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With former ECB Vice President Papademos installed as interim prime minister in November 2011, Greece quickly began readying itself for a second rescue programme. First on the agenda was the proposed private sector debt exchange. An effort to put a deal together in late 2011 had collapsed, so negotiations needed to start again on a bigger scale[1].
As the temporary fund prepared in 2012 to evolve into its permanent form, the ESM faced the same challenges as a start-up in the private sector: how to retain the nimble, entrepreneurial spirit of the early days while providing structure, and a career path and positive working environment for the professional staff.
Regling, chief executive of the EFSF, shepherded the permanent firewall into being
By December 2011, euro area leaders figured they had put together enough euros to reach the symbolic figure of $1 trillion in backstop resources. They hoped that amount would calm markets concerned that Spain or even Italy might represent Europe’s next weak link.
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.