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EU finance ministers decide on comprehensive package to preserve financial stability

Ministry of Finance 10.5.2010 15.08
Press release -

The European Union Member States decided yesterday on a comprehensive package of measures to preserve financial stability in Europe. The package consists of a number of measures: a financial package, strengthening the budgets of the Member States, action by the European Central Bank, stabilization procedures by the International Monetary Fund (IMF), enhanced economic policy coordination and accelerated financial markets regulation.

The financial package totals altogether EUR 750 billion, with the EU?s share being EUR 500 billion and the IMF?s contribution is EUR 250 billion. The package aims to steady the financial markets by offering financial support to EU and euro area economies that might otherwise run into serious financial difficulties.

The EU finance ministers decided to establish a European stabilisation mechanism. The mechanism is based on Art. 122.2 of the Treaty. Altogether EUR 60 billion will be foreseen for Member States in serious financial difficulties, and the mechanism will stay in place as long as needed to safeguard financial stability. It is subject to strong conditionality and will operate on terms and conditions similar to the IMF facilities. The mechanism will operate in tandem with the existing facility providing medium-term financial assistance for non-euro area Member States? balance of payments.

The overall financial package also includes a provision that euro area Member States will stand ready set up a special purpose vehicle (SPV) that can provide assistance to troubled euro area Member States. The SPV is a tailor-made lending facility that borrows resources for assistance from the markets. The euro area Member States guarantee rescue loans up to a maximum of EUR 440 billion. Finland?s participation in the system is conditional on parliamentary approval.

The euro area economies will participate in the guarantee mechanism on a pro rata basis according to their ECB capital share, meaning that it will be computed on the same principles as the ones used in the loans to Greece. Finland?s ECB capital share is 1.80%, with the imputed share of the EUR 440 billion facility is EUR 7.9 billion. The proportions may vary between Member States if the country in need of a loan does not participate in the funding (hence Finland?s share of the loan to Greece is 1.85% instead of 1.80%).

The SPV is a fixed-term arrangement that will expire after three years.

The European Central Bank (ECB) has announced its own measures for stabilizing the financial markets. The ECB will be buying government and private bonds in the open market to help improve the depth and liquidity of a poorly functioning market. The ECB will also bring back some of the emergency liquidity measures it had started to phase out. Banks will be granted unlimited 3- and 6-month liquidity against collateral. The ECB has also re-started dollar lending operations with the Federal Bank to secure market demand for provision of USD liquidity.

The IMF will participate in financing arrangements for both the euro area and the EU as a whole through its facilities in line with the recent stabilization programmes. The IMF?s overall contribution is EUR 250 billion, which is half as much as the EU contribution.

In addition, the EU will swiftly start working on the necessary reforms to ensure fiscal sustainability in the euro area. The work will build on the Commission Communication to be adopted on 12 May 2010. In this context importance will be attached to strengthening fiscal discipline.

The ECOFIN stressed the need to make rapid progress on financial market regulation and supervision, in particular with regard to derivative markets and the role of rating agencies. Work will continue on other initiatives too, such as a stability fee, which aims at ensuring that the financial sector shall in future bear its share of burden in case of a crisis, and exploring the possibility of a global transaction tax. The finance ministers also agreed to speed up work on crisis management and resolution.

Inquiries: Mr Martti Hetemäki, Permanent Under-Secretary, tel. 358 9 160 33091 and Mr Martti Salmi, Director, tel. 358 9 160 32516 and 358 400 510 304.