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SOVEREIGN DEBT: A NEW WAVE OF RESTRUCTURING The EU Framework. Dubai – October 31, 2011 Antoine Maffei. Available debt restructuring support? The European Financial Stabilization Mechanism (“ EFSM ”) The European Financial Stability Facility (“ EFSF ”)

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sovereign debt a new wave of restructuring the eu framework


Dubai – October 31, 2011

Antoine Maffei

Available debt restructuring support?
    • The European Financial Stabilization Mechanism (“EFSM”)
    • The European Financial Stability Facility (“EFSF”)
    • The Treaty establishing the European Stability Mechanism (“ESM”)
  • Together with:
    • International Monetary Fund (“IMF”) Support; and
    • Where appropriate European Central Bank Support


Decisions to create the EFSM and the EFSF:
  • European Council of May 9, 2010
  • EFSM:
    • is based on Article 122.2 of the Treaty on the Functioning of the European Union (“TFEU”), inducing financial support for Member States (“MS”) in difficulties or seriously threatened with severe difficulties caused by exceptional circumstances beyond MS control
    • Activation:
      • subject to strict conditionality 
      • in the context of a joint EU/IMF support
      • on terms and conditions similar to the IMF
    • Governing instrument: Council Regulation (EU) n°407/2010 of May 11, 2010 establishing a European Financial Stabilization Mechanism (“the EFSM Regulation”)


The EFSM Regulation:
  • Establishes conditions and procedures under which EU financial assistance may be granted to a MS experiencing or threatened with, severe economic orfinancial disturbances caused by exceptional circumstances beyond its control taking into account possible application of balance of payment regulation (EC n°332/2002 of February 18, 2002)
  • Form of assistance : loan or credit line to MS
  • Amount limited to margin applicable under own resources ceiling for payment appropriations (about Euro 60 billion plus about Euro 35 billion under the Balance of Payment Facility)


Procedure under the EFSM regulation:
  • To discuss with the EU Commission (“EC”) in liaison with ECB assessment of financial needs
  • To submit a draft economic and financial adjustment program
  • Decision of Council by qualified majority
  • To conclude a MOU with the EC

Where financing outside EU is sought, including from IMF in connection with the EFSM process:

  • The MS shall first consult the EC
  • The EC shall examine the availability under the EU financial assistance facility and compatibility of economic policy conditions with commitments of MS for implementation of Council recommendations and decisions


  • Is part of the package organized by the May 9, 2010 decision of the European Council held on that date
  • Its purpose is:
    • To provide financial support to Euro Area Member States (“EAMS”) in difficulties
    • Caused by exceptional circumstances beyond such EAMS control
    • Aiming at safeguarding financial stability of the Euro Area as a whole and of its Member States
    • Financial support to be provided to EAMS by EFSF in conjunction with the IMF


  • Incorporated on June 7, 2010 as a Luxembourg Company (Société Anonyme)
  • Concluded on June 7, 2010 an EFSF Framework Agreement (“ Agreement”) with 16 EAMS
  • The Agreement was amended in July 2011 to reflect decisions of EAMS taken on March 11, 2011 and further amended to reflect decisions taken on July 21, 2011
  • Tenure 3 years through June 2013


Purpose of EFSF - to provide stability support to EAMS through:
  • Loan facility agreements (in their original format)
  • Financial assistance facility agreements to provide financial assistance by way of:
    • Facilities for the purchase of bonds in the primary market (since March 11, 2011 council meeting)
    • Loan disbursements
    • Precautionary facilities (since July 21, 2011 Council meeting)
    • Facilities to finance the recapitalization of financial institutions in EAMS through loans to the governments of such MS including in non-program countries (7/21/2011)
    • Facilities for the purchase of bonds in the secondary market on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risk to financial stability (7/21/2011)


Funding of EFSF:
  • Financial assistance to be provided by EFSF, to be funded by issuing or entering into:
    • Bonds
    • Notes
    • Commercial paper
    • Debt securities
    • Other financing arrangements
  • All backed by the irrevocable and unconditional guarantees of each of the EAMS (other than the EAMS which is or has become a Stepping Out Guarantor prior to the issue of such instruments (other than in respect of an undrawn or unutilized precautionary facility, facility to refinance financial institutions or a facility to purchase bonds in the secondary market))


Amount of Guarantee (1):
  • In respect of each Guarantor the Guaranteed Amount is equal to:
    • The product of the related Contribution Key multiplied by 165% (Over-Guarantee percentage) and the obligations of EFSF (principal, interest or other due amounts) in respect of Funding Instruments
    • List of Guarantee Commitments:


Amount of Guarantee (2):
  • That percentage or Over-Guarantee percentage was 120% prior to entry into force of September 2011 Amendments of the Agreement


