‘Many believe what we are doing in Europe is new. It isn’t’ – Klaus Regling
From 80s Latin America to 90s Asia, economic history is filled with examples of the crisis-reform-growth cycle, says ESM chief
Klaus Regling, chief executive officer of the European Stability Mechanism. Photograph: Graham Crouch/Bloomberg via Getty Images
Amidst the vast expanse of Luxembourg’s gleaming financial and European district, a new building has quietly taken its place.
The European Stability Mechanism is one of the EU’s newest, and fastest-growing institutions. A child of the financial crisis, the fund evolved from its precursor, the European Financial Stability Facility (EFSF), and was officially established as the euro zone’s rescue fund last September.
Sitting in his second-floor office, ESM chief executive Klaus Regling is just back from Brazil, meeting potential investors. Regling spends much of his time on the road, showcasing the ESM’s investment story. The fund has seen solid demand for its regular short-term debt issuance and will commence long-term bond issuance in the autumn.
The ESM chief also knows a thing or two about Ireland. Together with Max Watson, he wrote one of the earliest government-commissioned reports on Ireland’s banking crisis in 2009. Ireland is once again back in the spotlight as it becomes the first euro zone country to exit a European bailout programme. International markets are watching closely.
Like most key euro zone figures, Regling is full of praise for Ireland’s progress. “Ten-year government bonds for Ireland now have a yield in the secondary market of below 4 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,” he says.
When it comes to Ireland’s need for a precautionary credit line to ease its passage back to full private market funding, he is less forthcoming. “Let’s see in a few months’ time where the country stands [...]in principle the instrument is available.”
Any precautionary credit line would be of a minimum 12-month duration which could be extended twice by six months, he says, though he declines to give any hints on any attached conditions.
The Irish Government is understood to be reluctant to sign up to any precautionary programme that might involve onerous conditions. A final decision is likely during the troika visit in October, a period that will coincide with preparations on the 2014 budget.
Coalition tensions have already emerged over the degree of flexibility the Government will have. How important is it that Ireland sticks to its target of a €3.1 billion fiscal adjustment in October?
“I think that is certainly one of the elements markets are looking at. They want to know how the budgetary developments are [...]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,” Regling says.
He emphasises that any application for a precautionary credit line needs the approval of the euro group, the euro zone’s 17 finance ministers. Is adherence to the €3.1 billion target in the budget necessary to guarantee that support?
“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.” Any precautionary credit line would be of a minimum 12-month duration, he said.
As for Ireland’s eligibility for the European Central Bank’s bond-buying programme, Regling questions whether Ireland has a need for outright monetary transactions (OMT), the ECB’s programme to buy bonds of bailout countries. “There has to be an ESM programme in place that allows for the possibility of primary market purchases, and then it’s up to the ECB to decide. In my view, at the current interest rate level, there’s no need for OMT at all,” he says.
He also dismisses a suggestion that the ESM could take Ireland’s problem tracker mortgages off banks’ balance sheets.
“That instrument doesn’t exist at all for the ESM. And I don’t see an appetite among the euro area countries to create a new instrument.”