11 November 2013

ESM/Regling: Interview with with Cinco Días, Spain

Spain

When Spain made the request in June last year we were in a very difficult moment in the euro area. That was a period when many people in the financial sectors in London or New York thought that the euro would disappear. And therefore it was important to communicate to the world that the euro area was prepared to help when help was needed - always with conditionality, of course. Showing big amounts of money available was very useful to calm down markets. In the end it was less than expected [€41 billion of €100 billion], and I think that’s very positive for Europe and for Spain. It’s the same when you look at the EFSF and the ESM: we have a combined lending capacity of €700 billion. We are very happy that only less than one third of that amount is actually committed. Most of it is available and that’s important for markets to know. They should know that if there’s any unexpected problem, the ESM has enough money to help.

Now that the programme is coming to an end, would you recommend to Spain to ask for a precautionary line to keep markets quiet?

I don’t think that’s needed, because Spain is able to refinance itself in the market at very reasonable interest rates. Spain did not have an overall macro-economic adjustment programme as the other borrowing countries; it was ‘only’ to support the restructuring of the banks. But of course, I will encourage Spain to continue with the reforms and it will also be good for Spain to look at the recommendations coming from EC, ECB and EU Council very carefully and consider how to best implement them. 

You claim that the Spanish banking rescue has been a success, so can we take it as a model for the future?

Every country is different. We have seen it during the crisis. The five countries that have programmes with us are all very, very different. Spain is the only one that has a programme that is entirely devoted to bank restructuring. There may be another case like that, but every country is different. We have the instrument available, but I don’t see another case at the moment. 

In the Spanish rescue even the junior debt has suffered losses as a condition for the public money to be injected. Will that condition be maintained in other countries?

In that area, the approach is evolving. It’s not related with the ESM instrument, but how the European competition authorities look at the state aid rules. As you know, the state aid rules for banks have been reformulated and became effective in August. According to these new rules, in the future it will always be necessary to have bail-in, including junior debt, before public money can be used for banks. That follows the Spanish example, not because of ESM conditionality but in a wider context where the state aid rules are clearer than in the past.

But Mr Draghi is asking for an exception of these rules in the case of solvent banks that after the stress tests need to increase its regulatory capital. Do you support that approach?

I understand why he has made this point, because this is a very special situation, where a bank is not insolvent but could be if the conditions of stress test materialised. So I understand why he made his point, but so far the Commission and the Eurogroup have not decided to follow up on that view. It may still be discussed, but at the moment the legal situation is clear that state aid rules have to be applied in Europe, unless another decision is taken. 

AQR/stress tests

Do you think that the AQR and the stress tests could reveal new problems in the banking sector?

I don’t expect that. Nor does the ECB expect that. The ECB does not expect major surprises, in particular not in Spain nor in the other countries under programme because in these countries the troika and the ESM staff scrutinised repeatedly the balance sheets of the banks. There has been a scrutiny of the banks in the five countries that borrow from us, with the help of external advisers. That’s why we can be very confident that we understand the banking systems in those countries quite well. 

It’s the third time in less than five years that the EU will try to dispel the doubts about the banking sector. Do you think that the markets will be convinced this time?

We had some disappointments in the past. Markets are watching very carefully how it is done this time. And I know that the ECB, which now is for the first time playing this role, is also fully aware how important it is. It’s important for the ECB’s credibility to get it right. It’s a difficult job, technically complex, but I’m convinced that the ECB will try very hard to impose uniform rules, and a uniform rulebook. They want to have really good, honest, credible results. 

Greece

Drawing on my experience working for more than a decade at the IMF, I have seen that solidarity with conditionality really works. And we see in Europe that it works, because we see in those five countries that borrow from the EFSF and the ESM that they are improving their fundamentals significantly. Otherwise, one would get into a system of permanent transfers payments, which would not be acceptable to anybody and will not happen.

But there’s discussion among the economists about the rhythm of the adjustment, especially in the case of Greece. Do you think that this country will be able to return to the markets without further help or a new haircut?

Yes, of course. It will be able to do that over time, for the simple reason that no one will finance Greece permanently. There’s no alternative. What we are doing is to provide financing for a number of years, and maybe Greece needs financing for some more years, but it will always be temporary. Nobody in Europe will provide permanent transfers, so they have to be back on their own feet. They are getting there through structural reform and fiscal consolidation. Progress in Greece is significant. According to the latest Commission forecasts, the Greek budget deficit in 2014 will be only 2 per cent of GDP, lower than in the majority of euro area countries.

Full speech

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