Amount of Guarantees (3):
  • The Aggregate Guaranteed Amount or Guarantee Commitment is 165% of Euro 440 Billion or Euro 770 Billion leaving an amount available for lending of Euro 440 billion
  • The over guarantee percentage is set in such a manner that the available amount is fully covered by triple A rated EAMS guarantees
  • Total maximum available amounts are:
    • In respect of EFSM : Euro 60 Billion
    • In respect of EFSF : Euro 440 Billion
    • Related IMF Facility : Euro 250 Billion
    • Total : Euro 750 Billion


Amount of Guarantees (4):
  • At the end of the July 21, 2011 Council meeting the Euro Area Heads of States decided to lengthen maturities (Tab.1) and lower interest rates of EFSF loans (Tab.2).
  • Table 1.: Length of Maturity

Source: French Economy, Industry and Employment Ministry

*Stand-By Arrangements (Loan to Greece); ** Extended Fund Facility (Loans to Ireland and Portugal)

  • Redemption clauses are contemplated where the States are able to redeem earlier


Amount of Guarantees (5):
  • Table 2.: Interest

Source: French Economy, Industry and Employment Ministry


Cash Reserve:
  • In respect of financial assistance disbursed prior to Effective Date of Amendments to the Agreement (Effective Date)
    • Service Fee: 50 basis points on aggregate principal amount of the Financial Assistance
    • Prepaid Margin: net present value of anticipated margin accruing on Financial Assistance through scheduled maturity
    • All deducted from the amount to be remitted to Beneficiary EAMS without prejudice to the face amount of such Financial Assistance


Cash Reserve:
  • In respect of Financial Assistance disbursedafter the Effective Date and subject to Notes obtaininghighest rating:
    • Margin payable in arrear
    • Advance Margin equal to 50 basis points on the aggregate principal amount of facility charged to the Beneficiary EAMS and to be deducted from amount remitted
    • On each Interest Payment Date each amount of margin payable shall be reduced by an amount equal to Advance Margin

Only deducted amounts are Advance Margin and Issuance Cost (such reduction without prejudice of obligation to repay the full principal amount prior to reduction and interest accrues on that amount)


Cash Reserve – Additional Enhancement:
  • Where highest rating is not obtained on the Notes additional enhancement mechanism is to be sought
  • If following full discharge of obligations there remain amounts in the cash reserve such amounts are to be paid to Guarantors

Financial Assistance Availability:

  • Financial Assistance Facility Agreements may only be requested through June 30, 2013


Financial Assistance Authorization Process
  • Beneficiary EAMS submit an application for Financial Assistance (assuming a country is unable to borrow on the markets at acceptable rates)
  • Stabilization Program is negotiated through the EC which contemplates strict conditionality (in cooperation with IMF and in liaison with ECB)
  • A common MOU is established between EC, IMF and Beneficiary EAMS approved by the Eurogroup Banking Group and IMF. Guarantors acting unanimously consider that EAMS are in compliance with the terms and conditions of the MOU then detailed. Financial assistance terms and conditions are prepared. Approval by Guarantors is to be unanimous
  • Technical Terms of the loan are set by EFSF (term, interest, repayment terms and schedule of disbursement)
  • Disbursement: review of compliance with MOU, Financial Assistance Agreement. Unanimous Guarantee Approval is required to permit disbursement of Financial Assistance


  • EFSF may issue Funding Instruments benefiting from the Guarantees of EAMS:
    • On a stand-alone basis
    • On the basis of one or more EFSF programs including:
      • A base prospectus with final terms for each issue of Funding Instruments
      • Information Memoranda
  • Financial assistance is, subject to market conditions, funded by issuance of Funding Instruments on a matched–funding basis
  • If not feasible due to market conditions a diversified Funding Strategy may be approved


Debt Issuance Management:
  • Allocated to  ”Finanzagentur” (German Debt Management Office)
    • Front office
    • Debt issuance
    • Cash management
    • Risk management


Role of EIB:
  • Management of receipt and payment of Funds
  • Management of EFSF Treasury
  • Legal (documentation) – accounting and human resources services together with IT facilities, procurement auditing services and logistical support

Role of ECB:

  • Paying agent
  • Maintenance of bank and securities accounts


Credit Enhancement:
  • The EAMS Guarantees and in particular the Over-Guarantee Percentage of up to 165%
  • Cash Reserve (retained in respect of Financial Assistance disbursed prior to the Effective Date of the Amendments)
  • Such other credit enhancement as may be approved and adopted


In case of shortfall following delay or failure to pay by a Beneficiary Member:
  • Demand on a prorata, pari passu, basis on the Guarantors up to applicable Over-Guarantee Percentage
  • Release of an amount of Cash Reserve
  • Recourse to additional credit enhancement EAMS may deem appropriate to the extent approved unanimously or such modifications in credit enhancement as may be approved unanimously such as provision of subordinated loans liquidity lines of backstop facilities, etc.


