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Latvijas iesaistīšanās eirozonas glābšanas programmu finansēšanā patlaban neuzliek mums lielu slogu

Pēdējos gados gana bieži esam dzirdējuši par lielām naudas summām, ko eirozonas valstis velta savu ekonomiskajā bēdulejā nonākušo biedru balstīšanai un atveseļošanai. Ceturtdien, 13.martā, Latvija pievienojas Eiropas Stabilitātes mehānismam un oficiāli kļūst par līdzdalībnieci šajā procesā. Jautājums ir strīdīgs, emocionāls, bet arī sarežģīts un apaudzis ar dažādiem pārpratumiem un mītiem.

Iepriekšējā nedēļā Rīgā viesojās Klauss Reglings (Klaus Regling), kurš vada abus eirozonas glābšanas fondus – Eiropas Finanšu stabilitātes fondu (European Financial Stability Facility jeb ESFS) un Eiropas Stabilitātes mehānismu (European Stability Mechanism jeb ESM). Lai gūtu skaidrāku priekšstatu gan par to, ko tieši šie fondi dara, gan arī par Latvijas lomu tajos, devāmies viņu intervēt. Intervijas īsinātā, tulkotā versija lasāmā šīs nedēļas žurnālā “Ir”. Te publicējam pilno intervijas tekstu angliski.

There are so many organizations and acronyms in the European Union. Could you please explain for our readers what the ESM is and what it does?

It stands for European Stability Mechanism. It’s important to know that it succeeds the EFSF – you can’t get around another acronym – which stands for the European Financial Stability Facility. That was the first of these crisis-fighting institutions. It was created in 2010 on a temporary basis. The EFSF supports three countries, the ESM supports two countries. Together they have a firepower or potential lending capacity of 700 billion euros, of which 238 billion has been committed. Most of that is from the EFSF. That is relevant for Latvia, because Latvia is becoming a member of the ESM, not the EFSF. From the euro area perspective we look at both together, but for Latvia, because you may want to look at where the risks are, only the two programs that the ESM supports are relevant.

So Latvia is not responsible for the loans to Greece, Portugal or Ireland.

Exactly, and that is the vast majority [of the money lent]. Latvia is only getting involved with what the ESM has been doing, that is Spain and Cyprus. The Spanish program is concluded, Spain exited in December. They received a bit more than 41 billion euros. Cyprus is in the middle of its program, overall it is 9 billion euros. Half of that has been disbursed. That means that 90% of the ESM’s potential lending capacity of 500 billion euros is uncommitted. That is good, because it is there to demonstrate to markets that if something goes wrong, the euro area is prepared, there is this unused firepower. At the moment we don’t see any need for this money, but one day there may be another crisis.

How much money does Latvia have to put in the ESM?

The contributions of the 18 member states follow the capital key of the European Central Bank, we didn’t invent anything new. According to that key Latvia’s share would be 0.4%, which would be equivalent to 2.8 billion euros. However, there is a general rule that there is a temporary twelve year correction for countries that at the time of entry into the ESM have a per capita income below 75% of the euro area average. This applies to Latvia and to four other countries. For the next twelve years it reduces Latvia’s share from 0.4% to 0.2757%, which means a capital subscription of 1.93 billion euros. That is Latvia’s share for the next twelve years.

Do we have to put 1.93 billion euros into the fund?

No, because overall the ESM has a capital of 700 billion euros, of which 80 billion is paid in. Out of the 1.93 billion euros which is Latvia’s capital share, 221 million has to be paid in over a five year period. At the end of March this year the first of five equal tranches will be paid in, that is 44.24 million. That is the first payment and there will be four subsequent payments once a year.

People in Latvia sometimes say that we are taking 44 million away from other expenditures.

The money is not lost. That is the key point. It is an investment, capital that is owned by Latvia. The same, of course, is true for other euro area member states. It is the same for [shares in] the World Bank, the European Bank for Reconstruction and Development, the European Investment Bank, and other development banks. When capital is paid into these institutions, it’s not lost. It belongs to the country. There is the possibility that there will be dividends paid on this one day. Another indication that it is not lost is that it is not counted as increasing the deficit as Eurostat calculates it according to the national accounts. Of course, it increases the cash requirements, because the money has to be raised on the markets, and therefore increases the debt of Latvia, but the counterpart to the increase in debt is the money you own in the institution.

Is there a possibility that sometime in the future the money lent by the EFSF could come under the auspices of the ESM in some way? That the ESM could become responsible for those loans?

No.

The crisis in the Eurozone has abated since 2012, but has the Eurozone done enough to stabilize the situation?

