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13 March 2014

ESM/Regling: Interview in Ir magazine


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Regling was interviewed i.a. on a possible third programme for Greece, whether Portugal would go for a clean exit or a precautionary programme, the ESM's potential recap involvement after the stress tests, and the situation in Italy.


Do you think Greece will need a third programme?

It is a possibility. Nothing is decided. The Troika is in Greece right now, but I think we will only know by the summer whether a third programme is needed or not. If it is needed, it will be a fraction of the previous programmes.

Would it be financed from the ESM?

Yes.

So you don't think simply reducing interest rates and extending maturities on existing loans would be enough. Some new money would have to be put into the programme.

If real additional money is needed it would come from the ESM. As I said, it's not decided, it's not absolutely clear, but if more money was needed, it would be a relatively small amount, and it would have to come from the ESM. There may be a little bit of room for extending maturities and lowering interest rates, but that does not have a big impact on the financing needs for the next two years. It can help with debt sustainability, but not with financing needs.

Do you think Portugal will finish up the programme this year?

It's too early to say, and it will be the judgement of the Portuguese government. Several options are under discussion. It could be a clean exit, it could be a precautionary programme. Most people do not see the need for a full additional programme. The market situation can also change, so all this may change again, but they have come a long way. They are doing well, but they are not yet quite where Ireland is. You see it looking at interest rates, at ten-year government bonds. Portugal is at 4.5 per cent, Ireland at 3 per cent, so there is a difference here. But there are a few more months and it is good to wait. There is another disbursement coming from the EFSF for Portugal and we will see in a few months where they stand.

Over the course of this year stress tests will be made of the European banks. Do you foresee that at the end of that process the ESM may need to get involved in recapitalising some banks?

Nobody can know what will be the outcome of stress tests. The ECB has said several times that they do not expect huge capital needs. But we know that there is suspicion in the market that there will be big surprises. That's why it is important to have a good, credible stress test. The banking sector in the five countries that borrow from us has been scrutinised several times, also with the help of outsiders like Blackrock and Pimco, and I know that there will not be huge needs or big surprises there. Looking at what the ESM may have to do, if I take out those five countries that I know best, I see that the northern European countries can take care of themselves if they have a problem. Then there's not much left. So from what we know today I don't see a huge need for the ESM to step in. In general there are several possibilities. Countries can request a general loan from the ESM, like Spain did for the restructuring of the Spanish banking system. That is an instrument that is available. I think by then we will have available a new instrument that doesn't exist yet but is under preparation - direct bank recapitalisation, where the ESM would take capital in a bank. But we have to wait and see whether there is a real need for that. It is already clear that in the future whenever a bank needs public money, and ESM money is public money, there will be a bail-in of bank creditors. That will reduce the need for public funds. Depending on the size of the bail-in, there may not be much left unfunded. This point is still under discussion - how much bail-in would be required. It's clear that a bail-in will be required, but the full extent is not yet decided but will be known the moment when the results of the asset quality review are announced.

It used to be that creditors were bailed out, depositors were bailed out entirely. Do you think the authorities should have realised earlier that creditors should be bailed in rather than tax payers taking the responsibility for saving the banks?

It's always easy to say with hindsight that one should have done certain things differently. In a crisis governments have to make decisions in real time without having all the information available that they would like to have. That is the nature of a crisis, unfortunately. A second point - certain instruments had just not been developed in 2009, so they could not be used. A third point - contagion risks were much higher in those days. Now contagion risks have become much, much smaller. International investors understand the European situation much better today, they can differentiate between different countries. Five years ago if a certain action had been taken in one country, immediately markets would have drawn the conclusion that it would be used everywhere else, and there would have been contagion effects. Therefore this question is not so easy to answer, it depends on all these elements that I mentioned.

But it's still quite controversial, for instance, in the Irish case. Ireland has taken on a huge burden because of its decision to guarantee the debt of all its banks. Do you think that this change in thinking merits a rethinking, a revisiting of the size of the Irish debt?

It is sometimes rethought, but we have to wait and see. I don't see a consensus developing for direct bank recapitalisation for Ireland. That seems unlikely to me. I know the Irish feel unfairly treated, but they should also remember that they got special help from the ECB on a large amount of bonds that were refinanced for a long maturity. Also, I think the fact that in the markets today Ireland gets by far the lowest interest rates of all the countries that borrowed from the EFSF/ESM probably has something to do with the way they did it. They were prepared to take the bank debts on their public balance sheet, protecting creditors, and therefore they are rewarded now with particularly low interest rates. So there is a quid pro quo here.

How worried are you about Italy, which has a very large public debt and slow growth. Do you see any danger that the money you manage will be needed for that country?

There is no indication of that at the moment, certainly less than the last three years. Italy has never lost access to the market. Now markets are back in Europe in full force. But Italy, of course, must watch out, because they have had low growth and high debt levels. They had low growth even before the crisis. For a long time growth rates in Italy were only half the euro area average, which was an indication that something was not working well, that there was a lack of reforms. We had one year of the Monti government, when prime minister Monti started working on this, but one year was too short to correct what had been neglected the previous 15 years. I very much hope that the new government will start working on these issues, because reforms have been blocked in Italy for a very long time. Many things need to be done. Also because the debt is high. I think the prime minister has made the right announcements, now we hope that the new government will implement them.

Full interview



© European Stability Mechanism


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