Debt crisis

In April 2010, the then 16 eurozone member states as well as several other EU nations created a loan package for Greece, agreeing to grant Athens 80 billion euros ($113 billion) in loans over the course of three years.

The International Monetary Fund (IMF) in Washington added an extra 30 billion euros. This overall sum of 110 billion euros was aimed at supporting Greece to the extent that the country would eventually be back in the position to take out loans at tolerable interest rates on its own on the capital market by 2012.

In the meantime, about half that amount has been paid out to Greece. The European Commission coordinates the loans, while the individual eurozone states serve as creditors.

According to recent EU and IMF figures, however, Greece's financial situation is worse now than expected a year ago. Experts anticipate an additional 40-60 billion euros in credit will become necessary by 2013.

In March, Greece was granted lower interest rates and deferred payment for the loans that have already been disbursed. This "soft" debt restructuring affects state creditors but not private banks who bought Greek government bonds.

In addition, the European Central Bank (ECB) - the central bank for the now 17 states who share the euro as a common currency - has purchased 50 billion euros in Greek government bonds. In the case of a "hard" debt restructuring - that is the depreciation of debt certificates - the ECB and private investors face harsh losses of possibly 50 percent of their bonds.

Safety net for all

The large safety net, the "European Financial Stability Facility" (EFSF) was established last summer in Luxembourg. It is a special purpose vehicle owned by eurozone member states.

The rescue fund, run by top German civil servant Klaus Regling, can, in theory, provide loans of up to 440 billion euros, backed by member states. In addition to that, the EU Commission provides 60 billion euros and the IMF's share makes up 250 billion euros, adding up to a total of 750 billion euros. In practice, though, the figure is just 450 billion euros, as the remainder has to be retained as equity.

The loans are secured with particularly stringent guarantees to ensure the top AAA credit rating, which the EFSF needs itself to secure adequate funds at low interest rates, which it can then pass on to struggling nations. EU leaders have agreed to top up the total amount that can be borrowed to 750 billion euros. That means member states will also have to raise their guarantees. In Finland, the anti-euro party is opposed to an extended rescue fund.

Ireland, Portugal benefit

Both Ireland and Portugal have availed themselves of the rescue fund. Last December, Ireland announced it needed 80 billion euros in the next three years. The EU Commission has so far granted Ireland around 22.5 billion euros.

The EFSF itself has only handed out 3.6 billion euros from its resources, with an interest rate of 5.9 percent. But for Ireland's new Prime Minister Enda Kenny, the current interest rate is too high, and he has demanded lower rates.

Portugal applied for help from the EFSF at the end of March. EU finance ministers on Monday agreed to a bailout package of 78 billion euros for Portugal, a third of which will come from the IMF. Portugal is due to receive the first payment in June.

Follow-up fund

From 2013, the European Stability Mechanism (ESM) is scheduled to follow the preliminary EFSF mechanism, as agreed by EU leaders in March. The ESM will be able to lend up 750 billion euros, with 250 billion euros coming from the IMF and 500 billion euros provided by the EU.

To guarantee the necessary AAA rating, the ESM will not only have guarantees in place, it will also contain 80 billion euros in cash as equity, which member states will have to pay in over five years. Germany's share will be 22 billion euros.

There is growing opposition to this model in Chancellor Angela Merkel's coalition. Germany's parliament, the Bundestag, is scheduled to vote on the ESM in the autumn. The ESM is designed to be an official EU institution, not a private company, like the EFSF.

Setting up the ESM requires a change in the EU treaty, which then has to be ratified by member states.

The European Commission also grants funds of up to 50 billion euros to countries outside the eurozone. So far, Romania, Latvia and Hungary have tapped into that fund. Hungary has already paid back its 20-billion euro loan, Romania has received around 20 billion euros from the EU and the IMF and Latvia received 7.5 billion euros.

Author: Bernd Riegert / ng, db
Editor: Martin Kuebler