"The European Monetary Union – Return to Stability" Questions and answers: Klaus Regling


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  • On 10 May 2010, the Council adopted a package to preserve financial stability, unity and integrity of the European Union These actions will provide financial assistance to a member state experiencing severe economic or financial difficulties caused by exceptional circumstances beyond its control Any EAMS seeking financial assistance under the European Stability Mechanism will negotiate a Memorandum of Understanding with the European Commission containing financial and economic adjustment measures. The Commission, in liaison with the ECB and the IMF, will monitor closely conditionality compliance before disbursements are made ECB purchases of sovereign debt in the secondary market, along with additional liquidity provisions In addition, the ECB has re-established USD FX swap lines with the Fed, and it is temporarily offering unlimited allotment in its Long Term Refinancing Operation
  • "The European Monetary Union – Return to Stability" Questions and answers: Klaus Regling

    1. 1. “ The European Monetary Union – Return to Stability” Klaus Regling, CEO of EFSF EESC, 9 November 2011
    2. 2. The Euro: a success story <ul><ul><li>Price stability </li></ul></ul><ul><ul><ul><li>Average inflation over last twelve years close to 2% </li></ul></ul></ul><ul><ul><li>Relative fiscal discipline </li></ul></ul><ul><ul><ul><li>Aggregated fiscal deficit of eurozone before financial crisis at 0.6 % of GDP </li></ul></ul></ul><ul><ul><ul><li>USA, UK and Japan close to 3% of GDP in 2007 </li></ul></ul></ul><ul><ul><li>EMU stimulated cross border trade </li></ul></ul><ul><ul><ul><li>Protection of Single Market against exchange rate volatility </li></ul></ul></ul><ul><ul><li>Higher GDP growth* </li></ul></ul><ul><ul><li>Second most important world currency </li></ul></ul>* McKinsey, KFW
    3. 3. EMU better positioned than other currency areas Source: IMF April 2011 Euro area without Estonia Fiscal balance, euro area vs USA and Japan (in % of GDP)
    4. 4. But, EMU needs to function better <ul><ul><li>Lack of fiscal discipline in some Member States led to sovereign debt crisis </li></ul></ul><ul><ul><li>Macro-economic imbalances emerged through loss of competitiveness </li></ul></ul><ul><ul><li>Lack of control over data </li></ul></ul><ul><ul><li>No crisis resolution mechanism </li></ul></ul>Problems emerged during first decade and were aggravated by global crisis
    5. 5. Member States have reacted … <ul><ul><li>… at national level </li></ul></ul><ul><ul><li>Fiscal consolidation/debt reduction </li></ul></ul><ul><ul><li>Structural reforms to enhance growth potential </li></ul></ul><ul><ul><li>Measures to avoid excessive economic imbalances </li></ul></ul><ul><ul><li>Improving the health of the banking sector </li></ul></ul><ul><ul><li>… at European level </li></ul></ul><ul><ul><li>Better governance of EMU </li></ul></ul><ul><ul><li>Stronger financial market supervision </li></ul></ul><ul><ul><li>Credible statistics </li></ul></ul><ul><ul><li>Crisis resolution mechanism </li></ul></ul>
    6. 6. National measures are showing results Source: European Commission: Forecast – Spring 2011 Fiscal balance, general government (as % of GDP) Unit Labour Costs relative to Germany, nominal (1998 Q1=100) Current account balance (as % of GDP) Source:OECD Portugal Greece Ireland Germany
    7. 7. Enhanced economic governance at European level <ul><li>Reinforcing the Stability and Growth Pact (SGP) </li></ul><ul><ul><ul><li>Possible sanctions in corrective and preventive arm </li></ul></ul></ul><ul><ul><ul><li>Reduced possibilities for political interference </li></ul></ul></ul><ul><li>SGP complemented by “European Semester” </li></ul><ul><ul><ul><li>To avoid negative spill-over effects </li></ul></ul></ul><ul><li>New “Excessive Imbalances Procedure” </li></ul><ul><ul><ul><li>Multilateral surveillance to tackle imbalances early – also sanctions possible </li></ul></ul></ul><ul><li>“ Euro-Plus-Pact” </li></ul><ul><ul><ul><li>National measures to foster competitiveness </li></ul></ul></ul><ul><ul><ul><li>Introduction of constitutional fiscal rules </li></ul></ul></ul><ul><li>“ Europe 2020 strategy” </li></ul><ul><ul><ul><li>Structural reforms to enhance growth and employment </li></ul></ul></ul><ul><li>More efficient decision-making process </li></ul><ul><ul><ul><li>Reinforcing the Eurogroup </li></ul></ul></ul><ul><ul><ul><li>Creation of Euro Area Summit </li></ul></ul></ul>
