5 Eurozone Acronyms Explained

By Tim Parker | January 02, 2012 AAA
5 Eurozone Acronyms Explained

Have you noticed that the European debt crisis seems to have a new acronym every few weeks? If you're confused every time the news media throws around a collection of letters when they report on the eurozone, we're here to help. Let's figure out what these five popular acronyms mean. (For related reading, see Bailout Acronyms 101.)

TUTORIAL: Market Crashes

IMF (International Monetary Fund)
Just as the United Nations takes on the implied role of overseeing world events, the IMF does the same thing with the world's money supply. Created near the end of the second world war, the IMF is represented by 187 nations and has the mandate of maintaining currency stability, reducing poverty and providing monetary assistance if a member nation finds itself in financial trouble.

ECB (European Central Bank)
In the United States, the Federal Reserve has two jobs: maximize employment and stablize prices. It attempts to meet these mandates by changing the policies governing things like interest rates and the amount of money in circulation. The ECB is the eurozone's version of the United States Federal Reserve. Any country or territory with its own currency has a central bank that monitors its performance and in the case of the euro, it's the ECB.

The ECB is at the center of the crisis. Due to problems in countries like Greece, Ireland and Italy, the ECB is finding it increasingly difficult to maintain financial stability. To put it in perspective, imagine what would happen to the United States Federal Reserve if more than a dozen states became unable to meet their debt obligations? That is what the ECB has dealt with for nearly two years. (For more information on the Federal Reserve, read How The Federal Reserve Was Formed.)

EFSF (European Financial Stability Facility)
Try to say that three times fast! The ECB would rather not find itself in the business of large-scale bailouts of other countries. The EFSF is a fund whose primary mission is to step in when a eurozone state finds itself in need of emergency funding.

Ireland was the first eurozone country to ask for and receive help from the EFSF. When Ireland made the request, the EFSF issued bonds that were guaranteed by each of the eurozone states in the amount of 5 billion euros. If Ireland were to default, the other 16 eurozone nations have to pay those bonds, similar to somebody cosigning a car loan for you.

EFSM (European Financial Stabilisation Mechanism)
Now we're getting complicated. The EFSM is very similar to the EFSF. It lends money to European countries in financial distress by issuing bonds but this fund is guaranteed by the larger 27-country European Union. It's a much smaller fund than the EFSF and there are currently two countries who are receiving funds from the EFSM: Ireland (22.5 billion euros) and Portugal (26 billion euros).

ESM (European Stability Mechanism)
If having a central bank along with two lending bodies seems a little redundant, it won't be that way much longer. In 2013, the EFSF and the EFSM will merge in to one lending body called the ESM, but European officials are reportedly considering moving the creation of this fund up to 2012.

One of the goals of this new lending facility is to take some of the burden off of the eurozone nations and allow other non-eurozone nations to be members of the fund. It will be a much larger fund and presumably, make it easier to navigate the complicated maze of laws and regulations since there will be one less set of charters to navigate.

The Bottom Line
Still feel a little lost? One of the reasons that help for eurozone nations is coming so slowly is because of the complicated laws, treaties and political interests at work. If they can't figure it out, how will the rest of us? (For related reading, see Is It eurobonds Or Bust For The eurozone?)

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