Benoît Coeuré: Interview in The Irish Times
Interview with Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, in The Irish Times, conducted by Mr Arthur Beesley on 12 January, published on
16 January 2015.
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How deep is the recovery in Ireland and to what extent can we be sure that this kind of
very positive growth is going to continue?
Ireland has a potential to be the fastest growing euro zone country in 2015. That's clearly a
recognition of the success of the adjustment programme...This has been done by the Irish
people and they have paid the price so it shows that this now comes with a reward, that it
was worth it.
Does it mean that everything is done and that Ireland is on the safe side? Well I hope so. I
wish the best for the Irish economy but there are still some challenging areas, like obviously
the labour market is still adjusting, youth unemployment is very high, which in most European
countries is an issue. That's an issue that Ireland faces. It's being addressed but it's not
done. It's not over yet.
I would also flag banking sector issues, in particular the high level of non-performing loans
which remain to be addressed, I guess what I'm saying is consistent with what the Central
Bank of Ireland says anyway. But I would certainly encourage banks to be very forthcoming
in addressing non-performing loans, in using their buffers to accept losses when they
restructure loans and I would also encourage borrowers and lenders to engage directly, not
waiting to go to court to settle. The more forthcoming collectively borrowers and the lenders
can be in addressing non-performing loans, the faster the banking sector will restart and the
more they can create room on their balance sheet to extend new loans to the economy
because that is what the economy needs. The economy needs fresh money. For that you
need to reset the system.
One last observation to make is on the fiscal side. A lot has been done obviously, but when
the economy bounces back in any country there is always a risk of being over-optimistic and
of spending money that is not yet there. I'm not saying that this is what is being done but I
certainly think the Government should guard against this risk of spending money that has not
come yet. They should err on the side of caution given the level of debt, which remains high.
Do you have any concern about the budget for 2015 which was a modestly
expansionary budget in a scenario where the original plan was to retrench by
€2 billion?
I think all institutions in the post-programme monitoring - the ECB together with the
Commission and the IMF - have advised the Government to be really on the side of caution
here.
Were you unhappy with the budget?
We would like the budget to be as conservative as possible. That's our advice.
Was that budget not conservative enough?
It's more advice for the future I'm making here... At the moment it is positive but you really
have to be extremely cautious.
The plan is to continue decreasing income tax again in the budget for 2016. Is that a
matter of concern to you given your expressed preference for as conservative a
budget as possible?
What really matters most is the fiscal stance in general. I am not in a position and I don't
want to pass a detailed judgement on what the Irish finance minister is doing. The ECB is not
a fiscal institution. We're not managing the Irish budget. We give advice given the
macroeconomic situation. That advice is on the fiscal stance generally.
The Government has also indicated very clearly that it will invite the public sector
trade unions into discussions around the unwinding of emergency laws to cut public
pay. Is that - to your mind - premature?
Again, I would have the same answer here. Ireland is out of the programme, right? So we've
moved out of this close monitoring mode by the troika. Fiscal policy is in the hand of the
Government, while remaining in line with the EU requirements. We give advice on what we
see fit, given the macroeconomic situation and our advice is to err on the side of caution
when it comes to the fiscal balance. I'm not going to give advice on the composition of the
budget. That is certainly for the Irish Government to decide.
Irish politics at the moment is in a mode where people are increasingly starting to
think about the general election to come... What would your observation be to people
who will be campaigning to get into government in Ireland?
I certainly have no advice to give to elected politicians or to incumbents or candidates in a
political campaign. What matters for us in a euro zone perspective is the continuity of
policies. As we've just discussed, Ireland is not out of the woods. A lot has been done. It has
started to yield benefits. We are seeing the benefits. However, fiscal consolidation is not
over. So here we need continuity. Our best advice is to ensure continuity in the
implementation of reforms. Now, it's certainly not for us to prejudge the content of policies.
The different parties have different policies. That is just normal. That's democracy, as
everywhere in Europe.
Are you saying that this is the economic reality in which whatever Irish government is
in power after the election must work? The reality it must deal is that the fiscal
position is going to remain constrained - is that what you are saying?
