14 December 2013

ESM/Regling: Interview with El País

Regling said that as with OMTs, direct recapitalisation of banks should only be considered as a crisis resolution instrument. He also discussed future risks and the ESM's role in post-programme Spain.

Some of the most ambitious ideas of the Banking Union have disappeared during the making process. Is this Banking Union enough?

The Banking Union is the most ambitious programme that we have in the EU, so one should not expect this to happen within a few months, it is technically complex and politically difficult. The first big step has been decided: the ECB as central supervisor for the most important banks in the euro area. In addition there will also have to be a resolution mechanism and a resolution fund, among other elements. Some instruments are important to set up although ideally they won’t be needed. Direct recapitalisation of banks, for example: it would be a crisis resolution instrument. A bit like the OMT announced by the ECB: it is available, it reassured the markets but it has not been used.

Eurogroup president Jeroen Dijsselbloem recently said that we don’t really know how the banks are. Do you expect a sort of day of recognition with the exams from the ECB?

Jeroen Dijsselbloem is right and this is why we will do this exercise, the so called balance sheet assessment of banks; however, in some countries we understand the banking system much better than in other countries. Spain is an example because it has been going through a bank restructuring programme, and Spanish banks have been scrutinised several times, with a stress test, asset quality reviews, also with the help of outside experts. Something similar has happened in all countries that have borrowed from the IMF and the ESM/EFSF. The ECB, which is more knowledgeable about this, has said repeatedly that no big surprises are expected in these countries.

You talk basically about a mountain of private debt, but the adjustment was focused in the public sector. Has it been too much, too quick, in too many countries at the same time?

Adjustments have to take place in both areas, public and private. About the speed: in the public sector, I think that the Commission has shown some flexibility with nominal targets as long as the structural effort is maintained. In the banking system it is much more difficult to determine the speed, because many factors aren’t under direct control of the governments.

What will be the role of the ESM in Spain after the end of its programme?

It is quite normal that all creditors that have provided big amounts of financing have a look at the country to know what happens with their money. The IMF does this and we must do the same in Europe. The Commission is starting a monitoring process until 75 per cent of the outstanding European loans are repaid. The ESM has its own process and will monitor Spain until its last claim of the total €41 bn in loans has been repaid. That means we will assess economic and budgetary developments but there is no new conditionality in any sense. We just need to be sure that the repayments of our loans are foreseen in the budget.

Where are the future risks? Do you see a third bail out in Greece, with some debt haircut? The Greek government shows a new assertive attitude…

A lot of progress has been made in Greece; the population has been forced into a lot of adjustment, unavoidable because so much had gone wrong in the past, but it must continue. The Eurogroup has said if Greece sticks to conditionality, then support will be made available if needed. That is the only possible approach. On restructuring: there already was a substantial haircut imposed on private creditors. On the public side, what we have done in Greece, giving loans at very low interest rates with very long maturities, is the equivalent to a haircut. The interest rates are significantly lower and the maturities are significantly longer than the IMF loans for Greece. And I think that is very helpful for Greece.

Full interview

© EFSF - European Financial Stability Facility