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Greece was a recurring concern in the first years of the euro crisis. By January 2011, the three major rating agencies had all reduced Greece’s debt to below investment grade.
With outstanding rescue debt reaching out a couple of decades, it became obvious over the course of 2011 that the newly operational EFSF and the incipient ESM were already in the market for the long haul. This required the EFSF to step back and craft a plan for how to go about this in the fixed-income markets.
Euro area politicians were under fire in their own countries as the crisis gained speed, which made it hard to find common ground on how next to tackle the crisis. On the one hand, the ESM was on the way and the EFSF was fully operational.
The 2011 accord to create a permanent mechanism was a breakthrough. Still, the ESM’s scheduled start date was more than two years away. The euro area had to take more immediate action to counter the crisis.
As the EFSF began operations and financial markets continued to test the euro area, there was a growing awareness that a temporary rescue vehicle would not be enough.
Programmes for Ireland and Portugal sent a signal that the new rescue fund would have to scale up. Chief Economist Strauch said the lending and funding structure devised in the beginning was an auspicious start. The expansion started a bigger discussion about what changes might be needed for the long run.
With Ireland and Greece in programmes, Portugal drew the focus of market attention. Its bond yields were already at critical levels in the spring of 2010, and the question became: would Portugal be next?
Albuquerque, who would later become Portuguese finance minister, was at the time leading the issuing department of the country’s debt management office.
Once the EFSF secured a provisional AAA rating from all three big-name rating firms, it was primed to go to the markets if needed.
In the months before Ireland’s formal request, the EFSF team prepared for what could be coming, lining up investors and clearing a number of obstacles.
A small suite of old-fashioned offices provided the firewall’s first home. Even those were a step up from Regling’s personal laptop and telephone, which constituted the fund’s entire infrastructure for his first weeks as chief executive in June 2010. When Regling was hired, the EFSF existed on paper only.
A potent mix of recession and banking crisis had pushed Irish government finances to the edge. With better bank governance and an eye towards fending off the worst excesses of a boom-bust cycle, Ireland might have been able to avert the debacle.