    8. 8. A clear commitment to future financial stability <ul><li>Comprehensive regulatory reform agenda for financial markets </li></ul><ul><ul><ul><li>Implementation of Basel III </li></ul></ul></ul><ul><ul><ul><li>Regulation of Rating Agencies </li></ul></ul></ul><ul><ul><ul><li>Regulation of Alternative Investment Fund Managers (Hedge Funds) </li></ul></ul></ul><ul><li>New European Institutions </li></ul><ul><ul><ul><li>Three new supervisory authorities – EBA , EIOPA , ESMA – to oversee banking, insurance and securities markets </li></ul></ul></ul><ul><ul><ul><li>A “European Systemic Risk Board” ( ESRB ) to monitor macro-economic risks </li></ul></ul></ul>
    9. 9. A new framework for crisis management European Financial Stabilisation Mechanism “ EFSM” € 60 bn Available to all 27 EU member states € 750bn Financial Stability Package European Financial Stability Facility “ EFSF” € 440 bn For euro area Member States International Monetary Fund € 250 bn max Up to half the amount drawn from EFSF and EFSM
    10. 10. EFSF: a lean organisation <ul><ul><li>Founded 7 June 2010 with Tenure of 3 years - up to June 2013 </li></ul></ul><ul><ul><li>Based in Luxembourg (“société anonyme” under Luxembourgish law) </li></ul></ul>Board of Directors* <ul><li>CEO Klaus Regling + </li></ul><ul><li>about 20 staff covering: </li></ul><ul><li>Operations: </li></ul><ul><ul><li>Funding strategy </li></ul></ul><ul><ul><li>Lending </li></ul></ul><ul><ul><li>Risk management </li></ul></ul><ul><li>Research </li></ul><ul><li>Legal </li></ul><ul><li>Communication </li></ul><ul><li>Corporate governance, </li></ul><ul><li>Audit, accounting & admin </li></ul>Finanzagentur (German DMO) Front/Back office debt issuance cash management risk management European Investment Bank Accounting Documentation Infrastructure (Facility) ECB (Account opened) European Financial Stability Facility Shareholders Euro Area Member States
    11. 11. EFSF: AAA credit rating AAA Stable Aaa Stable AAA Stable <ul><ul><li>The top rating and the long-term issuer rating reflect: </li></ul></ul><ul><ul><li>Strong shareholder support </li></ul></ul><ul><ul><li>Credit enhancement </li></ul></ul><ul><ul><li>An organisation supported by the best expertise </li></ul></ul><ul><ul><li>Conservative strategy of funding and investment </li></ul></ul><ul><ul><li>EFSF bonds are eligible as ECB collateral </li></ul></ul>
    12. 12. Financial assistance programme for Ireland <ul><ul><li>Objectives of the programme </li></ul></ul><ul><ul><ul><li>Immediate strengthening and comprehensive overhaul of the banking sector </li></ul></ul></ul><ul><ul><ul><li>Ambitious fiscal adjustment to restore fiscal sustainability, correction of excessive deficit by 2015 </li></ul></ul></ul><ul><ul><ul><li>Growth enhancing reforms , in particular on the labour market, to allow a return to a robust and sustainable growth </li></ul></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><ul><li>The total €85 billion of the programme will be financed as follows: </li></ul></ul></ul><ul><ul><ul><ul><li>€ 17.5 bn contribution from Ireland (Treasury and NPRF*) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>€ 67.5 bn external support </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>€ 22.5bn from IMF </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>€ 22.5bn from EFSM </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>€ 17.7bn from EFSF + bilateral loans from the UK (€3.8bn), Denmark (€0.4bn) and Sweden (€0.6bn) </li></ul></ul></ul></ul></ul><ul><li>Disbursements will be made over 3 years with an average loan maturity of 7½ years** </li></ul>* National Pension Reserve Fund ** Maturity and lending costs are subject to revision following euro zone summit of 21 July € 35 billion € 50 billion
