Glossary – European Stability Mechanism


Annual report (ESM)

A report prepared annually by the Managing Director and approved by the Board of Governors containing a description of the policies and activities of the ESM in the preceding financial year, the corresponding financial statements, a report of the external auditors in respect of their audit concerning these financial statements, and a report of the Board of Auditors on its audit work and findings in relation to the operational accounts and balance sheet of the ESM and its conclusions and recommendations. The ESM Annual Report is published on the ESM’s website following approval by the Board of Governors.

Authorised unpaid capital

The portion of the ESM’s authorised capital stock consisting of callable shares. These shares may be called in accordance with the terms set in the ESM Treaty (see capital call). Following the payment of paid-in capital of € 80 billion the total aggregate nominal value of callable shares will amount to €620 billion.


Back-to-back funding

A method of funding (financing) loans provided to beneficiary countries whereby bills or bonds are issued whose size and maturity exactly match the disbursement to a beneficiary country.
This strategy is used for specific purposes, such as bank recapitalisation, in addition to the EFSF’s and ESM’s predominant diversified funding strategy.

Benchmark bond

(i) A bond that provides a standard against which the performance of other bonds can be measured. (ii) The latest issue within a given maturity and size. (iii) According to bond market convention, a bond which delivers a certain size, liquidity and reputation: benchmark size is generally meant to be at least €3 billion for maturities up to 10 years and at least €1 billion for maturities above 10 years.

Board of Auditors

An independent organ of the ESM mandated to inspect the ESM accounts and verify that ESM’s operational accounts and balance sheet are in order. The Board of Auditors consists of five members appointed by the Board of Governors and includes two members from the supreme audit institutions of the ESM Members – with a rotation between the latter – and one from the European Court of Auditors. The Board of Auditors may inform the ESM Board of Directors at any time of its findings and draws up a report, on an annual basis, to the Board of Governors. This report also becomes accessible to the national parliaments and supreme audit institutions of the ESM Members and to the European Court of Auditors.

Board of Directors

A body in the ESM governance structure whose task is to take decisions as provided for in the ESM Treaty or delegated to it by the Board of Governors and to ensure that the ESM is run in accordance with the ESM Treaty and By-laws adopted by the Board of Governors (e.g. the Board of Directors decides on disbursements of assistance to a beneficiary ESM Member). Each Governor appoints one Director and one alternate Director from among people of high competence in economic and financial matters. The European Commission and ECB may each appoint a (non-voting) observer. The Board of Directors meets whenever called for by the affairs of the ESM.

Board of Governors

The Board of Governors forms the highest governing body of the ESM and comprises Ministers of Finance of the euro area Member States (as voting members).  The European Commissioner for Economic and Monetary Affairs and the ECB President may participate in meetings of the Board of Governors as (non-voting) observers.

The most important decisions taken by the Board of Governors require mutual agreement (unanimity of the members participating in a vote). These include decisions to provide stability support to an ESM Member, the choice of instruments, conditions and terms of such support, changing the authorised capital stock and adapting the maximum lending volume. The Board of Governors meets at least once every year and whenever called for by the affairs of the ESM.

Bond auction

A method of selling bonds and bills on the primary market by national governments and Sovereign, Supranational, Agency (SSA) issuers, where financial institutions place bids on the yield or price of the bond or bill being offered.

Borrowing costs

The costs of obtaining financing on financial markets by the issuance of debt securities (bills and bonds) in terms of the annual interest that an issuer has to pay on its issued debt securities (expressed as the yield of a bond).


Capital call

A legal right of the ESM to require its Members to pay authorised unpaid capital. The ESM Treaty specifies three types of capital calls: (i) general capital calls to accelerate or increase the payment of paid-in capital, which may be enacted at any time by the Board of Governors; (ii) capital calls to restore the level of paid-in capital, which may be made by the Board of Directors; and (iii) emergency capital calls to avoid a default of any payment obligation due to ESM creditors, which may be made by the Managing Director.


Policy conditions that ESM Members receiving financial assistance from the ESM are required to meet before receiving support. These conditions can, for instance, relate to policy measures to be implemented by the beneficiary ESM Member aimed at lowering tax evasion. The policy conditions that a beneficiary ESM Member needs to meet are concluded in a Memorandum of Understanding with the beneficiary ESM Member, which is approved by the Board of Governors of the ESM.

