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”
SL: There is a sense that the Irish government is quite wary, quite concerned about signing up to a precautionary credit line that would have onerous conditions. Does it actually need a precautionary credit line. Could it go it alone? Do you think the government has a strong argument there?
KR: It’s very hard to say because the programme still runs until December.
SL: Well that’s less than six months away.
KR: I think it makes sense to think about it. It’s an option. The conditions are clear but then it is up to the Irish government to decide whether to make a request or not.
SL: Michael Noonan said last week that a 12 month credit line would be appropriate. Do you think a longer credit line would be better?
KR: We would always start with a 12 month credit line. It can be extended, two times six months , but it would always start with a one year credit line if that is requested.
SL: You were involved in one of the early banking reports on Ireland. There’s a call in Ireland at the moment for a banking enquiry. Do you’ve any ideas of how a banking inquiry might work, and would it be helpful for Ireland to have a banking enquiry?
KR: I don’t have a view on that. The report I did three years ago with my co-author Max Watson was something different, it was about the origins of the crisis, what had happened and how the problem had become so big. I am happy to see that the report is still read in Ireland and has been useful. There have been other reports, from the governor of the Central Bank. I can understand that the Government wants to dig deeper into this, but I cannot really give advice.
SL With your experience, particularly during the report you highlighted problems such as lack of regulation, pay etc. Where do you think Ireland has made the most progress. Is it in competiveness, for example?
KR: When I look back, the origin of the crisis was of course a combination of a macroeconomic environment including very liquid markets, pro-cyclical policies in the later years and a lack of adequate regulation. There were also governance problems in banks, so it was a whole list of things, and what you mentioned, a loss of competitiveness, which has improved greatly now. Policies have been implemented to address that issue. If you look at competitiveness measured by unit labour costs: In the first decade of monetary union, unit labour costs in Ireland increased by more than any other country in the monetary union and about 50 per cent more than in Northern Europe and that’s why the current account deficit of Ireland was around 6 per cent of GDP. It became unsustainable, but the adjustment already happened 5 years ago . Starting in 2008, competitiveness has improved. It’s still above the level in Northern Europe but has come down a lot from the earlier peak, and is now maybe 15 - 20 percentage points above Northern Europe when it used to by 50 percentage points. That’s the positive implications of nominal cuts in civil servants salaries, pension payments and of course also a lot of progress on the fiscal side. On the whole banking and regulatory side there has also been significant of progress.
BANK STRESS TESTS
SL: There is a worry about the bank stress tests next year. Do you have a concern that this could damage the recovery, or show up capital holes?
KR: I don’t know if it is a concern but I think it is very important to have the asset quality review . We have two steps. First the ECB before taking over as a common supervisor will do the asset quality review for the banks it will supervise. This is important as they have to know what they’re getting into. Then, on top of that there will be the stress tests in the second quarter of next year. I hope this is not a concern, I think this should be very positive, to discover whatever problems there are. If there are problems it is better to know about them, and do something. The worst from a confidence point of view would be not to look into this and to leave some fears and worries which exist in international markets, and I’m not talking about Ireland now, but I am talking about the entire euro area. There are some concerns in markets that there might be problems in individual banks and banking systems. It’s very important to address those concerns, through credible asset quality reviews, and credible stress tests to put those concerns to rest and if there are problems we will have to deal with them.
SL: And will the ESM play a role?
KR: We know that there’s agreement among ministers about the Bank Recovery and Resolution Directive. Of course now this needs to be discussed with the European Parliament so we don’t know the final form, but there will be a certain sequence in how to involve bank creditors, and when public money might be used if it’s needed. The hope is of course that no public money is really needed. If it’s needed then ultimately of course the ESM could play a role so I think we have several lines of defence here that can be activated. So again I think it’s really important to do these reviews, these stress tests, see if there are problems. My expectation is that there are not too many, but it’s very important to really dig into it in a credible way so that these concerns in markets once and for all can be put to rest.
SL: when you talk about credible lines of defense, are you talking about something like you have for Spain, for example...that kind of model?
KR: That’s one instrument that we have and that continues to exist even after the direct bank recapitalisation might become an additional instrument. The instrument we used in Spain consists of helping a bank or a national banking system by providing a loan earmarked for bank restructuring but providing the loan to the government. That instrument will continue to exist. It’s always an option. Of course the expectation is that only countries use it that need outside help. Countries that are in a fiscally sound situation are not expected to request assistance from the ESM.
SINGLE RESOLUTION AUTHORITY
SL: Just on the banking union, there have been suggestions with the Commission’s proposal on the Single Resolution Authority, that the ESM could play a role there. What’s your views on that?
KR: There’s not much on that in the Commission proposal. But there’s a debate out there. The first point I would like to make is that the Single Resolution Mechanism, the SRM is an important complement to the ECB’s role as an SSM, as a Single Supervisory Mechanism. I think there is agreement on that among the euro area countries that we need something like the SRM. Now there are different ways to do it, to organise it. I think a discussion has now started in a serious way after the Commission put out its proposal. We know some countries believe it cannot work that way, that a treaty change is needed to give legal certainty about the procedure.
A sound legal basis is of course very important, because to close banks, to have bank resolutions is a very serious interference in property rights and we have to expect that when this happens litigation will follow in many cases. So a sound legal basis is very important. It’s very good to have a serious debate now with the Commission, the European Parliament and the Council on how to organise this, but in the end there has to be a single resolution mechanism. That’s important for the functioning of the banking union. It must be on a sound legal basis. That’s what counts for me. It’s not important who does it.
SL: Do you think the Commission is the right body to do it.
KR: The Commission has of course a lot of experience, particularly its Competition Directorate General. In the context of their state aid rules, it has gained a lot of experience in the last few years in restructuring banks. Therefore the Commission will always play a role because state aid rules will always come into play when a bank gets public money.
SL: And do you think the ESM would be a suitable institution?
KR: I’m not lobbying for that. There’s not much synergy that I can see for the ESM to play the SRM role . It’s different with the single resolution fund which will also be needed to collect the money from the banking industry. There the ESM can probably offer some synergies, but that is only a very small aspect of the whole operation.