    13. 13. EFSF inaugural issue : record breaking investor demand <ul><ul><li>On 25 January 2011 , EFSF placed its inaugural issue in support of Ireland. </li></ul></ul><ul><ul><li>Record breaking order book of €44.5 bn </li></ul></ul><ul><ul><li>Orders received from over 500 investors </li></ul></ul>Breakdown by investor type Geographical breakdown Amount placed € 5 billion Maturity 18/07/2016 Coupon 2.75% Initial pricing Mid swap +6bp Reoffer yield 2.892% Reoffer price 99.302% Settlement date 1 February 2011 Lead managers Citi, HSBC, Société Générale Effective lending cost 5.9% Amount transferred to Ireland € 3.6 billion
    14. 14. Financial assistance programme for Portugal <ul><li>Objectives of the programme </li></ul><ul><ul><li>Restore fiscal sustainability through ambitious fiscal adjustment </li></ul></ul><ul><ul><li>Enhance growth and competitiveness via reforms and measures, i.e. </li></ul></ul><ul><ul><ul><li>Freeze govt. sector wages until 2013, reduce pensions over €1500 </li></ul></ul></ul><ul><ul><ul><li>Reform unemployment benefits and reduce tax deductions </li></ul></ul></ul><ul><ul><ul><li>Execute an ambitious privatisation programme (TAP, Caixa Seguros …) </li></ul></ul></ul><ul><ul><li>Improve liquidity and solvency of financial sector </li></ul></ul><ul><ul><ul><li>Banking support scheme of up to €12 billion to provide necessary capital for banks to bring Tier 1 capital ratios to 10% by end 2012 in case market solutions cannot be found </li></ul></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><ul><li>The total €78 billion of the programme will be financed as follows: </li></ul></ul></ul><ul><ul><ul><ul><li>€ 26 billion from IMF </li></ul></ul></ul></ul><ul><ul><ul><ul><li>€ 26 billion from the EU (EFSM) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>€ 26 billion from EFSF </li></ul></ul></ul></ul><ul><li>Disbursements will be made over 3 years with an average loan maturity of 7½ years* </li></ul>GDP deficit reduction objectives % of GDP * Maturity and lending costs are subject to revision following euro zone summit of 21 July
    15. 15. First issue for Portugal <ul><ul><li>On 15 June 2011 , EFSF placed its first issue in support of the Portuguese programme </li></ul></ul><ul><ul><li>10 year maturity </li></ul></ul><ul><ul><li>Orders received from over 100 investors </li></ul></ul>Breakdown by investor type Geographical breakdown Amount placed € 5 billion Maturity 05/07/2021 Coupon 3.375% Initial pricing Mid swap +17bp Reoffer yield 3.493% Reoffer price 99.013% Settlement date 22 June 2011 Lead managers Barclays, Deutsche Bank, HSBC Effective lending cost 6.08% Amount transferred to Portugal € 3.7 billion
    16. 16. Second issue for Portugal <ul><ul><li>On 22 June 2011 , despite volatile market conditions, EFSF placed its second issue in support of the Portuguese programme </li></ul></ul><ul><ul><li>€ 3 billion issue with a 5 year maturity </li></ul></ul><ul><ul><li>Order book in excess of €7 billion </li></ul></ul>Breakdown by investor type Geographical breakdown Amount placed € 3 billion Maturity 05/12/2016 Coupon 2.750% Initial pricing Mid swap +6bp Reoffer yield 2.825% Reoffer price 99.636% Settlement date 29 June 2011 Lead managers BNP Paribas, Goldman Sachs, RBS Effective lending cost 5.32% Amount transferred to Portugal € 2.2 billion
    17. 17. The new EFSF <ul><ul><li>Increased guarantee commitments of €780 billion </li></ul></ul><ul><ul><li>Effective lending capacity of €440 billion </li></ul></ul><ul><ul><li>New instruments linked with appropriate conditionality: </li></ul></ul><ul><ul><ul><li>Intervention in primary and secondary markets </li></ul></ul></ul><ul><ul><ul><li>Precautionary programmes </li></ul></ul></ul><ul><ul><ul><li>Finance recapitalisation of financial institutions through loans to governments including in non-programme countries </li></ul></ul></ul>
    18. 18. Primary market purchases (PMP) <ul><ul><li>Objective: maintain or restore a Member State’s relationship with the dealer/investment community and reduce the risk of a failed auction </li></ul></ul><ul><ul><li>Circumstances </li></ul></ul><ul><ul><li>Countries under a macro-economic adjustment programme or to drawdown of funds under a precautionary programme. </li></ul></ul><ul><ul><li>Primarily used towards the end of an adjustment programme to facilitate a country’s return to the markets </li></ul></ul><ul><ul><li>Conditions: Those of macro-economic adjustment programme or the precautionary programme as stated in relevant MoU </li></ul></ul><ul><ul><li>Limit : No more than 50% of the final issued amount </li></ul></ul><ul><ul><li>Once purchased : EFSF could </li></ul></ul><ul><ul><li>Resell to private investors once market conditions have improved </li></ul></ul><ul><ul><li>Hold until maturity </li></ul></ul><ul><ul><li>Sell back to country </li></ul></ul><ul><ul><li>Use for repos with commercial banks to support EFSF’s liquidity management </li></ul></ul>
