Following on from our country-by-country breakdown of the Eurozone debt crisis, we've put together this (abridged) verision of the various policy tools currently being employed by officials from the European Union, European Commission and the European Central Bank.
European Union Tools:
EFSF & ESM: European Financial Stability Fund & European Stability Mechanism
Collectively the two Funds form the centrepiece of the EU's "firewall" around the sovereign debt crisis. With a total lending capacity of around €800bn (including prior commitments to Greece from earlier bailouts) the funds have a financial strength equal to the size of Canadian GDP.
The design is simple: around €80bn in hard capital from the 17 Eurozone members will provide the ESM's base, and it will have the ability to lend up to around €500bn when it's fully operational. The 15 percent capitalisation will be paid by the member states over a three year period (€32bn this year and next and €16bn in 2014). European leaders hope the fund will be strong enough to earn a triple-A credit grade from the three major ratings firms.
Prior commitments from the EFSF are around €192bn based on the EU contributions to bailouts for Ireland, Portugal and Greece. A further €100bn will be earmarked for Spanish banks, but the terms and conditions for the loans, as well as the ultimate size, haven't yet been finalised.
Contributions to the ESM, the permanent form of the fund which will run in tandem with the EFSF for the first few years, will be based on a percentage of the Eurozone member's economic size. For example, Italy is responsible for around 17.9 percent of the €80bn in paid-in capital.
The fund will lend money to ailing economies - and perhaps take direct stakes in banks - in times of distress. Loans from the fund will be senior, in collateral terms, to all existing debts of the borrower expect those owed to the International Monetary Fund (or the pre-committed loans to Greece, Ireland and Portugal).
Short term loans will be priced at 2 percent premium over the ESM's funding costs (a back-of-the-envelope calculation puts this at around 4 percent). Longer loans will carry a further 1 percent surcharge if they're not repaid after three years.
The biggest hurdle to the ESM becoming fully operational is the current legal challenge being heard in Germany's Constitutional Court. Hearings this week were expected to come to a conclusion, but the Court has decided to examine the details of the challenge further - thus preventing German President Joachim Gauck from signing off of his country's 27 percent contribution.
ELA: Emergency Liquidity Assistance
A lending programme to European banks that sits outside the conventional framework of the ECB but inside the rarely-discussed European System of Central Banks (ESCB). In broad terms, the ELA takes on a different set of collateral rules than the ECB and thus offers a riskier form of lending to stressed financial institutions. That risk, however, is held at the national central bank level and not shared by the broader ESCB.
EFSM: European Financial Stabilization Mechanism
An emergency funding program for EU member states in economic difficulty, which is reliant on funds raised in the financial markets and guaranteed by the European Commission (EC) using the budget of the European Union as collateral. The fund has the authority to raise up to €60 billion and has made loans to Ireland and Portugal (in conjunction with the European Financial Stability Facility (EFSF) since its May 2010 inception.
EFSM: European Financial Stabilization Mechanism
Similar in concept to the EFSM, this programme lends directly to countries instead of banks. The funds are raised in the capital markets and backed-up by the European Commission (via EU budget cash). It has the authority to raise around €60bn.
SGP: Stability and Growth Pact
The first of the three agreements member states have reached with respect to fiscal discipline and sustainable growth. First inked in 1997, the SGP calls for annual budget deficits that limits deficits and debts to 3 percent and 60 percent of GDP respectively. In theory, the EU reserves the right to fine persistent offenders but in practice this has never been the case: in fact, only Finland has ever fully complied.
Fiscal and Growth Compacts:
The Fiscal Compact, or the Fiscal Pact as its often called, is largely the result of the "Merkozy" austerity drive pushed by the former French President Nicolas Sarkozy and current German Chancellor Angela Merkel (with vocal support from Dutch Prime Minister Mark Rutte). The pact seeks legal and/or constitutional limits to structural deficits (0.5 percent of GDP) and empowers the European Court of Justice to levy stiff fines (1 percent of GDP) for flagrant breaches.
The Fiscal Pact needs the ratification of 12 of the 17 Eurozone members before it can kick into gear, but it's being held up in Germany as part of the same Constitutional Court challenge against the ESM.
The counterweight to the Fiscal Pact is the newer Growth Compact pushed for by, inter alia, new French President Francois Hollande and agreed at last month's Leaders' Summit in Brussels. It uses a series of tactics, including so-called "project bonds" issued by the European Investment Bank, to inject around €100bn in the Eurozone economy.
European Cental Bank Tools:
SMP: Securities Markets Programme
Part of the so-called "non-standard" measures the ECB can use in its role of maintaining price stability within the Eurozone. The SMP allows the ECB the power to buy bonds in the secondary - but not the primary - market to help lower the effective borrowing costs of members under financial strain. First launched in May 2010, the programme has bought around €210.5bn in Eurozone bonds (but won't provide specific details). It hasn't been active since its last round of purchases in March of this year.
Critically, the SMP is *not* deemed a form of quantitative easing by the ECB, as its purchases are "sterilised" by the weekly collection of fixed-term deposits.
The ECB has also purchased a small amount (€60bn) of covered bonds as part of a parallel Covered Bond Purchase Programme.
OMO: Open Market Operations
MRO: Main Refinancing Operations
The bread-and-butter of the ECB's policy toolbox, MROs for the backbone of the Bank's day-to-day activities and maintain the integrity of the benchmark lending rate (currently a record low 0.75 percent). According to the ECB, MROs "serve to steer short-term interest rates, to manage the liquidity situation, and to signal the stance of monetary policy in the euro area".
LTRO: Long Term Repo Operations
Another of the non-standard tools employed by the ECB, the LTRO focuses directly on bank liquidity, as opposed to bank solvency. In essence, the ECB takes on Eurozone banks' collateral and lends cheap, 1 percent (prior to the July rate cut) money for a period of up to three years. The ECB has executed two LTROs so far (21 December and 29 February) worth around €1tn.
It's a hugely controversial approach to market stability in that is brings onto the ECB's balance sheet (now measured at more than €3tn) a collection of assets that are difficult to gauge in terms of risk. Furthermore, it reminds us of the fact that there is no clear indemnification of the ECB by European taxpayers, unlike, say, the clear backstop of the US Federal Reserve by American rate-payers.
MLF: Marginal Lending Facility
Used by Eurozone banks to obtain overnight liquidity against what the ECB calls "the presentation of sufficient eligible assets".
B).DF: Deposit Facility
Just as the name implies, Eurozone banks can dump cash at the ECB window. The deposit rate, however, was cut to zero percent for the first time ever this month by ECB President Mario Draghi.
Activities in both facilities are made via a bespoke payments system connecting 976 Eurozone banks called "TARGET 2". (Trans-European Automated Real-time Gross Settlement Express Transfer). ECB figures show peak TARGET 2 deals last year of 524,856 transactions on a single day (31 January) and peak volumes of €3.713tn (30 November).