What Is the European Financial Stability Facility?

The European Financial Stability Facility (EFSF) was created in 2010 as a temporary crisis resolution measure in the wake of the financial and sovereign debt crisis in the euro area (eurozone). It provided assistance to Ireland, Portugal, and Greece. It no longer provides new financial assistance, with this task now the responsibility of the European Stability Mechanism (ESM), but it continues to exist to fulfill obligations on previously agreed programs.

Understanding the European Financial Stability Facility

The European Financial Stability Facility (EFSF) was set up by the European Union (EU) to help fund countries that were unable to fund themselves during the sovereign debt crisis. The EFSF offered financial assistance to euro area countries in need in this context, provided they committed to undertaking certain reforms (aimed at preventing the recurrence of similar crises). This assistance was financed through the issuance of EFSF bonds and other capital market instruments. The EFSF was authorized to raise a maximum of €440 billion in the capital market through the issuance of these securities. The securities, in turn, are backed by guarantees from member countries in the eurozone, in proportion to their shares of capital in the European Central Bank (ECB). The total guarantee line is €780 billion. In brief, the guarantees attracted investors who were not willing to lend directly to the crisis countries, and the EFSF provided loans to those countries (conditional upon the commitment to reforms).

The EFSF has not offered any new financing since July 1, 2013, having been replaced in this function by the ESM, which is a permanent crisis resolution mechanism. The EFSF, however, remains in existence to continue to finance agreed programs; its ongoing activities include receiving loan repayments from the countries it has assisted; making principal and interest payments on its issued bonds to investors; and rolling over existing bonds, because the maturity of its loans to the euro area beneficiaries is longer than that of its issued bonds.

Although the EFSF and ESM are different institutions with different governance structures, they share the same staff and offices (in Luxembourg). They both have the same mission: to safeguard financial stability in Europe through financial assistance to euro area countries. The two mechanisms together have disbursed €255 billion. In addition to Portugal, Greece, and Ireland, which were originally assisted by the EFSF, Spain and Cyprus have also received financing from the ESM. Four of these countries—all but Greece—have reformed and improved successfully enough to have exited their EFSF/ESM programs without requiring follow-up arrangements. Greece entered into a new program in 2015 and is currently the only EFSF/ESM program still active.