The Role of National Recapitalization Funds in Sovereign Lending

The Global Financial Crisis of 2007–2009 showed that a substantial portion of funds borrowed by a state from a lender of last resort may be allocated to bank recapitalization. While national recapitalization funds are not themselves borrowers, they play a key role in recovery operations. This article analyses how lenders, such as the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF), incorporate recapitalization funds into their lending framework and how they deal with extraordinary events, such as corporate transformations or liquidation of these funds. To do this, we formulate three key principles that a lender may consider when dealing with state entities. We examine these principles by briefly comparing the ESM and the International Monetary Fund legal frameworks as well as by examining the recent merger by absorption of the Greek national recapitalization fund, the Hellenic Financial Stability Fund, into the Hellenic Corporation of Assets and Participations. We conclude by discussing the applicability of the key principles more generally to supranational lending, as well as the practical implementation of these principles.