ESM’s Regling says reforms are Greece’s best insurance against risk


The head of the European Stability Mechanism (ESM), Klaus Regling, told Skai TV in an interview aired on Tuesday night that Greece can look forward to a “clean exit” from the bailout when it expires in August but needs to be aware of the risks of volatile markets.

Speaking on the “Istories” program from the Delphi Economic Forum, Regling said the ESM is ready to help if this is deemed necessary by the Greek government, though this does not seem to be needed right now.

However, the ESM chief also stressed that any clean exit from the program would depend on the successful completion of the fourth review and continuing the pace of reforms.

The Greek government’s goal is a clean exit after the end of the program this August. Are you confident that we can achieve this?

Yes, because there has been a lot of progress recently, implementing the program, continuing with the reforms. It has been possible for the government to enter the markets again, which is important, and it is also what other program countries did, like Ireland, Portugal, Cyprus, to go back to the markets, long before the end of the program. So all that is moving along. Of course there are always risks, at the moment markets are quiet. It is possible to issue bonds but we know markets can all of the sudden become very volatile again.

So it’s good to be aware that the ESM has instruments available for such a situation. At the moment it looks like it’s not needed to have a precautionary arrangement but I think it’s very good that we created this possibility. It is also reassuring for the markets, and I think also for the Greek population. I always talk about a long-term relationship between Europe, the other euro area countries, the ESM and Greece. We have a lot of money outstanding in Greece at very favorable lending terms and other instruments are available if needed. At the moment it doesn’t look they are needed, and it would have to be requested by the government anyway.

Many say that Greece should not take this risk because its economy is still very vulnerable. Do you share these concerns?

It’s true. Greece has made a lot of progress on the one hand, but it remains vulnerable on the other because it is coming out of a deep, deep crisis. I think the best insurance against this risk is to continue with reforms. As I said at the conference, every country in the world needs to implement reforms if it wants to keep pace with the rest of the world, if it wants to improve the standards of living of its population.

Are all the institutions on the same page as far as the day after is concerned? There was some tension between Finance Minister Euclid Tsakalotos and European Central Bank President Mario Draghi in the last Eurogroup, but also between the Bank of Greece and the government about the same issue.

I was at the last Eurogroup, as always and I think these stories about tension with Mr Draghi are wildly exaggerated. We had a discussion about the recent bond issue and the fact that interest rates have been going up after that bond issue. And that was it. So I would not exaggerate that. Again, the instrument is available. I take note that the governor of the Greek Central Bank has also pointed out that this is available, and that is correct. It’s up to the government to decide what to do. But if markets stay quite as they are at the moment, globally, and if Greece continues with the reforms – and that’s I think the really important condition, but it’s my working assumption that the Greek reforms will indeed be implemented – then, from today’s perspective it doesn’t seem to be necessary.

Before we get there we have a fourth review to complete. What are the main challenges and are confident that we will be done on time?

The good news is that only last week, the third review was really completed. There was a little bit missing and that is done. We can now proceed and prepare the disbursement later this month. We need some parliamentary procedures in some of our member states, but then we can disburse 5.7 billion euros and another billion then later in April. At the same time, last week the fourth review began in Athens with all the institutions. The reports as received from the ESM team were encouraging, that there was good progress, a good atmosphere.

There are 88 prior actions but I do not think they are quite as tough as in the past. The difficult decisions required to bring the fiscal situation in order to improve competitiveness have happened. Now it’s a question of strengthening the growth potential of the Greek economy, which, of course, is the ultimate objective.

This is also in the interest of the ESM. We are the largest creditor of Greece. More than half the Greek public debt is in our books. We lend it to Greece at very, very low interest rates, very much below market rate, with very long maturities. The last repayment would only happen in 2059, 41 years from now. That indicates that there is a long-term relationship between the ESM, the European side, the Eurogroup and Greece. And I think this will be a reliable productive relationship, which also gives the assurance to the Greek public and to potential investors that Greece is not on its own.

Since this is the last review, are there any margins for an extension of the program?

Not really, because extending the program is always politically difficult. It’s not totally excluded but as the situation has really improved I think we should not even think about it. We have enough time. There has been a good start of the review so I do not see why we should not be able to conclude all this over the next few months.

What kind of surveillance will Greece be under after the end of the program? There is much discussion about this.

Yes, yes I know and I think one has to understand that there three layers of surveillance. The first one is normal surveillance that exists for every member state of the European Union and member of the euro area. All countries are subject to that, to the stability and growth pact, to the macroeconomic and balance procedure. Second, for countries that have received money from European institutions, like the ESM, there is a post-program monitoring. This applies also to Greece, to Ireland, Portugal, Cyprus and Spain. We call it an early warning system at the ESM – a check on a regular basis that a country is able to repay.

Does this means that the representatives of the institutions will be coming to Greece and having reviews?

