Explaining the EFSF Bailout Fund (European Financial Stability Fund)

What is the EFSF Bailout Fund? In fact, the European Financial Stability Fund (EFSF) comprises the 16 countries that share the Euro and was established on the 9^th May 2010. So the objective of the EFSF is to preserve financial stability of Europe’s monetary union. Specifically by providing temporary financial assistance to euro area member states in difficulty. The following table shows all EU members, highlighting those EFSF members in grey.

Sources: www.efsf.europa.eu;

Accordingly as 10 out of the 17 members have voted (and passed), through their respective parliaments, to raise bailout funds for the EFSF, global investors are beginning to find some courage in investing back in the markets on expectations that all countries will comply. But we still have nearly 3 weeks until the final country (Slovakia) will push the raising of the EFSF funding through their parliament.

Austria and Estonia will vote on Friday (tonight) while Malta and the Netherlands vote next week.

Besides, there are some analysts that suggest the increase won’t cover the impact on French and German banks if Greece defaults. So which in turn would trigger higher costs to loans for Italy (ranked 8^th largest economy in the world), Spain and Portugal. Hence, there has been rumour that the EFSF will need to be raised to €2 trillion.

Of course, there’s no doubt that global investment confidence is hinging on action taken by the European Union. It doesn’t matter whether Greece defaults or not, as it is evident we could have a ‘lost decade’ of economic growth as these struggling economies attempt to pay off debt. The end result is that the markets will continue to show strong volatility for some time to come.

Having a major impact on stock market volatility is the fact that these individual governments are slow to act, whereas investors want to see clear and concise decision making to instil confidence. For example, the country to ratify the increase of funding was France on the 8^th September, while Slovakia won’t be making their parliamentary decision until the 17^th October – more than a month later.