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.
Rescue Programs
EFSF
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.
EFSM
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.
ESM
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
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.
ELA
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.
SMP
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).
LTRO (3-year)
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.
Target 2
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.
EMU
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
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 Progress
Fiscal Union
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”.
SGP
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
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
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
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
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
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.