The crisis is not over in the sense that more reforms are still needed in many countries. But a lot has happened to calm the crisis down. For me there are four elements in our crisis response that explain very well why the markets have stabilized. First and most importantly the countries that were in trouble and lost market access are improving their policies. They are all under programs with conditionality, so they are in a sense forced to change their policies if they take the money from the EFSF, the ESM and the IMF. And they are doing it. They have all brought down their fiscal deficits. They are all implementing structural reforms. They have all improved their competitiveness. They have all substantially improved their current account deficits. Basically those deficits have disappeared. Exports are growing in all these countries because competitiveness has been regained. So that is the first point, the national adjustment. That is the key, because it is for real and it stays. Whatever happens in markets, this adjustment is there. Second, we have improved and strengthened the system of economic policy coordination in the euro area. The often heard criticism from academics was that monetary union cannot work because you have a totally centralized monetary policy with only one interest rate, but [you have] decentralized economic policies. Our European response is that it can work, but economic policies have to be properly coordinated. We do that much better today than before the crisis through a new system of additional rules and tighter rules. Fiscal rules have been tightened. There is the tighter Stability and Growth Pact, the European Semester, the Fiscal Compact. It has been broadened to cover other areas besides fiscal policy. If competitiveness deteriorates too much, if there is too much private sector debt or a real estate bubble, if things like that are not controlled, they can lead to a crisis.

Will the EU be able to enforce these rules? We saw almost ten years ago that when Germany and France overstepped the line the rules were changed to make allowances for these big countries.

No, that is a wrong interpretation. The Commission took them to the European Court of Justice and Germany and France lost.

But [the head of the Commission at the time Romano] Prodi said that the Stability Pact was “stupid”.

That was not a very wise statement. It is correct that the Stability Pact was reformed in 2005, but that was a good reform. It was proposed by the Commission and it brought the pact more in line with reality. This story goes to my heart because I was there in the Commission [at that time]. If we had not had that reform in 2005, the Stability Pact would not have been usable now, because the old pact required that an excessive deficit above 3% of GDP must be corrected the next year. With the crisis this became impossible. The new pact said the deficit should be reduced as quickly as possible, but there will always be a decision proposed by the Commission and adopted by the Council at what speed it should be adjusted and brought down. The objective to bring it down to 3% remains, but now there is room for decisions. I think the crisis has shown that this is absolutely necessary, because the old rule would have been unimplementable. Deficits went up because of the crisis and in some cases they were so big that they could not be brought down to 3% in one year. So the reform was good. I often read that it meant a weakening of the pact, but for me it meant the survival of the pact. Otherwise it would have been dead. But more importantly the possibility of political interference has recently been reduced significantly. Before the crisis, before the last reform of the Stability Pact, it was the same approach that we always have in the EU. The Commission makes a proposal and it becomes law when the Council approves it with a qualified majority. Today, after the reform, in the context of the Stability Pact, when the Commission makes a proposal, it will become law unless there is a qualified majority in the Council against that proposal. To organize a blocking minority in the Council is relatively easy, but to organize a qualified majority against the Commission is almost impossible. That means two things. One, the role of the Commission has become much stronger. Second, political interference is much less possible.

There was a report in the Financial Times that Finland and Germany are unhappy with the Commission about being too lenient towards France and Italy.

I saw the article, I have not seen the note from the German government. This is a preliminary view, but from what I read in the FT, it seems a bit unfair, because the Commission must make the judgement whether the fiscal effort is as agreed. The nominal achievement can indeed be different if there is a recession or if growth is less than forecast, but one cannot blame the government for that. It is true that this approach makes the operation of the system more complicated and there is more room for judgement, but in my experience the Commission has been on the right side with its proposals. So I have confidence in the Commission.

We digressed from the four things that have been done to calm the crisis.

So, we had the national adjustment, second, the economic policy coordination. The third area is the banking system. All the work on banking union falls under that. The fourth area is institutional innovations in a broad sense. This includes my two institutions. They didn’t exist before the crisis, we didn’t think they would be needed. Now they are fully operational, they are playing their role. I would also put the ECB’s emergency actions under the heading of institutional innovations, including Outright Monetary Transactions. That was also something that would have been unthinkable before the crisis, but it played an important role in calming down markets. So these are the four elements of the crisis response. It is important to look at the overall response. I read often in the media that markets are now calmer only because [ECB president] Mario Draghi said he would do everything that’s necessary and because of OMT. I think that is the wrong judgement, and it would also be a dangerous judgement. If everything depended only on that, we could all be in trouble very soon again. But if you take a broader view and recognize the achievement of the national adjustment, the better rules for policy coordination, what we are doing on banking union, that we do have functioning crisis institutions – the EFSF and the ESM, it’s a much broader concept, and the progress we see there is for real.

