Angela Merkel

The Eurogroup has launched the European Stability Mechanism (EU's permanent bailout fund replacing the temporary EFSF) on Monday and the head of the lending institution Klaus Regling, appointed for 5 years, has affirmed that it had become fully operational, starting today.

Its initial lending capacity will be approximately 200 billion euros. EU finance ministers are also supposed to release a statement regarding the situation in Greece, in the light of last week's negotiations with the Troika inspectors.

The mission of the ESM program is "to safeguard financial stability in Europe by providing financial assistance to euro area Member States." The program will intervene in primary and secondary bond markets and it will "act on the basis of a precautionary programme."

As the following image shows, the 17 euro area Member States will be the shareholders and Germany, France, Italy and Spain will provide the most. Bilouted Countries like Greece, Portugal and Ireland will fund money.

table fund

Klaus Regling said that ESM's instruments were the same as those of the EFSF and assured that the matter of the direct recapitalization of distressed EU banks would be reassessed as soon as a single Eurozone banking supervisor was established.

Meanwhile, Fitch ratings agency announced on Monday that ESM's bonds had been granted the top AAA rating, with a stable outlook. Possible downgrades of AAA-rated Eurozone countries should not affect the funds' rating, although “in the event that Greece were to exit from the eurozone, the ratings of all sovereign and sovereign-rated entities in the eurozone, including the ESM, would be placed on Rating Watch Negative.”

Later on Monday, German Finance Minister Wolfgang Schäuble told reporters on Monday, ahead of the Eurogroup meeting in Luxembourg, that Spain “does not need additional financial aid,” adding that the country's government is doing all that is necessary to fight the crisis.

But market expects that Spain will be the first EU member state to apply for ESM funds, but most probably it won't happen just yet, as Spanish bond yields have been declining recently, while harsh budget cuts spurred a strong opposition among Spanish citizens. But with the bailout fund already in place investors will exert more pressure on Rajoy's government to ask for financial aid.

Spanish 10-Year bonds trade at 5.74%, with 426 points as differential with Germany. Italian 10Y bonds are at 5.08%; France's 10Y bond at 2.17% and German at 1.48%.

Commenting on another important point on the meeting agenda – the decision on the bailout for Greece - Schäuble admitted that it cannot be expected today, as Troika's report has not been finalized yet, stating however that "hope never dies for an October decision on Greece".