    19. 19. Secondary Market Purchases (SMP) <ul><ul><li>Objective: </li></ul></ul><ul><ul><li>Support the functioning of the debt markets and appropriate price formation in government bonds </li></ul></ul><ul><ul><li>Market making to ensure some liquidity in debt markets </li></ul></ul><ul><ul><li>Give incentives to investors to further participate in the financing of countries </li></ul></ul><ul><ul><li>Conditions: </li></ul></ul><ul><ul><li>Programme countries: conditionality of the programme applies as in MoU </li></ul></ul><ul><ul><li>Non-programme countries: conditionality refers to </li></ul></ul><ul><ul><ul><li>ex-ante eligibility criteria as defined in the context of the European fiscal and macro-economic surveillance framework </li></ul></ul></ul><ul><ul><ul><li>appropriate policy reforms as in MoU </li></ul></ul></ul><ul><ul><li>Procedure : </li></ul></ul><ul><ul><li>Initiated by a request from a Member State to Eurogroup president. </li></ul></ul><ul><ul><li>Exceptionally, ECB could issue an early warning. </li></ul></ul><ul><ul><li>In all cases, subject to an ECB report identifying risk to euro area and assessing need for intervention. </li></ul></ul>
    20. 20. Precautionary credit lines <ul><ul><li>Objective : </li></ul></ul><ul><ul><li>prevent crisis situations by assistance before MS face difficulties raising funds in the capital markets </li></ul></ul><ul><ul><li>avoid negative connotation of being a programme country </li></ul></ul><ul><ul><li>In line with established IMF practices: </li></ul></ul><ul><ul><li>Precautionary conditioned credit line (PCCL) </li></ul></ul><ul><ul><ul><li>access limited to countries with sound economic and financial situation, </li></ul></ul></ul><ul><ul><ul><li>Clear track record of access to capital markets, respect of SGP* and EIP* commitments </li></ul></ul></ul><ul><ul><li>Enhanced conditions credit line (ECCL) </li></ul></ul><ul><ul><ul><li>access open to countries with moderate vulnerabilities that preclude access to PCCL </li></ul></ul></ul><ul><ul><li>Conditions: </li></ul></ul><ul><ul><li>Beneficiary placed under enhanced surveillance during its availability period </li></ul></ul><ul><ul><li>All conditions stated in MoU </li></ul></ul><ul><ul><li>Size: Typical size 2-10% of GDP of beneficiary country. </li></ul></ul><ul><ul><li>Duration : 1 year renewable for 6 months twice </li></ul></ul><ul><ul><li>Procedure: lighter request procedure for swift implementation </li></ul></ul>*SGP: Stability and Growth Pact, EIP: Excessive Imbalances Procedure
    21. 21. Finance recapitalisation of financial institutions <ul><ul><li>Objective: </li></ul></ul><ul><ul><li>limit contagion of financial stress by assisting a country to finance recapitalisation of financial institution(s) at sustainable borrowing costs. </li></ul></ul><ul><ul><li>Open to all MS, particularly to countries with disproportionally large financial sector. </li></ul></ul><ul><ul><li>Circumstances: Any loans must be requested and disbursed to Member States. EFSF will not loan directly to financial institutions </li></ul></ul><ul><ul><li>In order to determine eligibility for an EFSF loan, a three step approach is applied: </li></ul></ul><ul><ul><li>Private sector (shareholders) </li></ul></ul><ul><ul><li>National level (government) </li></ul></ul><ul><ul><li>European level (EFSF) </li></ul></ul><ul><ul><li>Conditions: </li></ul></ul><ul><ul><li>Sine qua non condition of restructuring/resolution of financial institutions. </li></ul></ul><ul><ul><li>Compliance with European state aid rules </li></ul></ul><ul><ul><li>Additional conditionality on financial supervision, corporate governance and domesic laws on restructuring/resolution. </li></ul></ul><ul><ul><li>All conditions stated in MoU </li></ul></ul>
