Interview with Institutional Investor: Bailout Fund Ready to Go
At October's International Monetary Fund annual meeting in Tokyo, European Stability Mechanism head Klaus Regling discussed the outlook for the ESM and the euro with institutional Investor International Editor Tom Buerkle.
Few people know the euro like Klaus Regling. As a senior official in the German Finance Ministry during the 1990s, Regling helped lay the groundwork for European economic and monetary union. Then, after a stint as managing director at hedge fund firm Moore Capital Management in London, he headed the Brussels directorate that oversees the single currency, from 2001 to 2008 leaving just before the financial crisis that would wreak havoc on the euro area.
Last month Regling, 62, took charge of the EuropeanStability Mechanism, a new bailout fund with capital of €700 billion ($905 billion) and lending capacity of €500 billion that European Union leaders see as a fire wall to contain the blocs debt crisis. If Spain requests EU assistance soon, as most analysts expect, the ESM would be able to buy the kingdom's bond issues, while the European Central Bank could purchase short-term Spanish debt on the secondary market. Regling discussed the European debt crisis with Institutional Investor International Editor Tom Buerkle during the International Monetary Fund's annual meeting in Tokyo last month.
1. How significant is the launch of the ESM?
It's an important building block in completing the euro areas institutional architecture. There's never one miracle step that solves everything, but we have come a long way. We started in March-April 2010 with the Greek program. Then we launched the European Financial Stability Facility in May-June 2010. And now we have the ESM. The advantage is it's a permanent institution. We have capital, the biggest of any international financial institution at €700 billion, of which €80 billion will be paid in. That makes the ESM more stable. Under the EFSF we relied on guarantees of the 17 euro area countries, and when one of our triple-A members is downgraded, it automatically affects the EFSF rating. For the ESM there's no longer this clear link because the €80 billion is there, cash.
2. Does the ESM have the capacity to take on both Spain and Italy?
Let's say €50 billion of the ESM would be used for recapitalizing Spanish banks, so €450 billion would be left. It would be unlikely, in particular for large economies, that countries would be taken completely off the market like we did with Ireland, Portugal and Greece. In the case of a precautionary arrangement, primary market purchases can be done up to 50 percent of the issue; it would probably be less, particularly if the ECB were to step in and bring down rates in the secondary market. Therefore the €450 billion in my view is more than sufficient.