12 September 2013

ECB rules out backstop funding for Ireland without conditions

In an interview with Börsenzeitung, Asmussen dismissed the idea of no-strings-attached funding to ease Ireland's return to financial markets. He went on to comment on Greece, Portugal and the eurozone's situation in general.

How hot will it get in the much forecasted "hot autumn", with new discussions about Greece, Ireland, Portugal and Co.?

"Hot autumn" is an interesting term, but I think it’s overestimated. Even if many people think that the world will look different on 23 September – following the German parliamentary elections – it is not true. The introduction of eurobonds and the end of consolidation, etc. will not come about on 23 September either. Instead, in this autumn too, we will gradually have to confront the existing difficulties.

What is the most pressing topic?

Greece will certainly be at the top of the agenda again, with two urgent issues that will need to be resolved this autumn under the ongoing programme: First, it is set to run a budget deficit in 2015 and 2016 that will need to be corrected during the Troika programme review at the end of September, because Greece has introduced a medium-term fiscal strategy. Second, the ongoing programme reveals a financing gap in the second half of 2014 on the part of the donor countries, which will also need to be closed to ensure the involvement of the International Monetary Fund (IMF), because IMF involvement requires a programme that is fully funded for 12 months in advance.

Greece will have to return to the capital markets in 2014, because government bonds will mature. Will it manage to do so? And if not: how will the ECB, which holds a large part of these bonds, react?

According to the Greek Minister of Finance Ioannis Stournaras, Greece will try to return to the capital markets in the second half of the year. That is the right thing to do, and it remains to be seen if it will succeed. In any case, we as the ECB assume that the bonds we purchased under the Securities Markets Programme (SMP) will be fully repaid.

And when will a decision be made on "Greece III"? Will there also be a haircut?

If the country does not succeed in gaining full access to the markets for 2015, the question of a supplementary programme will arise in the course of 2014. But the main concern now is the implementation of the ongoing programme – not what happens after that.

Another urgent topic is Ireland. The Minister for Finance Michael Noonan has announced that Ireland is seeking a precautionary credit line from the ESM to the amount of EUR 10 billion in order to safeguard its return to the capital markets. Would that suffice as a prerequisite for the ECB to purchase Irish government bonds under its Outright Monetary Transactions (OMT) programme in order to support prices if necessary? Noonan has indeed expressed his hope that the credit line would not be linked to new conditions.

I have of course read what he said. He knows that a precautionary ESM programme also involves conditionality.

But that is limited to a country’s adherence to the Stability Pact and other EU regulations. There are no new conditions requiring reforms. Is that sufficient for the ECB?

OMTs can only be activated under the conditions that have been made known: a country requires an ESM programme, and that may also be a precautionary programme with the option of the ESM engaging in purchases in the primary market. Another requirement is IMF involvement. But it’s particularly important, and we have said this repeatedly, that countries under a European Financial Stability Facility (EFSF) Programme must be in a position to regain full access to the capital markets. Treasury bills, for example, are not sufficient. OMTs are a monetary tool, not a substitute for a lack of capital market access.

But OMTs can also be used to help countries to regain this access – they don’t need to have it already.

The ECB Governing Council will evaluate that in each case, based on considerations such as: does the country have an issuance calendar ? What volumes does it issue? Can it present a complete yield curve. A decision will then be made.

In Portugal the government itself is talking of a second rescue package and is hoping for a further relaxation of the conditions. Will Portugal need more help and will it receive it?

The country was set back by the political uncertainty in the summer. This uncertainty has now been overcome and the country can and should take up from where it stood in the spring of this year, when it was able to successfully issue a long-term bond. Market confidence could be won back through a full implementation of the programme. That is why it is essential to keep to the existing programme and all its objectives.

Many people are also concerned about the heavyweights France and Italy. Some observers fear that both countries are completely incapable of introducing reforms.

Let me say one thing first: we all have a strong interest in an economically strong France. The entire construction of the euro area can only function with a strong France. The latest pension reforms are a step in the right direction but do not go far enough. I also see problems regarding the intended funding through higher taxes and contributions, rather than through specific spending cuts. Besides, the plans also contradict the EU Commission’s country-specific recommendations. The bottom line is that France will need to do more to enhance its competitiveness. The government will need to speed up the pace of reforms.

In Italy, much was achieved through fiscal policy efforts under the former Prime Minister Mario Monti. It is now important to ensure that these successful achievements are not eroded.

Besides the reforms in the individual countries, reforms are proceeding in the euro area itself. Banking union is a key issue. Before the ECB takes on banking supervision, it wants to conduct a rigorous asset quality review. In carrying out this review, is it a condition for the ECB that countries commit themselves in advance to covering a capital shortfall if necessary?

This asset quality review will provide clarity about the banks’ balance sheets. Of course we don’t want to take on any "bad eggs"; the reputational risk is ours alone. However, from our perspective, a lack of clarity about the balance sheets is one of the main obstacles preventing banks from extending more credit. Clarity would also improve the functioning of the interbank market. In that sense, the review is not a threat but an opportunity. If it is to be a success, we must know what will be done should a capital shortfall emerge. If there is no answer to that, people will suspect that the review was too favourable. That doesn’t help anybody.

[…]

The OMT programme has made a significant contribution to the easing of the euro crisis. Many observers fear that the forthcoming ruling by Germany’s Federal Constitutional Court will impose strict limits on OMTs, and that this could trigger turbulence. How big is that risk?

I don’t know how the judges in Karlsruhe will rule either, and I have great respect for the court – from one independent institution to another. I think, though, that the views of market participants in New York, Frankfurt and Hong Kong are quite clear: the OMTs are fine the way they are, without any limitations being imposed.

Full interview

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