New facilities help safeguard financial stability in Europe

The unsustainable level of govern ment debt in Europe began to threaten financial stability in 2010. Highly indebted governments agreed to adjust their finances, but a solution to the sovereign debt problems also required enhanced coordination of economic policy between EU countries and instruments for financing the adjustment programmes of the financially distressed countries. The negotiations over the support package for Ireland marked the beginning of new financial stability arrangements. Debt issuance by the European Financial Stability Facility and the European Financial Stabilisation Mechanism has got off to a good start, and the first loans to Ireland have already been paid via these channels. Even so, the financial markets still expect yields on euro area peripheral government bonds to remain high until a permanent, comprehensive solution to the sovereign debt problems has been found.