Credit line

Precautionary financial support made available by the ESM to a beneficiary ESM Member establishing a balance that the beneficiary ESM Member is allowed to draw subject to certain conditions. The ESM offers two types of credit lines: the Precautionary Conditioned Credit Line (PCCL) and the Enhanced Conditions Credit Line (ECCL).


Diversified funding (strategy)

A strategy that uses a variety of financial instruments and maturities to ensure the efficiency of funding. One feature of this strategy is that funds raised through various instruments are not attributed to a particular beneficiary country. The funds are pooled and then disbursed to programme countries. The size and maturity of the bonds and bills issued therefore do not need to match exactly the size and maturity of the disbursements to a beneficiary country.

DMO (debt management office)

A government agency that is responsible for the issue of debt securities and the management of a country’s debt.


Emergency voting procedure

A voting procedure to be used when the European Commission and the ECB both conclude that a failure to urgently adopt a decision to grant or implement financial assistance, as defined in Articles 13 to 18 of the ESM Treaty, would threaten the economic and financial sustainability of the euro area. The adoption of a decision by mutual agreement by the Board of Governors to grant stability support under that emergency procedure requires a qualified majority of 85% of the votes cast.

Enhanced Conditions Credit Line (ECCL)

A credit line open to all ESM Members whose general economic and financial situation remains sound but do not comply with some of the eligibility criteria for accessing a Precautionary Conditioned Credit Line (PCCL). The beneficiary ESM Member will be obliged to adopt corrective measures aimed at addressing such weaknesses and avoiding any future difficulties in respect of access to market financing.

ESM Treaty

An intergovernmental treaty signed in Brussels on 2 February 2012 by the 17 EU Member States whose currency is the euro, establishing the European Stability Mechanism.  The ESM Treaty entered into force on 27 September 2012.


The informal gathering of the Finance Ministers of the euro area Member States. Meetings of the Eurogroup are aimed at enhancing economic policy coordination within the euro area. The Eurogroup is also attended by the EU Commissioner for economic and monetary affairs, the President of the European Central Bank, and the Chairman of the Eurogroup Working Group presenting the preparatory work done in that Group. The Managing Director of the ESM is regularly invited to Eurogroup meetings. The Eurogroup is chaired by a President, appointed for two and a half years (currently Jeroen Dijsselbloem from the Netherlands). For more information, please refer to:

European Semester

A six-month period each year when EU Member States’ budgetary, macro-economic and structural policies are coordinated so as to allow these countries to translate EU considerations into their national budgetary processes and into other aspects of their economic policymaking. For more information please refer to:

European Supervisory Authorities (ESAs)

Three EU authorities – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) – responsible for developing guidelines and recommendations for national supervisory authorities,  and drafting technical standards (formally adopted by the European Commission as EU law) contributing to the harmonisation of rules applicable to financial institutions. National supervisory authorities remain responsible for the supervision of individual financial institutions, with the exception of credit rating agencies, which are supervised by ESMA.


Financial Assistance Facility Agreement (FFA)

An agreement between the ESM and a beneficiary country, specifying the financial terms and conditions of the stability support instrument provided to the beneficiary country.

Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union)

The Fiscal Compact is an intergovernmental treaty signed by 25 EU Member States on 2 March 2012. It entered into force on 1 January 2013. The Compact requires national budgets to be in balance or in surplus.  This means the annual structural government deficit must not exceed 0.5% of GDP. This balanced budget rule must be incorporated into the Member States’ national legal systems, through permanent, binding provisions (preferably of a constitutional character) within one year following the entry into force of the Treaty. For more information please refer to:

Fiscal consolidation

A policy pursued by a country intended to reduce the government budget deficit and the accumulation of public debt by taking measures aimed at lowering its expenditures or increasing its revenue. An example of a measure aimed at increasing revenues can relate to measures limiting tax evasion in a country.


Issuing debt securities or other financial instruments in order to finance loans and other forms of financial assistance to ESM Members.


Intergovernmental organisation

An organisation, such as the European Stability Mechanism, which is established by and composed of sovereign Member States. An intergovernmental organisation should be distinguished from a supranational organisation (e.g. the European Union) to whom Member States cede some sovereign decision-making power in selected policy areas.

Issue and Repurchase Process (IRP)

The IRP is a process applied prior to a disbursement in kind (i.e. where no cash transfer is involved) of notes issued and held by the ESM/EFSF to Beneficiary Member States. The IRP provides the ESM/EFSF with the possibility to provide funding to Beneficiary Member States in a short period of time.

