OPINION

Klaus Regling stresses debt sustainability through commitment to reforms

BRUSSELS – The man who is responsible for the loans to Greece as managing director of the European Stability Mechanism (ESM/EFSF), Klaus Regling, is the only high-ranking European official who has close and regular contact with the major players of the international markets.

Regling’s opinion carries more weight than almost any other in Eurogroup decision-making, and in an interview with Kathimerini, he says that following the most recent decisions by the meeting of eurozone finance ministers, Greece’s debt load does not need to be reduced any further, that the markets are wary of any radical changes in the country’s course should the opposition come to power and that access to a precautionary credit line is the best option for Greece, which he describes as a “reform champion.”

You are in daily contact with world investors. How worried are they about the possibility of national elections and a change of government in the coming months? What is your take on the possible change?

Financial markets are monitoring the political situation and possibility of government change in every country. It’s normal that markets get more worried when the opposition has radically different views on the situation in the future. In Spain, Portugal and Ireland governments changed but the programs were not interrupted, details were adjusted but the new government that came in after an election supported the overall direction, therefore markets were reassured. In Greece there seems to be more uncertainty.

Do you agree that in the past month the troika’s position has become tougher? There had been a feeling that the review would be easier this time around and that there would be concessions from both sides.

I don’t think the troika position has hardened. The reviews have always been difficult and unfortunately delays are quite common. There has been very impressive progress with reforms in Greece. Greece’s ranking in the World Bank’s recent “Ease of Doing Business Index” is a good example of the great progress achieved, but also of what Greece still needs to do. Greece advanced in the ranking by 48 positions since 2010, which makes it one of the countries with the biggest progress in that period. But even after this huge jump, Greece is still only ranked 61st out of 189 countries. In other words: tremendous progress but still one of the lowest rankings among EU countries. The progress has to be recognized and in the Eurogroup we recently applauded this progress. But the Eurogroup also stressed that the reform agenda is not finished. In Greece’s real economy, the turning point is now behind us. Growth has been coming back in the last quarters and the forecasts for next year are encouraging. What is also very encouraging is that the structural reforms are starting to pay off. For example, the OECD is estimating trend growth over the next 20 years. According to the OECD estimates, Greece will have the highest potential growth of all euro area countries, provided the reforms continue.

The biggest problem in the negotiations seems to be the fiscal gap. The troika’s projection of the shortfall seems to keep changing, while Greece denies there will be one at all. Given that the troika has miscalculated the fiscal gap for the past two years, why do you think they maintain such a hard line?

I don’t think it is a question of a hard line. There is always a degree of uncertainty with forecasts. It’s true that a few measures were taken in Greece recently that could lead to a larger deficit. One example is the decision to allow the payment of tax arrears in 100 instalments – that was a surprise for the troika. I won’t go into details but the disagreement is not only on the fiscal side, it’s also about progress on structural reforms. This is why the Eurogroup extended the EFSF program until the end of February, to allow for more time to enable the Greek side and the troika to come to a common understanding.

Why did the markets react so negatively to the prospect of a “clean exit” for Greece, though not for Portugal and Ireland? Even when we are reform champions, as you said.

Greece is clearly a reform champion in the euro area. But at the same time, the reform gap in Greece was much wider when the program started than in the other program countries. Despite all the progress, there still is a lot to do in Greece. When Portugal and Ireland were about to exit their programs they had a cash buffer that covered over 12 months of their financing needs. Greece does not have such a comfortable buffer. Also, in Portugal and Ireland there was a relatively broad consensus among political parties and social groups about the reforms needed for the country. This reassured the markets. They felt that the people and politicians had ownership of the program and that everyone embraced the painful but necessary reform effort.

In the November 2012 Eurogroup there was an agreement that if Greece achieves a primary surplus its debt would be reduced. Today you say that this is not going to be necessary. What has changed your position?

The key objective of the euro finance ministers is very clear and I share it fully: we want to make sure that Greece returns to a sustainable debt situation. There are many ways to get there. An important way is that Greek debt sustainability is improved by the very favorable terms of EFSF lending to Greece. The effect of these terms was underestimated in the beginning. Our lending terms include very long loan maturities of over 30 years and very low interest rates of only around 1.5 percent. Also, since 2012 and until 2022 Greece does not pay any interest on the EFSF loans. These hugely favorable conditions provided savings in the volume of 8.6 billion euros for the Greek budget in 2013. That is equivalent to 4.7 percent of the Greek GDP and this benefit will be repeated every year for the foreseeable future. This is unprecedented solidarity from the euro countries to Greece and goes much beyond what was expected in November 2012. The Eurogroup will look again at Greek debt sustainability next year. It will take into account several elements: reform progress, the uncertainty around current forecasts, markets expectations and general global developments.

In that same Eurogroup, the return of the ANFA profits to Greece was also decided in an effort to reduce further Greek debt. This has not happened either.

When the question of rollover of ANFA holdings came up, it was clear that it would have to be subject to certain conditions. One of the conditions was that national central banks would check if it was legally possible and their reply was negative. According to the Maastricht Treaty, central banks in the euro area are not allowed to directly finance governments. As the return of the ANFA profits would have been in contradiction with this prohibition of monetary financing, the idea had to be dropped.

In the last Eurogroup an ECCL by the ESM was agreed for Greece, if and when the review concludes. Do you think it was a right decision?

Just to be precise: it was not yet agreed. The Eurogroup said it is favorably disposed to grant an ECCL, in other words a precautionary credit line by the ESM. Whether or not this credit line can be granted depends on whether Greece finalizes the reform measures that are still pending on the current review. It also depends on the talks about the continued involvement of the IMF in Greece. Lastly, all the relevant national procedures in some euro member states needed to agree on an ECCL precautionary credit line by the ESM have to be completed. We are moving toward an ECCL, once the current program comes to an end. The IMF has used a similar instrument many times and it proved very useful to help a country regain market access. Markets know that in principle the country doesn’t need this emergency financing. But markets are reassured that in case something goes wrong, or in case a bond issuance does not work as expected, the ESM can step in and support the country within the predetermined amount in its precautionary credit line.