Friday, September 7, 2012

Enhanced Conditions Credit Line

Yesterday’s announcements by ECB President, Mario Draghi, brought an additional acronym into mainstream view from the alphabet soup of EU policies and procedures.  This was when he described the features of the new Outright Monetary Transactions and outlined the requirement to have entered a rescue programme before OMTs are undertaken:

Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases.

The details of these precautionary programmes are provided in this document from the European Financial Stability Facility (EFSF).

Type of credit lines

1 A precautionary conditioned credit line (PCCL)

Access to a PCCL, which can be drawn as a loan or primary market purchase, is based exclusively on pre-established conditions and is limited to euro area Member States where the economic and financial situation are still fundamentally sound and which remain evidently committed to maintaining sound and credible policies in the future.

A global assessment shall be made on whether a Member State qualifies for PCCL, using as a basis the following criteria:

  • The respect of the SGP commitments. Countries under excessive deficit procedure could still access PCCL, provided they fully abide by the various Council decisions and recommendations aiming at ensuring a smooth and accelerated correction of their excessive deficit.
  • A sustainable public debt.
  • The respect of their EIP commitments. Countries under an excessive imbalance procedure could still access PCCL, provided that they can demonstrate that they are committed to addressing the imbalances identified by the Council.
  • A track record of access to international capital markets on reasonable terms.
  • A sustainable external position.
  • The absence of bank solvency problems that would pose systemic threats to the euro area banking system stability.

The beneficiary Member State shall ensure a continuous respect of the eligibility criteria after the PCCL is granted, to be monitored by the Commission. The PCCL has an initial duration of one year and is renewable twice, for six months each time.

2 An enhanced conditions credit line (ECCL)

Access to an ECCL, which can be drawn by way of a loan, primary market purchase is open to euro area Member States whose general economic and financial situation remains sound, but which do not comply with some of the eligibility criteria required for accessing a PCCL. Accordingly, the Member State concerned shall, after consultation of the Commission and of the ECB, adopt corrective measures aimed at addressing the above mentioned weaknesses and avoiding any future problems with access to market financing, while ensuring a continuous respect of the eligibility criteria which were considered met when the credit line was granted.

The ECCL has an initial duration of one year and is renewable twice, for six months each time. The availability fees charged shall aim at covering fully the costs occurred for the EFSF.

There is also an ECCL with a partial risk protection element.  The section on the ‘enhanced surveillance’ that comes with a precautionary credit line is also noteworthy.  There are no quarterly review missions as occur with full bailout loan programmes.  This is a much lower hurdle for politicians to step over to gain access to the ECB’s support.

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