Whenever financial assistance is to be disbursed in the form of ESM/EFSF notes, as a first step the ESM/EFSF notes need to be created, which requires for such notes to be acquired for a certain value.

The process works as follows: the ESM/EFSF issues notes to a counterparty (a bank belonging to the ESM/EFSF Market Group which meets specific criteria), which subscribes for the notes and pays the issue price. The notes are then immediately repurchased by the ESM/EFSF. Both transactions occur on the same day and at the same price. No gains or losses are linked to the process. The notes are then held in treasury by ESM/EFSF for later transfer. The pricing of the notes is done at market price, which means at a level similar to the price of outstanding ESM/EFSF notes in the secondary market. The notes are finally transferred to a Beneficiary Member State, e.g., for the purpose of recapitalising its banking sector, in which case the disbursed notes may be used by the recapitalised banks as collateral for repo transactions with commercial or central banks.


Lead manager

The bank(s) mandated by an issuer to arrange the raising of money via a bond, a loan or a share issue. The lead managers form a syndicate which negotiates with the issuer, assesses market conditions and works together with the issuer’s funding team on the transaction of raising money.

Lending capacity

The maximum total amount of funds (€500 billion) that the ESM may lend to its Members, specified in the ESM Treaty. The combined lending capacity of the ESM and EFSF amounts to €700 billion.


Macroeconomic adjustment programme

An extensive programme of policy reforms aimed at addressing problems in an ESM Member’s general economic and fiscal situation. A macroeconomic adjustment programme is negotiated between the troika and the beneficiary ESM Member. The implementation of policy reforms set out in the macroeconomic adjustment programme is a precondition for receiving disbursements of ESM loans.

Managing Director

The supreme executive officer and legal representative of the ESM, who is responsible for conducting its current business. The Managing Director is appointed by the Board of Governors for five years and may be reappointed once. The current Managing Director is Klaus Regling.

Memorandum of Understanding (MoU)

A document concluded by the European Commission, in liaison with the ECB, the IMF (where applicable) and an ESM/EFSF or Member, detailing the policy conditions attached to the stability support instrument provided.

Money markets

A segment of financial markets where short-term financial instruments are traded. These include government bills, commercial papers (CPs), certificates of deposits (CDs), repurchase agreements (repos) and also derivatives (e.g. EONIA swaps) with maturities ranging from one day to one year.


Paid-in capital

The portion of the ESM’s authorised capital stock paid in by ESM Members. The payment of paid-in capital will be made in five instalments and will reach the level of €80 billion (set in the ESM Treaty) by the first half of 2014. The paid-in capital will be invested in high quality liquid assets and serve as loss-absorbing capital.

Precautionary Conditioned Credit Line (PCCL)

A credit line available to an ESM Member whose economic and financial situation is fundamentally sound, as determined by respecting eligibility criteria regarding the sustainability of public debt, respect of commitments under the Stability and Growth Pact (SGP) and the excessive deficit procedure (EIP), track record of access to capital markets on reasonable terms, sustainable external position, and the absence of bank solvency problems that would pose systemic threats to the stability of the euro area banking system.

Precautionary financial assistance

A credit line granted to an ESM Member whose general economic and financial situation remains sound. Its aim is to prevent crisis situations by allowing such an ESM Member to secure the possibility to access ESM assistance before it experiences difficulties raising funds in capital markets.  There are two types of available credit lines: a Precautionary Conditioned Credit Line (PCCL) and an Enhanced Conditions Credit Line (ECCL). Both credit lines can be drawn via a loan or primary market purchase and have an initial availability period of one year and are renewable twice, each time for six months. When precautionary financial assistance is granted, an MoU is concluded with the beneficiary ESM Member.

Primary market support facility

The purchase of bonds or other debt instruments by the ESM issued by Member States via auctions or syndicated transactions.  The main objective of primary market support is to allow the ESM Members to maintain or restore their access to financial markets.


Recapitalisation of financial institutions

Strengthening the capital position of financial institutions through capital injections in return for the acquisition of a capital claim on the institutions concerned, for instance by acquiring common shares. Such capital injections are often accompanied by additional measures, such as restructuring, raising capital privately (issuing securities), the sale of assets, or segregating impaired assets into an asset management agency (‘bad bank’).

