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News - 30 July 2012

Financial Glossary: Part Three E to G

As part of our attempt to demystify the complex world of financial jargon, here is Part Three of the ABDS guide to current business terms.

E

EBA The European Banking Authority is a pan-European regulator created in 2010 to oversee all banks within the European Union. Its powers are limited, and it depends on national bank regulators such as the UK's Financial Services Authority to implement its recommendations. It has already been active in laying down new rules on bank bonuses and arranging the European bank stress tests.
Ebitda Earnings (or profit) before interest payments, tax, depreciation and amortisation. It is a measure of the cashflow at a company available to repay its debts, and is much more important indicator for lenders than the borrower's profits.
EBRD The European Bank for Reconstruction and Development is a similar institution to the World Bank, set up by the US and European countries after the fall of the Berlin Wall to assist in economic transition in Eastern Europe. Recently the EBRD's remit has been extended to help the Arab countries that emerged from dictatorship in 2011.
ECB The European Central Bank is the central bank responsible for monetary policy in the eurozone. It is headquartered in Frankfurt and has a mandate to ensure price stability - which is interpreted as an inflation rate of no more than 2% per year.
EIB The European Investment Bank is the European Union's development bank. It is owned by the EU's member governments, and provides loans to support pan-European infrastructure, economic development in the EU's poorer regions and environmental objectives, among other things.
ESM The European Stability Mechanism is a 500bn-euro rescue fund that will replace the EFSF and the EFSM from June 2013. Unlike the EFSF, the ESM is a permanent bail-out arrangement for the eurozone. Unlike the EFSM, the ESM will only be backed by members of the eurozone, and not by other European Union members such as the UK.
EFSF The European Financial Stability Facility is currently a temporary fund worth up to 440bn euros set up by the eurozone in May 2010. Following a previous bail-out of Greece, the EFSF was originally intended to help other struggling eurozone governments, and has since provided rescue loans to the Irish Republic and Portugal. More recently, the eurozone agreed to broaden the EFSF's mandate, for example by allowing it to support banks.
EFSM The European Financial Stability Mechanism is 60bn euros of money pledged by the member governments of the European Union, including 7.5bn euros pledged by the UK. The EFSM has been used to loan money to the Irish Republic and Portugal. It will be replaced by the ESM from 2013.
Equity The value of a business or investment after subtracting any debts owed by it. The equity in a company is the value of all its shares. In a house, your equity is the amount your house is worth minus the amount of mortgage debt that is outstanding on it.
Eurobond A term increasingly used for the idea of a common, jointly-guaranteed bond of the eurozone governments. It has been mooted as a solution to the eurozone debt crisis, as it would prevent markets from differentiating between the creditworthiness of different government borrowers.
Confusingly and quite seperately, "Eurobond" also refers to a bond issued in any currency in the international markets.
Eurozone The 17 countries that share the euro.

F

Federal Reserve The US central bank.
Financial Policy Committee A new committee at the Bank of England set up in 2010-11 in response to the financial crisis. It has overall responsibility for ensuring major risks do not build up within the UK financial system.
Financial transaction tax See Tobin tax.
Fiscal policy The government's borrowing, spending and taxation decisions. If a government is worried that it is borrowing too much, it can engage in austerity; raising taxes and/or cutting spending. Alternatively, if a government is afraid that the economy is going into recession it can engage in fiscal stimulus, which can include cutting taxes, raising spending and/or raising borrowing.
Freddie Mac, Fannie Mae Nicknames for the Federal Home Loans Mortgage Corporation and the Federal National Mortgage Association respectively. They don't lend mortgages directly to homebuyers, but they are responsible for obtaining a large part of the money that gets lent out as mortgages in the US from the international financial markets. Although privately-owned, the two operate as agents of the US federal government. After almost going bust in the financial crisis, the government put them into "conservatorship" - guaranteeing to provide them with any new capital needed to ensure they do not go bust.
FTSE 100 An index of the 100 companies listed on the London Stock Exchange with the biggest market value. The index is revised every three months.
Fundamentals Fundamentals determine a company, currency or security's value in the long-term. A company's fundamentals include its assets, debt, revenue, earnings and growth.
Futures A futures contract is an agreement to buy or sell a commodity at a predetermined date and price. It could be used to hedge or to speculate on the price of the commodity. Futures contracts are a type of derivative, and are traded on an exchange.

G

G7 The group of seven major industrialised economies, comprising the US, UK, France, Germany, Italy, Canada and Japan.
G8 The G7 plus Russia.
G20 The G8 plus developing countries that play an important role in the global economy, such as China, India, Brazil and Saudi Arabia. It gained in significance after leaders agreed how to tackle the 2008-09 financial crisis and recession at G20 gatherings.
GDP Gross domestic product. A measure of economic activity in a country, namely of all the services and goods produced in a year. There are three main ways of calculating GDP - through output, through income and through expenditure.
Glass-Steagall A US law dating from the 1930s Great Depression that separated ordinary commercial banking from investment banking. Like the UK's planned ring-fence, the law was intended to protect banks which lend to consumers and businesses - deemed vital to the US economy - from the risky speculation of investment banks. The law was repealed in 1999, largely to enable the creation of the banking giant Citigroup - a move that many commentators say was a contributing factor to the 2008 financial crisis.

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