Tuesday 25 October 2016

Q&A: What is The European Stability Mechanism?

Published 14/07/2015 | 02:30

The ESM is Europe's permanent bailout fund. It was established in the wake of the financial crisis and is designed to be used if a European country needs rescued. The ESM replaced the European Financial Stability Facility (ESFS), a temporary bailout fund.

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Q: it's just a big pot of money?

A: Yes. The idea was to have money available at all times. The ESM has total subscribed capital of €705bn, and that includes €80bn of paid-in-capital from Eurozone member states, including Ireland. We paid in €1.27bn in five instalments.

Q: So taxpayers will not have to pay for future bailouts?

A: In theory, yes.

Q: Could we lose money if Greece defaults?

A: Yes, default is always a possibility - and the risk is borne by the creditor.

Q: But Ireland will not have to put up any additional money for a Greek bailout beyond the €1.27bn already paid into the ESM?

A: The Department of Finance believes that's the case. However, the full details of the third bailout have yet to be ironed out. All that is in place is an agreement in principle, the expectation is no further money from taxpayers will be required beyond ESM support.

Q: There was talk the ESM would help with the cost of bailing out our banks, what happened?

A: It had been mooted at one point that the ESM might take a stake in the bailed out banks, but political support for using the fund for so-called retroactive recapitalisation was going to be tough for the Government to secure. Finance Minister Michael Noonan has suggested that because of the recovery, it would be more beneficial to sell the state's share of AIB and Bank of Ireland on the open market.

Q: Why would we have used the ESM? I thought it was just for countries in distress?

A: When Ireland was in distress and had to bailout the banks, there was no fund like the ESM to turn to. So there was an argument that Ireland was a "special case" and this new bailout fund could potentially be tapped by Ireland to help recover some of the crippling costs of the bank bailout. And in theory, the money recouped from the ESM taking a stake in the banks could have been used to slash the state's huge debt pile.

Q: But the Government isn't pursuing that option anymore?

A: Officially, the Government says the option is still on the table. But even the Fund's chief, Klaus Regling, has said it is unlikely because it wouldn't get the required political backing.

Luckily for the Government, the banks here have returned to profitability and the Irish economy has recovered quicker than expected.

We don't get the big bang effect of an ESM bank deal, but at least we are slowly clawing back taxpayers' cash.

Irish Independent

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