    22. 22. A comprehensive approach – the euro summit of 26 October 2011 <ul><ul><li>Optimising the EFSF’s firepower using two options </li></ul></ul><ul><ul><ul><li>Credit enhancement approach – partial protection certificates for newly issued euro area Member States’ bonds </li></ul></ul></ul><ul><ul><ul><li>Co-financing with private investors (CIF – Co-Investment Fund) </li></ul></ul></ul><ul><ul><li>Second rescue package for Greece including agreement on Private Sector Involvement </li></ul></ul><ul><ul><ul><li>Proposal of a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. Exchange to be completed early 2012 </li></ul></ul></ul><ul><ul><ul><li>Collateral for voluntary bond exchange of up to €30 billion </li></ul></ul></ul><ul><ul><ul><li>Additional programme financing of up to €100 billion until 2014, including required recapitalisation of Greek banks </li></ul></ul></ul><ul><ul><li>Recapitalisation of the European banking sector </li></ul></ul><ul><ul><ul><li>Facilitating access to term-funding through a coordinated approach at EU level </li></ul></ul></ul><ul><ul><ul><li>Increasing the capital position of banks to 9% of Core Tier 1 by the end of June 2012 </li></ul></ul></ul><ul><ul><li>Governance </li></ul></ul><ul><ul><ul><li>Strengthening of governance structure – bi-annual Euro Summit </li></ul></ul></ul><ul><ul><ul><li>Strict surveillance of euro area Member States </li></ul></ul></ul>
    23. 23. The need for a permanent crisis mechanism <ul><ul><li>Unlike the US, the Euro zone has no fiscal centre to tackle crises </li></ul></ul><ul><ul><li>Europe already had Balance of Payments instruments in place for EU members and EU neighbourhood countries but no financial assistance mechanism for euro area members </li></ul></ul><ul><ul><li>The Great Depression and the Gold Standard (fixed exchange rate) made the need for a global institution to provide financial support clear </li></ul></ul><ul><ul><li>This is why the International Monetary Fund was established in 1944 </li></ul></ul>Why?
    24. 24. Creation of a permanent crisis mechanism <ul><ul><li>The creation of the European Stability Mechanism (ESM) </li></ul></ul><ul><ul><ul><li>an intergovernmental organisation under public international law, operational from mid-2013 </li></ul></ul></ul><ul><ul><ul><li>ESM will take over all instruments of the new EFSF </li></ul></ul></ul><ul><ul><ul><li>effective lending capacity of €500 billion </li></ul></ul></ul><ul><ul><ul><li>total subscribed capital of €700 billion , with paid-in capital (€80 billion) and committed callable capital and guarantees (€620 billion) </li></ul></ul></ul><ul><ul><ul><li>private sector involvement </li></ul></ul></ul><ul><ul><ul><ul><li>Case-by-case based on debt sustainability analysis </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Following established IMF policies </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ESM will claim preferred creditor status </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Standardized and Collective Action Clauses (CACs) will be included for all new euro area government bonds from June 2013 </li></ul></ul></ul></ul><ul><ul><li>ESM treaty to be ratified by euro zone country parliaments in 2012 . </li></ul></ul>
    25. 25. <ul><ul><li>Member States took action </li></ul></ul><ul><ul><ul><li>National austerity packages and reforms to enhance competitiveness </li></ul></ul></ul><ul><ul><ul><li>Sharpening of Stability and Growth Pact </li></ul></ul></ul><ul><ul><ul><li>European procedure to tackle macro-economic imbalances </li></ul></ul></ul><ul><ul><ul><li>Strengthening of Financial Market Supervision </li></ul></ul></ul><ul><ul><ul><li>New crisis resolution mechanism </li></ul></ul></ul><ul><ul><ul><li>New powers for Eurostat </li></ul></ul></ul><ul><ul><li>Through adjustment, reforms and deeper integration </li></ul></ul><ul><ul><ul><li>The European Monetary Union will function better </li></ul></ul></ul><ul><ul><ul><li>Eurozone will play stronger role globally </li></ul></ul></ul><ul><ul><li>But is more needed? </li></ul></ul><ul><ul><ul><li>European Finance Minister? </li></ul></ul></ul><ul><ul><ul><li>Commissioner for Eurozone? </li></ul></ul></ul><ul><ul><ul><li>Right of Action to take Member State to European Court of Justice? </li></ul></ul></ul><ul><ul><ul><li>True Political and Fiscal Union including Eurobonds? </li></ul></ul></ul><ul><ul><ul><li>Democratic legitimacy? </li></ul></ul></ul>Conclusions: from crisis to a better functioning euro area