European Financial Stabiity Facility

by Jeremy Kalas and Jeff Lee

The European Financial Stability Facility (EFSF) is an organization created by the European Union (EU) in May 2010. It is financed through the sale of bonds, which are guaranteed by the governments of the euro zone countries. Its intent is to preserve financial stability among the countries within the EU.[1] Essentially, the EFSF delivers bailouts to members of the EU that are encountering extreme financial crises. [2] The EFSF needs to be expanded because its relatively small amount of capital is not sufficient to avoid the debt crisis that is spreading throughout the EU.

On October 12, 2011, Slovakian politicians agreed to pass the bill to ratify and increase the powers of the EFSF, by increasing the amount of capital of the EFSF from 440 billion euro to 780 billion euro. Slovakia was the last of the 17 members to ratify the bill. The bill is said to be officially ratified by October 14, 2011, so the EFSF will soon be able to act and support EU members as the European debt crisis worsens.[3]

Although the EFSF currently acts as a lender, many think that the EFSF could have a greater impact if it changed its role. Currently a plan proposed by a German insurer, Allianz, is gaining support in Europe. The plan calls for the EFSF to cease being a lender, and instead become a bond insurer. If it is a bond insurer, it can most effectively use its funds, as if it only insures 20% of the bond, over 3 trillion euros in bonds can be issued using the 780 billion of capital the EFSF has. This would offer a much larger effect than the EFSF offers currently, as it can only lend up to a maximum of 440 billion euros under current provisions.[4]

The EFSF currently issues bailouts to European governments. The intent is that the governments use these funds to avoid defaulting on some other loan, as a default on bonds would disrupt bond values and would jeopardize the stability of the reserves of many European banks. Its role will most likely change over the course of the next year as European nations look for a more effective way to attack the debt crisis. Whether the ESFS gives loans or insures bonds, the EFSF gives European countries somewhat of a safety net, in that it will give governments more time to fix their respective debt crises; however, unless significant policy change to curtail the debt within a country is enacted by the governments of the countries being bailed out, the bailouts issued by the EFSF will merely prolong the inevitable. The proposed change of the EFSF from a lending facility to an insurance facility would increase the financial influence of the EFSF, given its relatively small amount of capital.

Sources

European Financial Stability Facility, “About EFSF”, n.d., http://www.efsf.europa.eu/about/index.htm. (Accessed 10/17/11)

Investopedia, “European Financial Stability Facility (EFSF) Definition,” Investopedia, n.d., http://www.investopedia.com/terms/e/european-financial-stability-facility.asp#axzz1aaFMXAqQ. (accessed 10/12/11)

Reuters. “UPDATE 5-Slovak parties reach deal on EFSF approval-TV | Reuters”, n.d., http://www.reuters.com/article/2011/10/12/eurozone-slovakia-idUSL5E7LC0JT20111012. (accessed 10/12/11)

Wall Street Journal. “2nd UPDATE: EFSF Bond Insurance Plan Gaining Traction In Europe -Allianz,” wsj.com, October 11, 2011, sec. T Wire,

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[1]European Financial Stability Facility, “About EFSF”, n.d., http://www.efsf.europa.eu/about/index.htm. (Accessed 10/17/11)

[2] Investopedia, “European Financial Stability Facility (EFSF) Definition,” Investopedia, n.d., http://www.investopedia.com/terms/e/european-financial-stability-facility.asp#axzz1aaFMXAqQ. (accessed 10/12/11)

[3]“UPDATE 5-Slovak parties reach deal on EFSF approval-TV | Reuters”, n.d., http://www.reuters.com/article/2011/10/12/eurozone-slovakia-idUSL5E7LC0JT20111012. (accessed 10/12/11)

[4]“2nd UPDATE: EFSF Bond Insurance Plan Gaining Traction In Europe -Allianz,” wsj.com, October 11, 2011, sec. T Wire, http://online.wsj.com/article/BT-CO-20111011-712197.html. (accessed 10/12/11)