(Extract from pages 8-9 of BIS Quarterly Review, June 2010)
During the past few months, there have been growing concerns about the sustainability of the fiscal positions of several euro area governments. In April, the Greek government found it increasingly difficult and costly to issue debt. The European Union and IMF announced a joint €110 billion support package for Greece on 2 May. However, during early May, market concerns about Greece and several other euro area countries intensified. This led to a sharp deterioration in financial market conditions in Europe and visible spillover to global financial markets. On 9-10 May, the European Union, IMF, ECB and other major central banks announced a series of policy actions to help restore financial market confidence.
European Union
The European Stabilisation Mechanism announced by the EU has two components. One is an additional facility which supplements the existing €50 billion EU Balance-of-Payments Facility for non-euro area members; the other is the creation of a new European Financial Stabilisation Facility (EFSF) structured as a limited liability company. Both facilities will provide funding to eligible countries that are facing external financing difficulties, usually in conjunction with international organisations such as the IMF and accompanied by economic and fiscal adjustment programmes. The €60 billion European Stabilisation Mechanism facility is available to all 27 EU member states. It will be financed by the issuance of European Commission debt, which is implicitly guaranteed by the EU budget. The expansion of this facility does not require approval by national parliaments. The €440 billion EFSF can provide loans to any of the 16 euro area countries. Indications suggest that the funding for the EFSF will be guaranteed by euro area countries on a pro rata basis, in line with their share of paid-up capital in the ECB. The guarantees must be approved by national parliaments, and will come into force when they have been approved by countries representing at least 90% of shares in the EFSF. The EFSF debt is expected to receive a AAA rating.
International Monetary Fund
The IMF has stated that it is ready to cooperate with the European Union to support the affected European countries. If requested by individual countries, the IMF will provide financial assistance on a case by case basis and in accordance with its established lending procedures, in conjunction with the new European Stabilisation Mechanism. The IMF has indicated that its financial contribution will be broadly in proportion to its recent European arrangements (about one third of total funding) and will be accompanied by economic and fiscal adjustment programmes.
European Central Bank
The ECB has announced that it will purchase euro area public and private debt securities in the secondary markets to restore depth and liquidity in those markets. These purchases will be sterilised, to prevent an increase in bank reserves. As at 4 June 2010, the ECB had bought euro area government bonds worth €40 billion.
The ECB has also expanded its longer-term refinancing operations to give banks better access to longer-term funding. The regular three-month tenders (26 May and 30 June) will re-adopt the fixed rate procedure with full allotment. This means that, in each tender, the ECB will provide financial institutions with unlimited liquidity at a fixed interest rate. A six-month tender was also announced for 12 May, again at a fixed rate with full allotment.
Central bank swap lines
The Federal Reserve has reinstated temporary US dollar swap lines with the ECB, the Bank of England, the Bank of Canada, the Swiss National Bank and the Bank of Japan to help counter tightening liquidity conditions in US dollar funding markets and to prevent the spread of funding strains to other markets and financial centres. Central bank swap lines substantially lessened dislocations in cross-border funding markets in late 2008 and early 2009. The swap lines are of the same size as those announced previously - $30 billion for the Bank of Canada and unlimited for the other four central banks - and have been authorised up to January 2011. As of 2 June 2010, the ECB and the Bank of Japan had $6.4 billion (down from a high of $9 billion) and $0.2 billion of funds outstanding respectively. The Swiss National Bank and the Bank of England have held US dollar auctions but have not disbursed any funds, and the Bank of Canada has not yet held any auctions.