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08 February 2014

Interview with ESM/Regling in Swedish publication, Dagens Industri


Regling was quizzed i.a. on the stress tests, the ESM's role in recapitalisation and Greece's finance gap. He said it was too early to say whether Portugal would be able to exit its support programme this year.

Stress tests / ESM

Would you agree that there is a conflict between having credible stress tests and not risking the recovery by forcing banks to improve their capital ratios too drastically?

I don’t think a harsh stress test could hamper the recovery. I think the ECB knows that the markets expect credible stress tests. The stress tests in the past were not good enough. But it does not mean one needs a stress test that is artificially tough. It has to be transparent so that market participants can do their own work.

Estimates of how much additional capital European banks need reach as high as €100 billion. What is your estimate?

I have seen estimates that are actually higher than that, which I consider unrealistic. The ECB itself has said that they do not expect big numbers. The argument is as follows: the peripheral economies have gone through several stress tests with the help of outsiders. One can be fairly confident that we understand the banking systems in Greece, Portugal, Ireland, Spain and Cyprus, so there will be no big surprises there. My baseline scenario is that no country will need additional assistance because of banking problems.

The maximum amount the ESM will be able to use for direct bank recapitalisation is €60 billion. Is that enough?

€60 billion certainly is more than enough, because we are now working under a new bail-in regime in Europe. The shareholders will lose their capital, senior bonds will be bailed in and from 2016 most likely the Bank Resolution and Restructuring Directive will become effective. This requires that 8 per cent of a bank’s liabilities will be bailed in before any public money can be used. Thus the need for public funds will be reduced dramatically.

What about so-called legacy assets? Can ESM money be used for that purpose?

Legacy assets are problems that come from the past. The question is should this be dealt with differently going forward as we develop new instruments like the direct bank recap. What the Eurogroup has said is that this can happen on a case by case-basis . On the one hand it could happen, but at the same time it would be an exceptional solution. But there is so far no consensus on this.

So basically we won’t really know until we get there?

No. 

Greece

There is talk of extending the loans even further, to 50 years, and lowering interest rates. Any comments?

This will be discussed in the Eurogroup in the summer. Some people have mentioned that as a possibility, particularly on the Greek side. We have already gone a long way by extending the maturities to 30 years and deferring interest payments for the first 10 years, which clearly helps Greece a lot. In 2013 Greece’s debt service costs would have been 8-9 billion euros higher if they would have had to refinance themselves on the capital markets. One could consider going further than that, but there is not very much room because we cannot lower our interest rates further. We did it in the past because initially the EFSF charged a premium on our funding costs but that was abolished already two years ago. Now we charge only our own funding costs plus a very small margin to cover our operational costs. So I do not see that happening. However there are some loans from the first Greek package where this might be a possibility.

Greece has a financing gap of around €10 billion. How can that be dealt with?

Many people believe that a small third package might be needed. But we do not have the numbers since they depend on the review which is about to begin in Athens. However, any package would be a fraction of the earlier packages. The second package, for example, amounted to 140 billion euros.

Portugal

Will Portugal be able to exit their support programme this year as planned?

Portugal is on a very good way and may be able to repeat what Ireland did in December and exit the existing programme without any need for any further direct or indirect assistance. But it is too early to say.

Full interview



© European Stability Mechanism


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