prior legislation to maintain the stability of the EMU through fiscal monitoring and sanctions. It is now in the process of being ratified by member states and will become binding following ratification by 12 states. The compact sets deficit and debt targets for Economic Monetary Union (EMU) and rules to impose sanctions when agreements are breached (as did the Stability and Growth Pact (SGP) and the “Six Pack”). It goes one step farther by requiring its members to pass a national law or an amendment of the national constitution that limits the structural budget deficit to 0.5% of GDP, except in rare instances. The European Court of Justice can fine a country up to 0.1 % of GDP if this was not done a year after ratification.
Two Pack. The two-pack legislative proposals complement the six-pack for reform of the economic governance of the EU, which was implemented in December 2011. The second package of the economic governance consists of two main parts. One part deals with the Euro area countries with financial troubles, strengthening economic and budgetary surveillance and oversight of these countries. The other part deals with the budget discipline of the economic and monetary union, requiring the monitoring of draft budgetary plans of Euro area nations and other oversight. The European Parliament voted in favor of the new rules on June 13, 2012, but made several amendments to the European Commission's original proposals set to meet opposition from member states. To become law, a common version of the rules needs to be agreed on by member states, the European Parliament and the European Commission. The amendments included a required growth mechanism that would mobilize around 1% of the EU's gross domestic product for infrastructure investment. The parliament also seeks a roadmap toward Euro area bonds and a European Debt Redemption Fund, which would group together all Euro area members' debt exceeding 60% of their GDP for common debt issuance.
Debt mutualization. Sharing of existing government debt across the governments of the Euro area in order to overcome what is ultimately a ‘debt overhang’ problem, centered in the European periphery. While in the end, the bill for “mutualization” will be shared across the Euro area (with the majority of the “sharing”, however, ultimately falling on the larger economies, e.g. Germany and France), the mechanism for sharing could potentially be the European Central Bank (ECB), which is backed by the member states, the European Stability Mechanism (ESM) that will also be funded across member states or a new vehicle issuing jointly-and-severally guaranteed securities.
Banking union. A scheme for the Euro area to strengthen the overall banking system through: 1) the institution of a central authority that would take over from the current 17 national regulators and become responsible for the supervision of the entire area’s banking sector 2) the establishment of common resolution authority to wind down failed banks; 3) funding of the restructuring of viable banks and the winding down of failed ones through a pooling of common resources, and 4) a Euro area-wide common deposit insurance scheme, in which deposits would be guaranteed by the broader group regardless of where the euro is held. In the June 28-29 summit, progress towards the first three elements was made, but the summit stopped short of discussing pan-European deposit insurance.
Four Presidents’ report
Four Presidents’ report. A report by the “four Presidents” – Herman Van Rompuy (European Council), Mario Draghi (European Central Bank), José Manuel Barroso (European Commission), and Jean-Claude Juncker (Eurogroup) – that served as a basis for several of the proposals adopted at the June 28-29 summit. The plan calls for speedy progress towards banking union with the establishment of a single supervisory authority for all EU banks, a common resolution scheme for winding down failed banks and a common deposit guarantee scheme for the EU, the latter two proposals backstopped by the European Stability Mechanism (ESM). The plan also envisions further mechanisms to prevent and correct unsustainable fiscal policies such as upper limits on the annual budget balance and on government debt levels. It also suggests the possibility of the issuance of common debt. The Presidents promised a more detailed report in December 2012 and an interim report in October 2012.
Source: Goldman Sachs