Let me phrase it positively. I would say that these efforts have been successful. Ireland has
reaped benefits not only in terms of growth but also in terms of restoring market access and
lowering the cost of government funding and this is about consolidating this success and
building on the successes, and for that you need continuity in policies.
Is there any danger to your mind that some of the progress made could be lost if
Ireland gets it wrong?
There is always this danger. There is always a risk of complacency. There is always a risk of
things turning wrong. But given everything that we've seen in Ireland over the last years...
We've seen so many achievements so much commitment, not only by the political elite but
by the Irish people themselves, they've paid the price, they've made the efforts, they're now
seeing the first effect of these policies. So I'm extremely confident that this can go on.
You know what? We at the ECB use Ireland as a model for larger euro zone economies. This
is a country that has been hit extremely hard by the crisis, has made a lot of efforts and is
now starting to reap the fruits - or the benefit - of the efforts. Such cannot be said of all euro
zone countries, in particular not of the large countries so that's really an example we use in
the European discussion of how things can work.
Is there any concern at the level of the ECB - as an institution - about any danger that
there could be political instability in Ireland?
Again, we don't pass judgement on political outcome or political risks. Politics are fragile all
throughout Europe in all countries, large and small, and this is because of the crisis. The
crisis has shaken the foundations of our societies, in particular through high unemployment
everywhere. And politics are now fragile. So the only advice we can give because we are not
a political institution is to design and implement reforms that can restore growth and create
jobs, that's the only way to make politics more solid.
You mentioned labour market policies. What specifically would you like to see?
I'm just saying that we need continued implementation of what was agreed in the
memorandum, nothing more.
Labour market activation policies? That kind of stuff?
Exactly.
Turning to the banks, how crucial is for them to bite the bullet and use their capital
buffers to confront the question of loan losses?
Banks have to navigate between different constraints. I'm not saying that it's an easy job to
do. There are constraints. We ourselves as supervisor of the four largest banks, we would be
the first to say that they needed some capital. They were right to replenish their capital. In
one case this has been mandated by the stress test. It is being done. So strong capital is a
protection in today's world. It is mandatory, mandated by regulation and it is a protection and
it is something that allows you to lend more contrary to what bankers sometimes suggest.
Strong capital is not money that is divested away from the economy. It's quite the contrary,
something that makes it possible to lend more. So they need strong capital but they also
need to be forthcoming in addressing the non performing loan issue and sometimes there
are different ways - depending on the kind of loan we are talking about - sometimes loan
restructuring involves recognition of loan losses and then they have to be ready to use their
P& L and their capital to do it, because it's an investment, it's an investment into the future,
it's not money being lost. It's an investment to recreate capacity to lend into the economy. It's
also for the benefit of all so it has a social purpose.
Why in your view haven't they done this?
Because it is complex. Because in many cases discussions between borrowers and creditors
are difficult and you don't have an incentive to be forthcoming. Sometimes you just want to
wait until it comes to court and wait for the court decision, which is perfectly legal but it just
postpones the resolution of the issue. So it creates uncertainty which is bad for the economy.
Is that a concern throughout the banking sector or do you have concerns in respect of
particular institutions?
It is a priority throughout the banking system.
Are we in a space in which you as ECB - as regulator - could set targets for the banks
in this space?
From what I can see, what the Central Bank of Ireland has done has been effective in
accelerating this process so it's certainly moving in the right direction.
But you want banks to go further, faster?
Yes.
Mario Draghi said the ECB will not be participating in the inquiry but Enda Kenny said
he approached Mr Draghi at the last European summit and asked him to reconsider.
Has there been any reconsideration? Is the position of the ECB settled? Will the ECB
be cooperating in any way with the inquiry?
The position of the ECB is settled. It is settled for fundamental institutional and legal reasons
- and I would like to clarify that there is no lack of good faith on our side. What we're saying
is that we have clear rules that for good reasons frame the accountability of the ECB and that
is accountability to the European Parliament, accountability under European law. So ECB
officials - president, board members, staff members, including the former president by the
way, if you would ask the question - are accountable to the European Parliament, to
European citizens. They cannot be bound by parliamentary procedures under national law in
any EU country. This is not the way it works.