But you have said the crisis isn’t over yet. What still has to be done to overcome it?

In a broad sense, it’s always a question of how you define the end of the crisis. On the one hand as the head of the EFSF and ESM I take a narrow view and say [the crisis is over] when the countries are able to finance themselves again and don’t need any additional money from my institutions. That’s one way to say the crisis is over, and that’s quite legitimate, because it is a good step when countries can return to the markets. But that does not mean that the people in the countries feel that there is no longer a crisis, because unemployment is still high, incomes are lower than before the crisis. So it depends a bit how you define the end of the crisis. But definitely countries like Greece and Cyprus have to continue their adjustment efforts. They are still in the middle of it, despite a lot of progress. Portugal is coming close to the end and we will see whether they need a bit more support or whether they can exit. Two of the five countries have exited, but Spain still has high unemployment, so they have to continue with their structural reforms to work on those problems.

Do you think Greece will need a third program?

It is a possibility. Nothing is decided. The troika is in Greece right now, but I think we will only know by the summer whether a third program is needed or not. If it is needed, it will be a fraction of the previous programs.

Would it be financed from the ESM?

Yes.

So you don’t think simply reducing interest rates and extending maturities on existing loans would be enough. Some new money would have to be put into the program.

If real additional money is needed it would come from the ESM. As I said, it’s not decided, it’s not absolutely clear, but if more money was needed, it would be a relatively small amount, and it would have to come from the ESM. There may be a little bit of room for extending maturities and lowering interest rates, but that does not have a big impact on the financing needs for the next two years. It can help with debt sustainability, but not with financing needs.

Do you think Portugal will finish up the program this year?

It’s too early to say, and it will be the judgement of the Portuguese government. Several options are under discussion. It could be a clean exit, it could be a precautionary program. Most people do not see the need for a full additional program. The market situation can also change, so all this may change again, but they have come a long way. They are doing well, but they are not yet quite where Ireland is. You see it looking at interest rates, at ten-year government bonds. Portugal is at 4.5%, Ireland at 3%, so there is a difference here. But there are a few more months and it is good to wait. There is another disbursement coming from the EFSF for Portugal and we will see in a few months where they stand.

Over the course of this year stress tests will be made of the European banks. Do you foresee that at the end of that process the ESM may need to get involved in recapitalizing some banks?

Nobody can know what will be the outcome of stress tests. The ECB has said several times that they do not expect huge capital needs. But we know that there is suspicion in the market that there will be big surprises. That’s why it is important to have a good, credible stress test. The banking sector in the five countries that borrow from us has been scrutinized several times, also with the help of outsiders like Blackrock and Pimco, and I know that there will not be huge needs or big surprises there. Looking at what the ESM may have to do, if I take out those five countries that I know best, I see that the northern European countries can take care of themselves if they have a problem. Then there’s not much left. So from what we know today I don’t see a huge need for the ESM to step in. In general there are several possibilities. Countries can request a general loan from the ESM, like Spain did for the restructuring of the Spanish banking system. That is an instrument that is available. I think by then we will have available a new instrument that doesn’t exist yet but is under preparation – direct bank recapitalization, where the ESM would take capital in a bank. But we have to wait and see whether there is a real need for that. It is already clear that in the future whenever a bank needs public money, and ESM money is public money, there will be a bail-in of bank creditors. That will reduce the need for public funds. Depending on the size of the bail-in, there may not be much left unfunded. This point is still under discussion – how much bail-in would be required. It’s clear that a bail-in will be required, but the full extent is not yet decided but will be known the moment when the results of the asset quality review are announced.

This has changed since 2009.

Yes, absolutely.

It used to be that creditors were bailed out, depositors were bailed out entirely. Do you think the authorities should have realized earlier that creditors should be bailed in rather than tax payers taking the responsibility for saving the banks?

It’s always easy to say with hindsight that one should have done certain things differently. In a crisis governments have to make decisions in real time without having all the information available that they would like to have. That is the nature of a crisis, unfortunately. A second point – certain instruments had just not been developed in 2009, so they could not be used. A third point – contagion risks were much higher in those days. Now contagion risks have become much, much smaller. International investors understand the European situation much better today, they can differentiate between different countries. Five years ago if a certain action had been taken in one country, immediately markets would have drawn the conclusion that it would be used everywhere else, and there would have been contagion effects. Therefore this question is not so easy to answer, it depends on all these elements that I mentioned.

But it’s still quite controversial, for instance, in the Irish case. Ireland has taken on a huge burden because of its decision to guarantee the debt of all its banks. Do you think that this change in thinking merits a rethinking, a revisiting of the size of the Irish debt?

