European Stability Mechanism
The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operate under public international law for all eurozone Member States having ratified a special ESM intergovernmental treaty. It was established on 27 September 2012 as a permanent firewall for the eurozone, to safeguard and provide instant access to financial assistance programmes for member states of the eurozone in financial difficulty, with a maximum lending capacity of €500 billion. It replaces two earlier temporary EU funding programmes: the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). All new bailouts for any eurozone member state will now be covered by ESM, while the EFSF and EFSM will continue to handle money transfers and programme monitoring for the previously approved bailout loans to Ireland, Portugal and Greece.The Treaty Establishing the European Stability Mechanism stipulated that the organization would be established if member states representing 90% of its capital requirements ratified the founding treaty. This threshold was surpassed with Germany's completion of the ratification process on 27 September 2012, which brought the treaty into force on that date for sixteen of the seventeen members of the eurozone. The remaining state, Estonia, which had only committed 0.19% of the capital, completed its ratification on 4 October 2012. A separate treaty, amending Article 136 of the Treaty on the Functioning of the European Union (TFEU) to authorize the establishment of the ESM under EU law, was planned to enter into force on 1 January 2013. However, the last of the then-27 European Union member states to complete their ratification of this amendment, the Czech Republic, did not do so until 23 April 2013, postponing its entry into force until 1 May 2013.The ESM commenced its operations after an inaugural meeting on 8 October 2012. The first 40% of the paid-in capital was transferred by all ESM member states ahead of a treaty regulated deadline of 12 October 2012. ESM member states can apply for a bailout if they are in financial difficulty or their financial sector is a stability threat in need of recapitalization. ESM bailouts are conditional on member states first signing a Memorandum of Understanding (MoU), outlining a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability. Another precondition for receiving an ESM bailout is that the member state must have ratified the European Fiscal Compact. When applying for ESM support, the country in concern is analyzed and evaluated on all relevant financial stability matters by the so-called Troika (European Commission, ECB and IMF) in order to decide which of its five different kinds of support programmes should be offered. As of April 2013, the ESM has approved two Financial Assistance Facility Agreement (FAFA) programmes, with up till €100bn earmarked for recapitalization of Spanish Banks, and €9bn in disbursements for Cyprus for a sovereign state bailout programme. The Cyprus bank recapitalization was funded by converting bank deposits into equity.