The ESM is a permanent rescue funding program which is expected to come online in July 2012, about a year ahead envisioned during the facility’s inception in 2010. It has a lending capacity of €500 bn. The paid-in capital of the ESM may be around €80 bn with another €620 bn in guarantees of callable capital. By being over-funded in can continue to carry a AAA rating when its auctions its bonds in the private market. We explores its role and key issues around the ESM and the EFSF.

“LTRO” stands for ‘long-term refinancing operation’ and is a monetary tools used by the ECB to help pump liquidity into the banking system. The ECB offers European banks long term loans at the prevailing ECB interest-rate. These operations are part of the ECB non-standard measures, and are offered during emergencies such as the funding crisis that hit European banks at the end of 2011. Part of the design of the LTRO is to give banks a chance to participate in the “carry trade” of European sovereign bonds. We explain that and more inside.

With Europe these past few years, the financial markets are seeing the crisis of too much government debt and poor government balance sheets as well as a weak banking sector unfolding. The crisis originated with Greece, moved to Ireland and Portugal, and struck Italy in the second half of 2011. This article will try and present the historical reasons why, as well as the key issues facing Europe in early 2012. At the root here, this story is about competitiveness, interest rates, and the imbalances that grew out of the introduction of the euro.