Jeroen Dijsselbloem: ‘Outlook for Ireland is rather positive’
Dutch finance minister, UCC alumnus and now head of the eurogroup, anticipates that agreement to extend loan maturities will be reached today
Standing in the 19th-century Aula Maxima hall in University College Cork, Jeroen Dijsselbloem is in reminiscent mode. “This wonderful hall I’ve never seen. For some reason I don’t think I was allowed in,” he smiles, as he recalls his time spent at the university in 1991.
More than 20 years later, Dijsselbloem has become one of UCC’s best known alumni. In January, the Dutch finance minister (47) took the helm at the eurogroup, the widely used name for the euro zone’s 17 finance ministers, which has played an increasingly prominent role in euro zone economic affairs since the crisis broke more than four years ago.
But it was the Cypriot bailout crisis, and in particular an interview in which he suggested that Cyprus could be a model for future bank rescues, that propelled the Dutchman into the limelight. His comments prompted an immediate reaction from markets and a hasty clarification from Dijsselbloem, who stressed that he had never used the word “template”.
“I can just repeat what I said in the interview – that I think we have to work towards a different way of dealing with banking crises in the future,” Dijsselbloem says, in his first international press interview since his comments last month. We’ve dealt with them in an acute crisis situation and then the governments simply have to step in, nationalise banks, save banks, there is no choice.
“In a post-crisis situation you need mechanisms to deal with these problems. We are working on those – in the resolution and recovery directive there will be a way of dealing with a ‘bail-in’, giving us the instruments to do bailins in a proper way.”
He stresses that in any future case the approach will “always be different – every bank is different – but the instruments will allow us to deal with the banking crisis”.
Those instruments are contained in the proposed banking recovery and resolution directive, a key piece of EU banking legislation that was proposed in draft form by the European commission last June, but has come under renewed focus since the Cypriot crisis. Establishing a common resolution system to wind down European banks is a key strand of the nascent European banking union, and negotiations between member states are being chaired by the Irish presidency of the European Council.
While Dijsselbloem’s comments about a new way of dealing with future banking crises signalled to many a sea change in the euro zone approach to banking, in reality it was a statement of the policy position contained in the bank resolution proposal.
This includes a provision to bail in private creditors, which may include shareholders, senior bondholders and, most controversially, large depositors, though there are suggestions that the European Parliament in particular may push for a clause to protect certain classes of depositors. Does he believe depositors will be hit in future bailouts, as happened in Cyprus?
“There will be a hierarchy and the uninsured depositors will be at the end of the hierarchy... I can’t speculate on what the outcome is, but they’re definitely included in the proposal that’s now on the table,” he says, stressing that the guarantee on deposits under €100,000 remains in place.
“We should do everything in order to stabilise banks and to reduce the risks that we’ll have to bail in large depositors. They are part of the discussion on the bailin, there’s no doubt about that, but I think we should first of all concentrate on what we should do in order to make banks more stable. This has to do with capital requirements, regulation and of course supervision.”
Banking resolution law
While the banking resolution law was not expected to come into force for another five years, Dijsselbloem favours earlier implementation, potentially in 2015. “For all the elements of the banking union we should go as fast as we can. Banks should contribute to the real economy, make a positive contribution to economic growth [...] The main issue here is to give clarity to financial markets and citizens [...] If we can give that in 2015, instead of 2018, that would be great.”
This move from the concept of a publicly funded bailout, to one in which creditors – including shareholders, bondholders and uninsured depositors – take on the risk, will be seen by many as coming too late for Ireland. While ordinary retail depositors were spared in the Irish bailout, senior bondholders, controversially, were repaid at the expense of the taxpayer.
Has Ireland been a victim of Europe’s piecemeal approach to the financial crisis? “If we look back at the banking situation in Ireland, it goes back quite a long time, and in that time the different instruments to deal with banking problems, debts or problems, recapitalisation and different instruments weren’t available. As we speak we’re still working on developing the instruments, direct recap is still being modelled, discussed and hopefully we will finalise the discussions in June.”
Using the ESM to directly recapitalise AIB and Bank of Ireland is a key policy priority for Ireland in its bid to alleviate the banking debt burden taken on by the State, with the Irish Government consistently pointing to the pledge given last June to break the link between banking and sovereign debt. In September, Germany, Finland and the Netherlands issued a joint statement saying the rescue fund should only be used to deal with future problems.
Dijsselbloem is reluctant to be drawn on the probability that the ESM will be sanctioned to directly recapitalise retroactively, something his predecessor, Jean-Claude Juncker, endorsed in January when he called for “some degree of retroactivity” to be included in the mechanism. Is there resistance to the notion of retroactivity among euro zone member states?
“Well there is definitely a debate about it. I don’t want to go into what minister feels what, what country has what position, but there is still a debate to be finalised on that issue.”
While the issue of legacy assets is up for discussion at today’s meeting of euro zone finance ministers, the question of retroactivity is likely to be agreed upon by June. However, any final decision on the application of the ESM to individual countries – something that will need to be sought by countries themselves, Dijsselbloem emphasises – will be made after the ECB takes over supervision of the banks, most likely mid-2014. “[On] the issue of direct recap, we simply have to follow the order, and for us to discuss what the instrument will look like, whether there will be a possibility for retroactive use, we will have to set up ECB supervision, and then there will be a discussion on what country will use it.... That’s the order.”
Despite calls from the IMF that the ESM takes an equity stake in the Irish banks, the sense of urgency behind the idea of ESM direct recapitalisation appears to be losing pace in Europe. Dijesselbloem believes if banking union works, this will eradicate the need for ESM direct recapitalisation.
“If we get all the instruments right, if we are able to strengthen the balance sheets of the banks, if we get the supervision right, hopefully in the ideal situation a direct recap instrument won’t be needed. Spain is possibly an example. The whole debate about the direct recap instrument started with Spain, but time has moved on, Spain has been helped with a programme to restructure their banks [...], possibly Spain will never want to make use of the instrument. So what I’m saying is we’re not going to wait for the instrument, we’ve to deal with the problems we have with the instruments we have.”
Does he feel that the lack of progress on retrospective direct recap for Ireland could impede Ireland’s efforts to raise private funding at manageable rates when it returns to the markets? “I think we should separate these issues. I think the outlook for Ireland is rather positive. I can’t speculate on how [the return to markets] will take place, how long it will take, but the outlook is optimistic, and what we can do is look at the maturities of the EFSF loans and that’s why we are discussing a proposal by the troika on more time for Ireland and Portugal. That would greatly help both countries going back to the markets and finding their own funding. There is a link between the maturity issues and going back to the market obviously, but I don’t think we should link it with discussions on the ESM.”
While he says the issue of outright monetary transactions for Ireland has not been raised, on the question of a provision of a precautionary credit line to ease the return to private market funding by the end of the year, there is room for a “broader approach”. “There are different ways to help countries to exit programmes and to re-enter the markets . . . We’ll discuss [at the meeting] what options there are. It could be a broader approach than just looking at the maturities.”
Dijsselbloemanticipates that agreement to extend Ireland and Portugal’s loan maturities will be reached today, something he says attests to Europe’s willingness to actively help countries.
He is optimistic that the euro zone economy will show signs of growth towards the end of this year. “In a lot of countries, structural reforms are being undertaken and these reforms will lead to a stronger infrastructure, stronger labour markets, more competitive industries [...] All these reforms that are taking place are not easy to go through, but at the end of the day it will make countries more competitive.”