The European Stability Mechanism (ESM) is the future firewall for eurozone government rescue funding. Its entry into force has been held up awaiting a ruling on Wednesday by Germany's Constitutional Court on challenges over its legality.
The ESM was to have come into force on July 1, 12 months earlier than first planned. It is due, upon ratification, to absorb unused funds from its predecessor, the European Financial Stability Facility. The Court is examining a raft of challenges seeking to block ratification by Germany's president of the ESM treaty and a related fiscal pact, even though German lawmakers have already passed the two agreements.
-- Its mission
The ESM uses a mix of stakeholder governments' capital and guarantees. The funds borrow on the money markets and then lend the proceeds to stressed eurozone governments at much lower interest rates than such nations would get with private investors.
The ESM is a more sophisticated version than the EFSF. It will be able to buy sovereign bonds in primary and secondary markets, financing precautionary aid programmes for countries before they run into serious problems, such as providing bank recapitalisation support as agreed for Spain. The idea here is to avoid states getting deeper into debt when their banks hit problems that can be linked to wider financial market turbulence.
Only governments that have ratified the parallel treaty obliging them to run balanced budgets will have access to ESM finance.
-- Decisions on use
The ESM can begin operations once shareholders representing 90 percent of its capital give their approval.
Regarding daily business, Finland secured an effective opt-out, with a deal to offset risks and returns if it is out-voted on individual applications. As a consequence, decisions on use require an 85-percent qualified majority, not unanimity as was the case with the EFSF.
-- Lending capacity
The ESM's effective lending capacity was agreed at inception as 500 billion euros ($643 billion). Unlike the 440-billion-euro EFSF, there will be 80 billion euros of paid-in capital in the ESM, in addition to guarantees put up by governments.
This cash bedrock is to be paid, pro rata depending on a state's size, in five instalments between now and the start of 2014.