sovereign debt: a new wave of restructuring the eu framework
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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 ”) - PowerPoint PPT PresentationTRANSCRIPT
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SOVEREIGN DEBT: A NEW WAVE OF RESTRUCTURING
The EU Framework
Dubai – October 31, 2011
Antoine Maffei
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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
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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”)
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The EFSM Regulation:
Establishes conditions and procedures under which EU financial assistance may be granted to a MS experiencing or threatened with, severe economic or financial 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)
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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
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The EFSF:
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
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THE EFSF:
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
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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)
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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))
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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:
Country ECB Capital subscription key % Contribution key Guarantee Commitment EUR (millions)
Kingdom of Belgium 2.4256 3.4666% 27,031.99
Federal Republic of Germany
18.9373 27.0647% 211,045.90
Republic of Estonia 0.1790 0.2558% 1,994.86
Ireland 1.1107 1.5874% 12,378.15
Hellenic Republic 1.9649 2.8082% 21,897.74
Kingdom of Spain 8.3040 11.8679% 92,543.56
French Republic 14.2212 20.3246% 158,487.53
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Amount of Guarantee (2):
That percentage or Over-Guarantee percentage was 120% prior to entry into force of September 2011 Amendments of the Agreement
Country ECB Capital subscription key % Contribution key Guarantee Commitment EUR (millions)
Italian Republic 12.4966 17.8598% 139,267.81
Republic of Cyprus 0.1369 0.1957% 1,525.68
Grand Duchy of Luxembourg
0.1747 0.2497% 1,964.94
Republic of Malta 0.0632 0.0903% 704.33
Kingdom of the Netherlands
3.9882 5.6998% 44,446.32
Republic of Austria 1.9417 2.7750% 21,639.19
Portuguese Republic 1.7504 2.5016% 19,507.26
Republic of Slovenia 0.3288 0.4699% 3,664.30
Slovak Republic 0.6934 0.9910% 7,727.57
Republic of Finland 1.2539 1.7920% 13.904,03
Total 69.9705 100.0000% 779.783,14
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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
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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
EFSF - after July 21, 2011
EFSF - before July 21, 2011 EFSM IMF
Average Maturity Not determined 7,5 years 7,5 years maximum 4*/7,5** years
Maximum Maturity 30 years 15 years Not determined 5*/10** years
Maximum Grace Period 10 years not systematical not systematical 3,25*/4,5** years
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Amount of Guarantees (5):
Table 2.: Interest
Source: French Economy, Industry and Employment Ministry
Applicable rate for first 3 years Step-up after 3 years
EFSF - before July 21, 2011 EFSF Cost of Funding + 200 bp + 100 bp
EFSF - after July 21, 2011 EFSF Cost of Funding + 50 bp 0 bp
EFSM EFSM Cost of Funding + 200 bp + 100 bp
IMFSDR rate + 100 bp + 200 bp
(applicable to the amount of the facility in excess of 300% of IMF
quota)
+ 100 bp
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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
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Cash Reserve:
In respect of Financial Assistance disbursed after the Effective Date and subject to Notes obtaining highest 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)
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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
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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
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Funding:
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
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EFSF Bond Issues:
Issue Date Amount issued
January 25, 2011 EUR 5 Billion
June 15, 2011 EUR 5 Billion
June 22, 2011 EUR 3 Billion
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EFSF Guaranteed Debt Issuance Programme
Date Amount
August 24, 2011 EUR 55 Billion
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Debt Issuance Management:
Allocated to ”Finanzagentur” (German Debt Management Office) Front office
Debt issuance
Cash management
Risk management
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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