Financial assistance to ESM Members for the recapitalisation of financial institutions can be provided in the form of a loan from the ESM to the beneficiary ESM Member. The support is channelled to the beneficiary institution by the ESM Member in accordance with the provisions of the EU state aid framework. The institution(s) concerned should have a systemic relevance or pose a serious threat to the financial stability of the euro area as a whole or of its Member States. Their systemic dimension is assessed taking into account, primarily, their size, interconnectedness, complexity, and substitutability.

The Eurozone crisis has seen highly indebted governments borrowing from banks, which then themselves become weak as a consequence of their exposure to sovereign debt. Governments are then forced to support ailing banks, adding to their public debt. This link between governments and banks has been widely regarded as a crucial destabilising factor for the euro area, and that is why the leaders of Eurozone countries decided that it was necessary to undertake action.

The Heads of State or Government of the euro area have stated that when an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a MoU.

Repurchase agreement (repo)

A contractual arrangement between two parties, whereby one party agrees to sell a security at a specified price with a commitment to buy the security back at a later date for another specified price. In essence, this makes a repurchase agreement much like a short-term interest-bearing loan against specific collateral.

Various kinds and motivations for trading repos are common and well-established in financial markets. Central banks use repurchase agreements to increase or reduce the money supply – a basic function of monetary policy. For example, by offering to buy securities in exchange for cash, central banks can inject money into the economy. Commercial banks often use repurchase agreements to borrow cash for short periods.

Reserve fund

A fund established by the Board of Governors for placing net income generated by the ESM operations, as well as the proceeds of the financial sanctions received from the ESM Members under the multilateral surveillance procedure, the excessive deficit procedure and the macro-economic imbalances procedure. The resources of the reserve fund will be invested in accordance with guidelines adopted by the Board of Directors.


Salary scale of ESM

For the salary scale of ESM please click here.

Secondary market support facility

The purchase of bonds or other debt instruments by the ESM or EFSF issued by Member States on the secondary debt market. The aim of EFSF/ESM secondary market intervention is to support the good functioning of the government debt markets of ESM Members in exceptional circumstances where the lack of market liquidity threatens financial stability, with a risk of pushing sovereign interest rates towards unsustainable levels and creating refinancing problems for the banking system of the ESM Member concerned. ESM secondary market support is intended to enable market making that would ensure some debt market liquidity and incentivize investors to further participate in the financing of ESM Members.


Seniority refers to the order of repayment of debt in the event of a sale or bankruptcy of a borrower/issuer. ESM loans to its Members enjoy preferred creditor status in a similar fashion to those of the IMF, while accepting preferred creditor status of the IMF over the ESM. This would, however, not apply to ESM loans granted to countries under an EFSF programme existing at the time of the signature of the ESM Treaty.

By contrast, EFSF loans to Member States are pari passu, i.e. each creditor has a right to be paid pro rata in accordance with the amount of its claim.

In the case of the recapitalisation of Spanish banks by the ESM, preferred creditor status was foregone, as the Financial Assistance Facility Agreement (FFA) was negotiated by the EFSF. This FFA was transferred to the ESM with rights and obligations, including the EFSF’s pari passu status.

Single supervisory mechanism

On 12 September 2012 the European Commission published draft legislation proposing the establishment of a single supervisory mechanism (SSM) covering the euro area and open to all other EU member States. In the new SSM proposed by the Commission, ultimate responsibility for the supervision of euro area banks would lie with the European Central Bank (ECB), while national supervisors would continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions. The Commission also proposed changes to the existing regulation establishing the European Banking Authority in order to ensure that EBA decision-making remains balanced once the SSM has entered into force.

The Heads of state and government of the Eurozone on 29 June 2012 stated that once an effective SSM is established, the ESM could, following a regular decision, have the possibility to recapitalise banks directly.


A set of six legal acts adopted in 2011, enhancing procedures for the surveillance of the EU member states’ fiscal policies (strengthening the Stability and Growth Pact) and macroeconomic policies (with a new Macroeconomic Imbalances Procedure).
EU member states are bound under the EU treaties and the Stability and Growth Pact by reference values for government deficit and public debt set at 3% and 60% of GDP respectively, and report their budgetary plans annually. In the event of not respecting these reference values, an excessive deficit procedure is initiated, with deadlines for corrective measures. The new solutions introduced in the Six-Pack are aimed at strengthening the provisions set for ensuring the respect of those criteria. They affect both the preventive arm of the pact, namely the procedures that are followed to ensure that excessive deficits are avoided, and the corrective arm of the pact, i.e. the procedure followed for the correction of excessive deficits.
In addition, the Six-Pack creates a formal framework for monitoring macroeconomic imbalances, including an early warning system and mechanisms for correcting imbalances, and lays down minimum requirements for national budgetary frameworks.