Yes, exactly. We do it in the other countries, as I said, like Ireland, Portugal. We go on a regular basis to those countries, together with the European Commission and the ECB, and we look at the economic situation, the fiscal situation, policy decisions. This will also happen in Greece. And then there might be a third layer, which is not decided yet, as we are looking at the possibility of additional debt relief, as was promised by the Eurogroup two years ago. That will be decided over the next few months and then surveillance might be tightened.

That would mean a new program.

No, it’s not a new program. It’s not a program, not with additional conditionality, but with our commitments as part of the current program, like maintaining the primary surplus until 2022 at 3.5 percent, that’s one example. And we will certainly want to check whether this commitment is truly maintained. There are also decisions already taken on additional tax reforms and pension reforms, coming in 2019. So we want to check whether that is being done.

There are concerns about Greece going back to its old habits. Do you share these concerns?

Well, I do not know what is meant by old habits. I hope it does not mean running big fiscal deficits, raising incomes faster than productivity, which led by 2009 to a serious deterioration in competitiveness. That’s why the trade deficit was very, very large, the largest in Europe. Those old habits hopefully will never come back because we now know very well that adjustment was needed to correct what went wrong the previous 10 years.

I am confident that together we all have learned what works. The government has implemented now for many years important reforms that make the economy less vulnerable. We see that growth is coming back and according to all forecasts it will accelerate this year and be good in 2019. The fiscal house is back in order, competitiveness is back, exports are growing. So that should continue and that is very important. It does not mean that everything is done. I think it’s important to continue to strengthen the public administration and the legal system. Privatization must continue. There are some professions that are still pretty closed. So, looking at all these things and strengthening the growth potential will continue to be important.

Can you reassure the Greek people that no more fiscal measures will be needed?

With a fiscal over-performance in the last two years and in 2020 an already agreed fiscal stimulus package kicking in, the population will see the opposite of what happened the last few years. There will be positive effects coming from the fiscal side. And I think it will be important to lower tax rates actually, to strengthen the growth potential.

Is there a room for lower taxation?

Based on forecasts, which are very close to the forecast of the government, the measures that have been agreed so far and including what happens in 2019, then there will be room for tax cuts, yes.

Are there already discussions about which taxes could be lowered?

There are discussions on that too and some decisions have already been taken. So based on what we know at the moment there is no need for additional decisions on the fiscal side that are difficult. It’s quite the opposite; there should be growth-promoting measures.

What about the investment environment in Greece? Have we made any progress on this?

Yes, of course, in the context of the all the three programs there have been many measures taken to strengthen the growth environment; the economy has become more flexible, less regulated. That is good. That makes it stronger and less vulnerable. I think that will be the positive legacy of these programs. Competitiveness is again back. Competitiveness was lost in 2009 after a decade of wrong decisions and was also negatively affected during the first half of 2015 through some wrong decisions. But now Greece is in much better position than in previous years.

Does this mean that you have found the government to be more investment friendly recently?

I would say that all the three programs we have seen have contributed to a better economic situation, to a stronger economy. And then there were some reversals, some hiccups, some ups and downs – it was not always smooth. But when I look all the measures taken over the last eight years, substantial achievements are there.

Do you have any concerns about political instability in Greece? There is much tension in the political scene and we will be having elections soon.

No. I do not know how you define political instability. Elections are part of democracy, so that for me is not a concern per se. We have been through programs in other countries like Portugal, like Ireland when in the middle of a program there was a change in government and the opposition took over. We made some adjustments but continued to work with the new government.

Some political rivals of the current government have said that it has been the best partner of troika. Is it true that after a certain point you loved cooperating with this government?

I do not know whether the word love is the right one, but it’s true that since August-September 2015, we have worked very well with Finance Minister Tsakalotos and Prime Minister [Alexis] Tsipras. We also had good phases with previous governments. Good phases, bad phases. With this government it was a very rocky start in the first half of 2015 but the last two-and-a-half years have been productive for both sides.

My last question has to do with the damage done in the first semester of 2015. Last time we met, you estimated that damage at about 100 billion euros. A few days earlier, EWG chief Thomas Wieser estimated the damage about 200 billions. What’s the truth here?

I think one cannot have one number. There is no scientific way to say it’s exactly this amount. I take note that the Greek central bank has estimated the cost at 83 million euro. Thomas Wieser thinks it’s a lot more. It is a big amount; I think we all agree on that. There were serious mistakes done. And therefore we needed a third program, which was not at all expected at the end of 2014. We know that in 2015 and 2016 there was negative growth, despite the fact that all forecasts at the end of 2014 expected good, solid growth.

This means a permanent loss in GDP of the economic activities in the country of 5-6 percent points every year and this continues today. Economic activity could be higher today if this first half of 2015 had not happened. Therefore the loss is very, very high. Whether it is 100 or 120 billion or even 200, I think it is less important. I think it is a very big number.