EU agree on capital, ESM loan pricing

The eurozone's permanent bailout fund, the European Stability Mechanism, will be backed by paid-in and callable capital and offer loans more cheaply than the temporary facility does now, a eurozone source said. The ESM, which is to have an effective lending capacity of 500 billion euros, will be backed by 80 billion euros of paid-in capital and 620 billion of callable capital, the source said.
-- ESM to be backed by paid-in and callable capital -source
-- Paid capital to be 80 billion euros
-- Callable capital to be 620 billion euros
The agreement was reached at an extraordinary meeting of European Union finance ministers on Monday devoted to sorting out remaining technical details of the eurozone's comprehensive response to the sovereign debt crisis. The comprehensive package is to be approved by EU leaders on March 24-25.
Euro zone leaders asked finance ministers on March 11 to come up with the appropriate mix of paid-in capital, callable capital and guarantees to support the effective lending of the ESM, which the eurozone would like to have a triple-A rating. The eurozone source said no guarantees would be used.
The ESM, which will start operating from mid-2013, will offer loans at funding costs plus 200 basis points for loans up to three years and plus another 100 basis points for loans longer than three years. There will be no service charge.
The current bailout fund, the European Financial Stability Facility (EFSF), offers loans with a margin of 300 basis points for up to three years and 400 basis points over three years plus a one-off fee of 50 basis points.
Agreement on the ESM capital structure was not straightforward, because of objections of six EU countries to the key used for the capital contributions.
The six countries said the key used for government guarantees which now support EFSF borrowing - the European Central Bank capital key - was unfair, because it favoured richer countries. The source said eurozone countries therefore backed a proposal from Estonia which based the ESM capital key 75 percent in a country's Gross National Income (GNI) and 25 percent in the ECB key.