The European Financial Stability Facility or EFSF is a temporary institution formed by the members of the European Union to overcome the financial crisis experienced by Greece, Portugal and Ireland through the provision of financial assistance. To provide assistance to the three countries, bonds were issued to investors whose payments were guaranteed by the member states of the European Union.
Using the above scheme, Greece, Portugal and Ireland could actually issue bonds independently, but the problem is that the credit ratings of the three countries are quite low, therefore they are forced to offer bond interest with a large enough value. This condition does not solve the problem but adds to the problem.
Through solidarity between members of the European Union to save three other disadvantaged countries, a temporary institution called the European Financial Stability Facility was formed which was mandated to issue bonds with relatively low interest rates. The scheme is more or less like in the picture above. The investors will buy the bonds offered by the EFSF later the funds raised will be given to three countries in need to restore their respective economies.
Each beneficiary country is required to return assistance to the EFSF on a regular basis so that it can pay interest or coupons according to the specified time and and pay the principal capital at the end of the bond tenor. To ensure this, like it or not, the EFSF must oversee the management of the aid funds that have been provided so that the appropriate sectors are allocated to accelerate economic recovery.
It’s simple like this, assume that one day entrepreneur X needs money to pay the debt installments that are due with the risk that the house will be confiscated if the debt installments are not paid. Incidentally, entrepreneur A has a friend, namely B who cares and is quite well-established who is willing to lend money at the bank with relatively low interest. The money is then given to entrepreneur A so that he has the funds to pay the debt installments that are due and continue the company’s operations.
Entrepreneur A is obliged to pay installments on new debts to his friend B on a regular basis. To avoid problems in the future, party B must supervise the management of the funds that have been given to entrepreneur A. If the funds are managed properly, the business will run well and entrepreneur A can pay installments to party B on time.
EFSF Goals
* Maintaining financial stability in the European Union region
The European Union area consists of 27 countries and each country will normally focus on managing finances at home and not interfere in the kitchen affairs of other countries. When a member country experiences a financial crisis, it will indirectly affect the economic conditions of other member countries. If it is not handled immediately, there is a possibility that one by one other member countries will experience the same condition. For this reason, the EFSF was formed with an office in Luxembourg, serving as a third party and focusing on helping each member country that was hit by a financial crisis
Currently the EFSF still exists, but as a legal entity and the main bond issuer, but can no longer issue new loans.
The purpose of the fund is to maintain financial stability in Europe by providing financial assistance to eurozone countries to overcome economic difficulties.
Companies owned by EAMS or “Euro Area Member States” are registered in Luxembourg and headed by Klaus Regling, a former Director General of Economic and Financial Affairs of the European Commission.
The EFSF may issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the necessary funds. such as providing loans to countries in the Eurozone that are experiencing financial difficulties.
The issuance of bonds against the guarantees of EU member states is proportional to their share of the ECB’s capital.
The action is in accordance with the terms of negotiations with the European Commission and in cooperation with the European Central Bank and the International Monetary Fund. The terms themselves must be approved by the Eurogroup.
The fund has the ability to borrow up to 60 billion euros from the European Financial Stabilization Mechanism – subject to funds raised by the European Commission and the use of the EU budget as collateral, and up to 250 billion euros from the International Monetary Fund (IMF) for financial stability.
EFSF reliability
EFSF has the best credit ratings: AAA issued by the largest rating agencies S&P and Fitch Ratings, and Aaa by Moody’s.
If there is no financial operating activity, the EFSF can be closed after three years, namely on June 30, 2013. If a financial transaction is carried out, the funds will continue to exist until the last obligation is completed.
The European Financial Stability Facility is a special institution to overcome the debt crisis in some European countries. This institution was founded on May 9, 2010 with its headquarters in Luxembourg City, the establishment of this institution was approved by the 27 member states of the European Union and the funds from this institution came from these countries. The purpose of the establishment of the EFSF is to provide assistance to eurozone member countries whose economies are experiencing difficulties, European investment banks are also involved in providing financial management services and administrative support.
In providing assistance, EFSF finances it through the issuance of EFSF bonds and other capital market instruments. The securities guaranteed by the European Union countries are proportional to the capital of these countries in the ECB. With this guarantee, investors who do not want to finance an EU country that is experiencing a crisis are willing to provide direct loans to that country because of this guarantee. On 1 July 2013 the role of EFSF was replaced by ESM, but the EFSF institution itself remains, with the aim of continuing to fund approved programs and receive payments from the forests of European countries that have applied for loans.
EFSF Assisted Countries
EFSF has provided assistance to several European countries experiencing economic problems, including:
EFSF assistance to Ireland. On 28 November 2010 the EFSF decided to provide assistance to Ireland. The total financial aid package designed is €85 billion of which the EFSF provides funding of €23 billion.
EFSF help in portugal. The Portuguese authorities formally submitted a request for assistance on 7 April 2011. On 17 May 2011 the Euro Group and the EU Council of Ministers of Economy and Finance agreed on a financial aid package of €78 billion, the EFSM and EFSF providing €26 billion each, while the remaining amounted to €26 billion. €26 billion provided by the IMF.
Greek bailout. Assistance to Greece by the EFSF through the transfer of 100% of Greece’s jurisdictional bonds to EFSF with a value of € 164 billion.
In addition to these countries since 2008 EFSF has provided bailout funds to European Union members with a total value of 544 billion Euros. The recipient countries include Hungary, Cyprus, Latvia, Romania and Spain.
