The ESM was set up as an international financial institution by the euro area Member States to help euro area countries in severe financial distress.

The European Stability Mechanism (ESM) was set up in October 2012 as a successor to the EFSF. It is a permanent solution for a problem that arose early in the sovereign debt crisis: the lack of a backstop for euro area countries no longer able to tap the markets. The EFSF and ESM remain separate legal entities but share staff, facilities, and operations. Together, the EFSF and the ESM had €700 billion in firepower.

The ESM’s mission is to provide financial assistance to euro area countries experiencing or threatened by severe financing problems. This assistance is granted only if it is proven necessary to safeguard the financial stability of the euro area as a whole and of ESM Members.

For this, the ESM counts on several instruments. The ESM can grant a loan as part of a macroeconomic adjustment programme, such as the one that was already used by Cyprus and is currently ongoing in Greece. Ireland, Greece, and Portugal have used similar programmes delivered by the EFSF. The only other instrument used was an ESM loan to recapitalise banks which was provided to Spain. 

The ESM lends hundreds of billions of euros to programme countries. But this does not cost taxpayers any money, because the ESM raises the money it needs in financial markets. The ESM does this by selling bills and bonds to investors all over the world. From their trading room, the funding team keeps a close eye on the market to decide on the next issuance. In the upcoming 10 years, they need to raise between €30 and €50 billion from investors. 

Once the money is in their accounts, the lending team passes it on to programme countries such as Greece. This happens only under strict conditions. Countries must implement tough reform programmes before they get ESM money. Each step is carefully scrutinised by the mission chiefs, who regularly visit the programme countries.

The relationship with these countries is a long-term one, because of the long maturities of their loans. Through the so-called Early Warning System, the ESM country teams continuously monitor countries’ ability to repay the loans. The ESM recently also received a new mandate to evaluate the effectiveness of the programmes.

The ESM also manages its own capital of €80 billion. This money has been paid in by the euro zone countries. It cannot be used to make loans. It is a guarantee, showing that the strongest countries support the ESM. Their portfolio managers prudently invest the capital to protect its value. They work under very strict guidelines, and can only buy the safest instruments.

Because of these robust guarantees, the ESM has a strong credit rating and can raise money at very favourable rates. These low costs are passed on to their programme countries. As a result, the programme countries realise substantial budget savings.

With so much money changing hands within the ESM, it is no surprise that the risk department has a very central place, reporting directly into Managing Director Klaus Regling. So does our communication team, which explains their mission to the general public, and answers questions from journalists.

The Corporate Governance department organises their annual shareholder meeting. Unlike corporations, they host 19 euro area finance ministers in their building to approve the annual report. Needless to say this requires careful coordination.

They also have a solid back-office group to assist their trading operations and the state-of-the-art technology that comes with it. Their legal team groups specialists in EU law, and bond and loans experts amongst many other areas of expertise. Other units that are part of the internal business are Human Resources and Finance and Control.

The ESM is such a young institution. It has been established using the most up-to-date management techniques and is a lean and cost-effective organisation. Functions that can be better done elsewhere are outsourced.

Despite its large balance sheet, the ESM only employs some 160 people. Because the ESM legally speaking is not part of the EU, they can recruit among the best performers from the private and public sectors around the world. Currently, they employ staff from 40 different nationalities, 36% of whom are women.