Payment Dates under Financial Assistance Facility Agreements:
  • In order to ensure timely processing of payments scheduled payment dates under Facility Agreements are, to the extent feasible, at least 14 days prior to scheduled payment dates under related Funding Instruments

Where payment is not received under a Financial Assistance Facility Agreement:

  • A demand is made to each Guarantor

Where EFSF fails to pay a scheduled payment under a Funding Instrument:

  • The relevant Note holder is entitled to make a demand directly to Guarantors with a copy to EFSF
  • Provision is made to avoid double counting


Contribution between Guarantors:
  • A Guarantor making payment in excess of its required proportion:
    • Is entitled to be indemnified and to receive a contribution from other Guarantors
    • So that each Guarantor ultimately only bears its Required Proportion of Guaranteed Liabilities
    • The Required proportion is equal to the Adjusted Contribution Key Percentage applicable to the relevant guaranteed obligation of EFSF


The European Stability Mechanism (ESM):
  • The ESM:
    • Is a permanent crisis resolution mechanism established by a Treaty signed on July 11, 2011
    • Will assume the task currently fulfilled by the EFSF and the EFSM providing where needed financial assistance to Euro Area Members after June 2013
    • Is created following an amendment to Article 136 of the Treaty on the Functioning of the EU
    • Is established as an international financial organization having the status of an intergovernmental organization under public international law


The first line of Defence against the confidence crisis affecting the stability of the Euro as a whole remains strict observance of the European Economic Framework in particular:
  • Integrated macro-economic surveillance
  • The Stability and Growth Path
  • The macro-economic imbalances framework
  • Economic governance rules of the EU


Access to ESM financial assistance will be provided:
  • On the basis of strict economic policy conditionality
  • Under a macro-economic adjustment program commensurate with the severity of the economic and financial imbalances experienced by that ESM Member ; and
  • On a rigorous analysis of public debt sustainability

To ESM Member States:

  • Experiencing or threatened by severe financial problems
  • If indispensable to safeguard the financial stability of the euro area as a whole

ESM initial lending volume: Euro 500 000 million after complete rundown of EFSF


ESM will cooperate with IMF:
  • Financial assistance request from an EAMS is expected to be addressed simultaneously to IMF
  • Non-euro area Members States will be invited to participate as observers in ESM meetings when financial assistance and its monitoring will be discussed
  • Like IMF, ESM will provide financial assistance to an ESM Member when access to market financing is impaired
  • Therefore ESM:
    • Will enjoy preferred creditor status in similar fashion to IMF
    • While accepting preferred creditor status of IMF over the ESM effective July 2013
  • EAMS will support equivalent creditor status of the ESM and that of other EAMS lending bilaterally alongside the ESM


ESM Capital:
  • Authorized subscribed capital: Euro 700 billion
  • Initial total aggregate value of paid-in shares: Euro 80 Billion phased in 5 equal installments
  • Committed callable capital from EAMS to a total amount of Euro 620 billion
  • During transitory phase from 2013 to 2017, EAMS commit to accelerate if needed the provision of appropriate instruments in order to maintain a minimum 15% ratio between paid in capital and ESM issuances
  • Contribution key:
    • Based on the ECB contribution key
    • States with GDP per capital less than 75% average will benefit from a temporary correction for a period of 12 years after entry in euro area


Capital Calls:
  • By Board of Governors at any time
  • By Board of Directors by simple majority to restore the level of paid in capital if paid in capital is reduced below Euro 80 Billion (as may be amended by Board of Governors decision) as a result of absorption of losses
  • By the managing director in a timely manner, if needed to avoid ESM Default


Private sector involvement:
  • Adequate and proportionate form of private sector support in line with IMF practice depending on:
    • sustainability analysis
    • risk of contagion and potential spill over
  • Maintenance of private sector exposure is to be encouraged where public debt sustainability may be restored
  • Otherwise ESM Member Beneficiary will be encouraged to negotiate in order to secure private sector direct involvement in restoring debt sustainability
  • Collective action clauses are to be included in new euro area government securities from July 2013 in a standardized manner


Procedure for ESM Financial Assistance:
  • ESM Financial assistance is activated by a request to the Chairperson of the ESM Board of Governors
  • EC in liaison with ECB :
    • Assesses the existence of a risk to financial stability of the euro area as a whole
    • Analysis, wherever possible, together with IMF of debt sustainability of relevant ESM Member Beneficiary
    • Assessment of actual financing needs of ESM Member Beneficiary and nature of private sector involvement
  • Board of Governors may on that basis decide to grant in principle financial assistance
  • A MOU, detailing a macro-economic adjustment program, is negotiated by EC, whenever possible, together with IMF in liaison with ECB
  • ESM Board of Directors approves technical assistance agreement and disbursement of first tranche


ESM warning and monitoring:
  • ESM establishes a warning system to ensure receipt of payment in a timely manner
  • EC, whenever possible together with IMF, and in liaison with ECB, is entrusted with monitoring with economic policy conditionality compliance
  • ESM Board of Directors decides by mutual agreement on the disbursement of tranches subsequent to first disbursement