It is sometimes rethought, but we have to wait and see. I don’t see a consensus developing for direct bank recapitalization for Ireland. That seems unlikely to me. I know the Irish feel unfairly treated, but they should also remember that they got special help from the ECB on a large amount of bonds that were refinanced for a long maturity. Also, I think the fact that in the markets today Ireland gets by far the lowest interest rates of all the countries that borrowed from the EFSF/ESM probably has something to do with the way they did it. They were prepared to take the bank debts on their public balance sheet, protecting creditors, and therefore they are rewarded now with particularly low interest rates. So there is a quid pro quo here.

A bit more broadly about the banking union. Do you think that the structure that is being set up is enough to really break this perceived tie between the sovereign and the banking system, which is one of the goals that has been set for the banking union?

That is one of the goals. There are other goals, of course, like reducing the fragmentation. This break in the link will happen over time, not immediately. With the new institutions put in place and common supervision taking over, after a ten year period with a common financing pot of money available, then we will break that link, but not immediately.

How worried are you about Italy, which has a very large public debt and slow growth. Do you see any danger that the money you manage will be needed for that country?

There is no indication of that at the moment, certainly less than the last three years. Italy has never lost access to the market. Now markets are back in Europe in full force. But Italy, of course, must watch out, because they have had low growth and high debt levels. They had low growth even before the crisis. For a long time growth rates in Italy were only half the euro area average, which was an indication that something was not working well, that there was a lack of reforms. We had one year of the Monti government, when prime minister Monti started working on this, but one year was too short to correct what had been neglected the previous fifteen years. I very much hope that the new government will start working on these issues, because reforms have been blocked in Italy for a very long time. Many things need to be done. Also because the debt is high. I think the prime minister has made the right announcements, now we hope that the new government will implement them.

Do you think that the “taper” – a decrease in quantitative easing by the Fed – could worsen the overall environment and put a heavier burden on countries like Portugal and Greece to get out of their programs?

So far we see the opposite. The tapering made some of the problems that were already there in some big emerging markets more obvious, more visible, and then money started flowing out. What we have seen so far over the last twelve months is that Southern European countries benefited from that. Because of our four point strategy, particularly with the national adjustment, countries like Portugal are becoming more creditworthy. In relative terms, as emerging markets become more risky, we have benefited. This was welcome, but in the long run one should not rely on the weakness of others to get the money one needs. If these countries continue their reforms, they will have no problems getting market access or keeping the market access that Portugal and Ireland have regained. Hopefully Greece is on [the right path] too.

What are the lessons to be learned from the Latvian case? How do you see the situation in Latvia going forward and what risks will it face?

Looking backward, Latvia was the first EU country that got into a serious crisis, which, like all the other crises in Europe, was made more difficult by the global crisis. But a lot was homemade. The way Latvia tackled its own crisis has become a model for other European countries. It is the clearest example of what we now call the internal devaluation – not moving the exchange rate, which was controversial five years ago, but reducing costs and prices and improving competitiveness in a different way. That is not easy, but Latvia demonstrated very well that it is possible, as opposed to what many famous US professors thought. They thought this would not work, that Latvia would become an Argentina Two. One could read that many, many times in the Financial Times five years ago. It did not happen because the Latvian adjustment and reform process was implemented with determination and very quickly. It was painful for the population, we know that. But I think the rewards are also very visible now. That has become a model for many other countries in the periphery, because they are in a similar situation. Countries in the monetary union cannot devalue. Outside a monetary union that is sometimes the easy way out. That is not available for us. Therefore the instruments that were used by Latvia are followed by other countries. It is a very valuable experience. Having this experience in our monetary union is one reason why Latvia is now most welcome as the eighteenth member of the euro area and the eighteenth member of the ESM. I think that Latvia will continue to remind everybody to do their homework and to avoid policy mistakes that can lead to problems.

Do you see any risks for Latvia in the coming years? There has been some talk about non-resident deposits, which were a problem for Cyprus.

I know that has been mentioned, but compared to Cyprus the amount is small. It’s a big amount of money for Latvia, but it’s also small in terms of GDP compared to what we saw in Cyprus. A year ago there were some concerns that money from Cyprus might move to Latvia, but we don’t actually see any of that.

At the moment it seems that the situation is quite healthy. Of course, governments always have to watch out when a situation seems easy, that it doesn’t lead to problems. When it’s seemingly easy, that’s always the moment when demands may become excessive and when slippage and complacency might happen. But from my talks with the prime minister, the finance minister and the central bank governor I understand that they are fully aware of this, particularly in a difficult period before an election, which is often in many other countries the moment when slippages happen. I heard a clear commitment not to let it happen in Latvia.

The interview has been lightly edited and condensed for publication.