Klaus Regling: “I hope Ireland realises that a lot of help has been provided”
“We know from experience that structural reforms combined with fiscal adjustment, over time leads to higher growth”
The is the full text of The Irish Times interview with European Stability Mechanism (ESM) managing director Klaus Regling on July 22nd, 2013.
PRECAUTIONARY CREDIT LINE FOR IRELAND
Suzanne Lynch, European Corespondent [SL]: Ireland is entering the final phase of the programme - it had its eleventh troika review last week - and intends to exit its bailout programme and return to private market funding by the end of the year. Do you think it needs the support of a precautionary credit line?
Klaus Regling [KR]: It’s hard to say. The first thing to say is that Ireland has made very good progress. The objective of every support programme is to return to the market. Ireland has been able to return to the market already, even with a 10 year government bond issue, there was one in March , and there were shorter maturities and all were at reasonable rates. 10 year government bonds for Ireland now have a yield in the secondary market of below four per cent. That’s a very reasonable rate and in that sense Ireland is already a success story and very close to normal market conditions . I know there is a debate out there about what should happen after the end of this programme, but I cannot add very much to that because we are now in July and the programme ends in December. I am very happy to see the 11th review was concluded successfully like all the reviews before, so let’s see in a few months time where the country stands. Concerning your question on a precautionary credit line I can only say that in principle the instrument is available.
SL: Yes, so what possibilities are there from the ESM’s perspective?
KR: The ESM has a precautionary programme, like the IMF offers such a programme. It has never been used so far at the ESM. It does require a request from the government of the beneficiary country to the group of euro finance ministers, the euro group, which is our board of governors. It would require, in five or six member states, approval by their parliaments.
SL: What kind of conditions would it require?
KR: That is really impossible to say. That would depend very much on the assessment at the time.
SL: As you say the bond yields have come right down below 4 per cent. There’s been a huge drop.
KR: By more than two thirds. Very impressive!
SL: But how important is it - Ireland has a budget coming in October - that Ireland implements this cut of €3.1 billion in terms of it exiting the bailout and keeping those bond-levels down?
KR: I think that is certainly one of the elements markets are looking at. They want to know how the budgetary developments are. Ireland comes from a particularly high fiscal deficit. We know why, it is the result of recapitalising banks. Ireland had in that context the highest deficit of any country in Europe, or maybe the world, so Ireland has made good progress. But it is important to continue that. All our member states agreed on the revised stability and growth pact which requires to move first to a deficit below 3 per cent of GDP and then towards a balanced budget. It is important to make progress in that direction. I think that at the end of the 11th review, it was very clear that another €3.1 billion fiscal adjustment as foreseen under current rules and as previously agreed with the authorities is the important next step.
SL: You mentioned there that any decision on a precautionary credit line would need the support of the euro group...
KR: Oh absolutely, there the rules are very clear. We can only engage into a new programme, whether it’s a full scale macroadjustment programme or a precautionary programme, if the euro group takes an unanimous decision.
SL: So do you think that Ireland needs to stick to its target in October in order to get the support of the euro group?
KR: I don’t know what the conditions would be, but if the agreed target were not reached I’m sure that would not be well-received.
SL: Ok, to move on, to the direct bank recapitalization instrument. This was a real priority for Ireland in terms of the retroactivity element, and it was seen as a victory for Ireland and Portugal last month when the euro group agreed to look at this on a case by case basis. Irish people have been told, or believe, that this will be open to Ireland. Do you think this is realistic?
KR: Firstly the agreement to create the instrument of direct bank recapitalisation once the ECB plays its role as a single supervisor is a very important step for Ireland, but also for the entire euro area. The reason is that it is one of several elements of the banking union that we are trying to achieve and I think that’s very important for the euro area as a whole, including Ireland. The question of retroactivity is controversial. The euro group agreed to consider it on a case by case basis and to decide on it by mutual consent, that’s what the communiqué said. So it’s impossible for me to judge today under which circumstances it might be approved.
SL: Is it not the case that the whole ambition of direct recap has been scaled back slightly? There’s a belief out there that it might never happen. Now it is dependent on the Bank Recovery and Resolution Directive being passed by the European Parliament. Is direct bank recap ever going to happen?
KR: The euro group, the 17 finance ministers of the euro area, agreed on the main features of the instrument, so here at the ESM we are preparing ourselves to be ready in case a formal decision is taken later to create this new instrument. We received the mandate to prepare ourselves and I assume we would not have been asked to do that unless ministers wanted to use it once the circumstances are in place under which they want to use this instrument. When you say there is a general feeling it has been scaled back, I don’t know whether you refer to the media, or to analysts. There is a bit of fluctuations in these feelings. Two weeks before the main features of the direct bank recapitalisation instrument were agreed there was a general feeling in many newspapers that it would never happen, that there would be no agreement. But there was agreement. And I think that was positive for the euro area as a whole.
Of course one has to look at the overall context. The ESM has an overall lending capacity of €500 billion. We have many instruments available. We know that direct bank recapitalisation takes a lot of our capital, up to three times more than for a normal macro-economic adjustment programme. That’s why the overall amount that is potentially available for direct bank recap was capped at €60 billion. The reason for this cap is that everyone agrees that enough money should be left for the other instruments that the ESM has at its disposal, in particular the macroeconomic adjustment lending . That will remain the main focus of the ESM. But direct bank recap very likely will become a new instrument, an additional instrument, and again we are preparing ourselves.
SL Do you have any views on its suitability for a country like Ireland. Politically a lot of store is put on something like this . A lot of ordinary tax payers feel that while the changes in banking union shifts away the burden from the tax payer and onto private creditors, that’s too late for Ireland, that wasn’t available for Ireland, so Irish people feel they are entitled to get some of the money they put into the banks. Do you agree with that? Or do you think that Ireland doesn’t necessarily need this to regain private market funding? How important do you think it is?
KR: It is easy to say it would help, but the eurogroup communiqué said that the decision to use the direct bank recapitalization instrument retroactively would be taken on a case by case basis and by mutual agreement. It will be up to the political level in the euro area to decide how that is interpreted. At the same time I hope Ireland realises that a lot of help has been provided, because the financing we provided, that the IMF has been providing, and also third countries have provided over the last two and a half years comes at very low interest rates, so Ireland benefits from this low interest rate.
Our own lending is provided at less than one and a half per cent for instance so that’s a big benefit for Ireland as it is for other countries that borrow from the EFSF. There are also special arrangements with the ECB that have been found, where the Irish banking sector benefits greatly. We know that the crisis has put a huge burden on the Irish taxpayer, the Irish population, but there has also been a lot of solidarity from Europe and the international partners.