FRANKFURT (MNI) – Eurostat, the EU’s statistical arm, announced
Thursday that funds raised by Europe’s rescue facility, the EFSF, must
be counted as debt on the books of member governments that provide the
guarantees for it. It would be divided in proportion to each
country’s share of the guarantees.

Below is the verbatim text released by Eurostat, as well as an
explanation of the EFSF:

The set-up of the EFSF

The creation of a European Financial Stability Facility (EFSF) was
finalised by the agreement reached on 7 June 2010 between the 16 states
who were members of the euro area at that date. This Facility, created
for three years and available for members of the euro area, allows up to
440 billion euro to be borrowed to loan to a Member State which is no
longer able to borrow from the markets, or only under too severe
conditions. This raising of funds by the EFSF is supported by an
irrevocable and unconditional guarantee given by the members of the euro
area, in proportion to their share in the capital of the European
Central Bank, adjusted for each support operation.

The entity managing the Facility is a limited company based in
Luxembourg. This company (whose start-up capital is 30 million euro) is
not a financial institution subject to the legal arrangements in force
in Luxembourg for this type of institution.

If a Member State makes a request to benefit from this Facility,
the European Commission, together with the European Central Bank and the
International Monetary Fund, makes a proposal on a “loan facility” to
the euro area Member States, who then take a unanimous decision. The
EFSF is charged with raising the funding on the market and making the
loan, with the technical assistance of other institutions, notably the
European Investment Bank (EIB) and the Finanzagentur (the German public
debt agency).

Analysis of the EFSF in national accounts

For Eurostat, the main question is to decide, in the case that the
Facility comes into operation, to who the debt raised should be
attributed. The Member State benefiting from the loan will of course
have a debt, but to who belongs the initial debt acquired by the
Facility in order to make the loan?

Eurostat’s opinion is that the EFSF does not possess all the normal
characteristics of an institutional unit under ESA 95. It has no
capacity for initiative and a limited autonomy of decision in the
exercise of its primary function, providing loans to countries in
difficulty and their financing. Decisions related to this primary
function are in practice subject to the prior approval, usually
unanimous, of the Eurogroup members taking part in a support operation.
Furthermore, Eurostat considers that EFSF can not be regarded as an
international financial institution, of which it has none of the usual
characteristics. It cannot also be consolidated with any of the European
institutions established by the Treaties (such as the European
Commission, Council or Parliament). In practice, the EFSF only reports
on its activities to the Eurogroup (recognized in the Treaty of Lisbon
as just a working group of the Council) and is not under the control of
existing European institutions.

Eurostat therefore considers that the EFSF is an accounting and
treasury tool to enable the same conditions for access to borrowing for
members of the euro area, acting exclusively on behalf of them and under
their total control. Not being an institutional unit as defined in
national accounts, EFSF operations must be partially consolidated in
national accounts tables with the institutional units to which it
belongs, in this case, the governments of euro area Member States.

Eurostat’s decision

Based on the preceding analysis, Eurostat therefore considers that
the debt issued by the EFSF for each support operation for a member of
the euro area must be reallocated to the public accounts of States
providing guarantees, in proportion to their share of the guarantees for
each debt issuing operation. It will be therefore accounted for in the
government debt of States having provided guarantees.

In accounting terms, EFSF will be classified in national accounts
in the financial corporations sector in Luxembourg. The loans made by it
will remain under its own name but, in the national accounts, this debt
will result in addition to the recording of a loan from the EFSF to the
guarantor Member States, based on their share of the guarantee for the
loan transaction. These Member States will record in their national
accounts, in proportion to their share and for an amount equal to the
EFSF loan registered in their accounts, a loan to the euro area Member
State which has requested the activation of the mutual support mechanism
through the EFSF. This will not affect the amount of the government debt
of the borrowing Member State, but simply the geographical breakdown of
it.

The recording of these flows via the Member States providing
guarantees will have an impact on their gross government debt (as
defined in the Maastricht Treaty), but this transaction will be neutral
in terms of debt, net of the loans they have granted for support
operations to other Member States.

In addition, all revenue streams (interest, margins and service
fees), recorded on an accrual basis, will pass through the national
accounts of States having provided a guarantee. A portion of these flows
(margins and service fees) will have a positive impact on government
deficit/surplus of these States.

This decision contributes to the comparability of data on public
finances across the EU, since it allows the recording in the same way,
especially as regards the impact on gross and net debt, of all support
operations, whether done on a bilateral basis – as in the case of the
euro area for Greece in the spring of 2010, or by some non-members of
the euro area in the case of Ireland – or through a specific entity such
as the EFSF.

Eurostat will from now on publish, in its twice yearly News Release
on the notification of government deficit and debt data for EU Member
States, information that will permit the calculation of Member States’
debt, net of the loans they have granted for support operations to other
Member States.

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