For details, please refer to press release 16446/11.


The positive/negative difference in relation to a benchmark or index (e.g. compared to Germany’s debt instruments, the Bund spread, SSA spread). Spreads are commonly quoted in basis points (1 basis point is equal to 0.01%).

Stability and Growth Pact (SGP)

A set of EU budgetary rules agreed in 1997 underpinning the Economic and Monetary Union (EMU). The main aim of the Stability and Growth Pact is to prevent the occurrence of excessive budget deficits, defined as more than 3% of gross domestic product (GDP). Member states are also required to have a level of total public debt of no more than 60 % of GDP or be taking steps to reduce it to that level. The SGP requires EU Member States to promptly implement an excessive deficit procedure if it is found to be in serious breach of the rules. The procedure requires a Member State to correct the budget deficit below 3% of GDP within a certain timeframe.
In December 2011, the EU adopted the Six-Pack of legislation on economic governance. Four of these laws are aimed at reforming the SGP by enforcing a stricter application and surveillance of fiscal rules.

Stability support

Support granted by the ESM to an ESM Member. The ESM offers five forms of stability support instruments to its Members (all subject to appropriate policy conditionality reflecting the circumstances of the beneficiary ESM Member): precautionary financial assistance (the ECCL and the PCCL), financial assistance for the recapitalisation of financial institutions of an ESM Member, primary market support facility, secondary market support facility, and ESM loans.
Financial assistance in the form of ESM loans is subject to a macroeconomic adjustment programme and is intended to assist ESM Members that have significant financing needs but have to a large extent lost access to market financing and have severe problems in their general economic and fiscal situation. The decision to grant a loan is taken by the ESM Board of Governors, based on an assessment by the troika. Loans are provided in one or more tranches, which may each consist of one or more disbursements. The disbursement of the first tranche is decided by the Board of Directors together with the approval of the Financial Assistance Facility Agreement (FFA).
A decision regarding the disbursement of subsequent tranches of financial assistance is taken by the Board of Directors after having received a report from the European Commission on the monitoring of and compliance by the beneficiary ESM Member with the policy conditionality attached to the loan.

Supranational, Sovereign and Agency (SSA)

A sector of the bond market which comprises sovereign, supranational and agency issuers. The ESM and EFSF both belong to this category.


A method of issuing bonds where a syndicate of several banks underwrite the bonds issued (i.e. buy the whole issue) and resell the bonds to institutional investors.


Tap (“tapping a bond”)

A procedure that allows issuers to sell bonds from past issues. The bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price. Increasing issues using a tap allow an organisation to avoid certain transaction or legal costs and to increase the liquidity of existing bonds.

Treaty on Stability, Coordination and Governance in EMU

See Fiscal Compact


An informal, collective name for the three institutions (European Commission, European Central Bank and International Monetary Fund) that work together to negotiate policy conditionality for euro area Member States which have applied for financial assistance from the ESM (and IMF). Assistance is provided on the condition that the beneficiary Member State implements a package of policy reforms typically involving fiscal adjustment and structural reforms to boost potential growth, create jobs and improve competitiveness. The policy reforms are specified in an MoU, and afterwards the troika is responsible for monitoring compliance with the policy conditionality.


The second package of proposals on economic governance that was presented by the European Commission in November 2011 and builds on the so-called Six-Pack of economic governance proposals. Once adopted, the two draft regulations will introduce provisions for enhanced monitoring of euro area Member States’ budgetary policies.

Under the European Commission’s proposals, euro area member states would be required to submit annually to the European Commission and the Eurogroup their draft budgetary plans for the next year by 15 October. Closer monitoring would apply to euro area Member States in an excessive deficit procedure in order to enable the European Commission to better assess whether a risk of non-compliance with the deadline to correct the excessive deficit exists. Euro area Member States experiencing severe difficulties with regard to their financial stability or receiving financial assistance would be subject to even more stringent monitoring.

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