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?)

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  3. Economics

    What Countries Spend On Antiterrorism

    It would be an understatement to say that no country's anti-terrorism budget has decreased in the last two decades. Here are some hard numbers.
  4. Trading Strategies

    How to Trade In a Flat Market

    Reduce position size by 50% to 75% in a flat market.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  7. Markets

    What Slow Global Growth Means for Portfolios

    While U.S. growth remains relatively resilient, global growth continues to slip.
  8. Economics

    Could Saudi Arabia Really Go Bankrupt?

    The IMF warned that Saudi Arabia may run out of the financial assets needed to support spending within five years. Is Saudi Arabia's government doing enough?
  9. Economics

    Who Stands To Lose (And Gain) From The Paris Attacks

    For every major world event, there are those who stand to lose and those who stand to gain. A look at the short, medium, and long-term impacts of the Paris attacks.
  10. Investing News

    How the Paris Attacks Could Impact the Economy

    The horrific terror attacks in Paris will have a ripple effect on comsumer spending and tourism.
  1. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  2. Who decides to print money in Russia?

    The Central Bank of the Russian Federation (CBRF), like its peers in most countries, is the governmental entity responsible ... Read Full Answer >>
  3. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  4. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  5. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
  6. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>

You May Also Like

Trading Center