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07 March 2014

ESM/Regling: Priority is to create a real integrated banking market again without fragmentation


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Regling was interviewed i.a. on Greece, the stress tests and the IMF's future role in Europe. He underlined that countries must conclude their adjustment processes, saying that he saw this, along with Banking and Fiscal Union, as an important part of the long-term blueprint for the eurozone.


Greece
 
Last October, you said that Greece may need a third aid package as soon as in 2014. Do you still hold this view?
 
That’s a possibility. It’s not decided yet but it seems like a real possibility compared to other countries. Ireland and Spain exited their programmes and do not need more money. Portugal will conclude its programme in a few months, and they probably also do not need more money.
 
If everything goes very well in Greece it may not need more assistance. But my central scenario would be that more loans are needed. In any case, the amount will be very small. The last programme (the second Greek programme) was €140 billion. If there is a third programme for Greece, it will be a fraction of that, probably less than 10 per cent of the second. It’s a big change, because they have made so much progress on the fiscal side. The fiscal deficit in Greece this year will be 2 per cent of GDP, which is one of the lowest numbers in the world. It is lower than the US or Japan, even Netherlands, Finland or some of the most fiscally responsible countries in Europe. This is big progress, particularly if you remember Greece had a deficit of 15 per cent four years ago.
 
We met the Prime Minister of Greece last year and asked him if the country needed a new plan. He said no and ruled out every possibility. Have you had talks with the leadership in Greece? Why did they say no to the next aid package?
 
If they can avoid it, that is great and everybody will be happy. But it means that they have to be very strict on their adjustment, and have to be able to go back to the market. Nobody knows how the market will react to that six months from now, which is too far away. Whether the interest rate Greece will have to pay in the market is reasonable or excessive, we will see. If they manage, everybody will be happy. I am just saying what is more likely in my view, but I will be very happy if a third programme is not necessary.
 
There are some options of solutions for Greece, e.g. debt rollover, extension of bond maturities. Which one do you prefer in terms of debt sustainability?
 
That is something we will discuss in detail in the summer. My point is that it is not sufficient to look at the debt ratio (debt to GDP), which is very high in the case of Greece. We should also look at the financing flows, the level of real burden on Greek budget and the Greek economy. We know that for Greece, for the next ten or twenty years, there will be no debt overhang. Our financing is very long term. The EFSF is the biggest creditor of Greece, and the average maturity of EFSF loans is 30 years. So Greece is not repaying any capital in the next 25 years. The interest rates we charge are very low; they are half as high as the IMF interest rate. That is just our funding cost. For the next 10 years, we agreed on an interest deferral, which means Greece is not paying any interest and no amortisation to us. So there is no debt burden for the next ten years. In that sense, there is no debt overhang, because the normal argument is that too much debt will be a burden on the budget. Foreign investors are reluctant to invest because they are afraid that taxes might be raised to pay these debt services. But all this will not be an issue for Greece in the next 20 or 30 years. Investors have to understand this, and can see that there won’t be much debt service burden in Greece in the next twenty years. And therefore, it is not sufficient to look only at the debt to GDP ratio.
 
Do you see any country in the eurozone that may need help from you in the near term?
 
No, I don't see that. I’m realistic. I think developments have proved that I am not optimistic, but realistic. There was for a while a debate about Slovenia, but that has died down. We now know the results of stress tests for the banks. Slovenia is able to finance those capital needs by themselves. Beyond Slovenia, there wasn't even a debate for any other countries.

What are useful tools here to fix the monetary transmission mechanism?

I think we have to do many things. In the context of Banking Union, now the ECB will become the common supervisor and they will do the asset quality review and the stress tests. We will discover whether there are any problems anywhere in the system. We do not expect big ones, maybe a few small ones. So it is important to understand better what the situation of all the big banks is. Particularly because some people of the market are suspicious that there may be problems. Either we find some problems or they are really not there. So that will be important. Also, we need to set up the other instruments that complement the SSM (Single Supervisory Mechanism). There is work going on with the SRM (Single Resolution Mechanism), and the SRF (Single Resolution Fund). We will have, in the end, a real integrated banking market. I think it is the best we can do for the real economy in Southern European countries.

The three pillars of the Banking Union are in progress. But still the sceptics believe more is needed. Do you think we have reached a critical point that things will get better soon?

It will definitely get better. It has been better, more than expected, because most people thought that Europe will disappear. To create a full Banking Union will take a decade. It is a big project, and some people think it is as big as creating the euro. Therefore one needs a bit more patience, because it is a complex technical issue to create a Banking Union. Many steps are needed, and new institutions will be established, so it cannot be done in one night. But I think it is important that the process has started, the ECB has become a common supervisor, and they are preparing themselves. The ESM has been asked to prepare for the possibility of direct bank recapitalisation. That may not happen but the possibility will exist. I think that is very useful to have the instrument. The other elements of Banking Union are still under negotiation with the European Parliament, but I am optimistic that we will make progress in the next few months.

What would be the progress in terms of banking deposit insurance schemes?

That was agreed in December. It was a harmonisation of national deposit insurance schemes. So there will not be one scheme for all. Every country has its own system, and those who don’t have it will create it, and they will all follow the same standards and comparative rules.

You said that we don't need the Troika or the IMF any more?

No. I said that for the next crisis we may not need the IMF. For this one, nobody wants to throw out the IMF. We are in the middle of a process, Spain and Ireland have exited their programmes, but the other three countries (Greece, Portugal, Cyprus) and we are happy the IMF is there. But in the long run, in the next crisis which may come in 20 years or so, we will be in a different situation. Normally there is a crisis once in a generation. It is important that countries adjust to avoid new crises. They are part of our economic system but if a country does its homework and has good fundamentals, it should not happen too soon. With better policy coordination, with adequate institutions, with stronger banks, which are the essential elements of our crisis response, it should also mean that next crisis will not come that soon.

Do you mean that the IMF will become irrelevant in Europe in the medium and long term? No, I wouldn't go that far because all European countries are members of the IMF, like China also is. . If there is another crisis in Europe, we will see how much we can do on our own. But each member state of the IMF supports it and if a country is in trouble it has the right to seek help from the IMF. Why should European or other countries give up that right?

If you have a blueprint for the eurozone in the long term, which part is the most important now?

The countries must conclude their adjustment processes. They have come a long way, but it’s not over. Even Ireland, though it has exited, still has a fiscal deficit of 7 per cent of GDP, which must be reduced and cannot stay at 7 per cent forever. So, the first thing is that countries should conclude their adjustment. The other focus at the moment is the move towards Banking Union. Regarding fiscal union, one extreme definition of fiscal union is that all countries give up their national budgets and there is one budget for all of them. Then we would have the United States of Europe. This is unrealistic and will not happen soon. But we have moved towards a fiscal union in several important ways: tighter rules for policy coordination, particularly on the fiscal side, are a step towards fiscal union, not a complete fiscal union, throwing all budgets together, but on a system of much tighter rules to conduct fiscal policy.

Full interview



© European Stability Mechanism


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