Q&A: HOW DOES THE EFSF WORK?

Q. WHAT IS THE EFSF?

A. The European Financial Stability Facility (EFSF) is the region’s bailout fund, underwritten by members of the Eurozone. It currently has €440bn at its disposal, but that is due to be boosted to €780bn once all 17 member states have ratified changes to the fund agreed on 21 July.

Q. WHAT CAN THE EFSF USE THIS CASH FOR?

A. Aside from bailing out nations, the other changes agreed in July include the ability for the EFSF to buy government bonds in order to cap yields (taking over the responsibility of the ECB in this regard) and to recapitalise banks if the ECB deems it necessary. However, the details of this have yet to be worked out.

Q. WHAT ARE FRANCE AND GERMANY ARGUING ABOUT?

A. They are disputing when it is the EFSF should be tapped in order to bail out banks. Germany thinks it should be a last resort, with national governments footing the bill for bank rescues first and the EFSF stepping in only if sovereigns cannot afford it. However, France is anxious that this could affect its triple-A rating and would rather that the cost of bank bailouts was borne collectively – effectively, it wants the region’s paymaster economies to subsidise its bank recapitalisations. There is no sign of an agreement on this so far, though Merkel and Sarkozy insisted yesterday that they are not at loggerheads.

Q. WILL ALL THESE CHANGES BE RATIFIED?

A. So far, most Eurozone parliaments have fallen into line and ratified the deal. But Slovakia could cause a problem: of the four parties in the governing coalition, one has said it will vote against the package, while three will vote for it. That means the deal’s fate will be decided by the opposition party. It is not yet clear how they will vote.