We've said extremely clearly that we are ready to engage with all stakeholders, starting with
the Irish parliament in informal discussions outside of this inquiry because it is of course
possible to have conversations with any national parliaments. We've done it in the past. It is
just not possible to bind the ECB through a national procedure, a national parliamentary
procedure.
Governor Honohan is absolutely the right person to account not only for the decisions of the
Central Bank of Ireland but also for the decisions of the Eurosystem because he's a member
of the Governing Council.
You say there's been an informal engagement with the inquiry?
I am saying that there can be an informal engagement with the Irish Parliament outside of the
inquiry. We're open to that.
That strikes me as a change?
I don't think so.
And what might such an informal engagement encompass - a willingness to have
meetings but not necessarily in open session in a committee room in parliament?
...That's a discussion to be had with them. I haven't seen such requests. That's a discussion
we should have with the Oireachtas.
There's the avenue of private meetings with the inquiry or officers of the inquiry?
There's the question of providing paper records, the account of the ECB?
Whatever can be useful provided that it's consistent with our legal framework notably in
terms of confidentiality.
The inquiry is likely to look at what happened in the lead in to the bailout, which
remains controversial. Did Jean-Claude Trichet go too far in the letter?
First as you know the letters have been disclosed on our website with all kind of
accompanying documents which I hope help inform the discussion, also in Ireland. We've
done it also to inform the discussion in Ireland.
In substance what the ECB president did at the time was to clarify the framework under
which the ECB operates. The ECB is a rules-based institution. We have to make it clear what
are the constraints under which we are operating. Some of them are legal, some of them are
practices or long-standing practices and ECB decisions, which altogether constitute our
organisational framework. At the heart of this organisational framework, we have the
principle under which the ECB lends - under monetary policy - and the national central
banks lend - under emergency liquidity assistance when that happens. Both the ECB and
the NCB can lend only to solvent institutions because lending to an insolvent institution would
be doing the government's job to resolve it and circumventing the prohibition on monetary
financing, which is a treaty requirement. And, when they lend, both have to lend against good
collateral. What the President of the ECB did was to restate these constraints and to explain
a number of conditions that would need to be met to fit into these strict criteria. So that was
about reaffirming the rules. To be clear: the ECB did not take a decision. The ECB did not
invent a new rule. That was just about enforcing existing rules in that particular very new
case. In an unforeseen, untested situation, there was a need to clarify how the rules would
apply.
You had an ECB president saying emergency support for Ireland's banks could be
withdrawn if there's no bailout. And yet once there was a bailout - and this remains
very controversial in Ireland - a demand to impose losses on senior bondholders was
refused on three occasions.
That's a totally different discussion, in terms of size. We are talking of bailing in or not bailing
in senior bondholders which would have been in the order of €3 billion or €4 billion, when in
late 2011, the issue of burden sharing of senior debt issued by Anglo Irish Bank was on the
programme's agenda. You can compare this figure to the total ECB and Central Bank of
Ireland lending - Eurosystem lending, all in all.
At the moment when the programme started, in November 2010, this was in the region of
€140 billion if I'm right, which is 85 per cent of Irish GDP and which was one-fourth of all
Eurosystem lending, given that the capital key of Ireland in the ECB is 1 per cent.
You should also bear in mind that in late 2011, the Irish government was in the process of
undertaking a very significant recapitalisation of Irish banks to an amount of around ¤24bn,
or approximately 14% of GDP. Had confidence been shaken by the bail-in, more money
could have been required for recapitalisation, ultimately impinging on the Irish taxpayer. So
these are the numbers.
So we are talking of something which would have been limited in size anyway and which
would have come on top of something which has been decided. - The bailing in of junior
bondholders, which took place, was also significantly larger, €14 billion I would say. We are
talking of something which would not have made a difference in terms of programme
funding... I say at the time because you have to judge the discussion based on the
information and based on the constraints that were there at the time, right? You cannot
revisit the past and the environment has changed.
I'll tell you why. At the time, the situation was that there was international and European
consensus that the senior bondholders in a restructuring should not be bailed in at European
level. This had been said at G20 level, if I'm not wrong, and there were significant - or very
elevated - financial stability concerns related to contagion, not only within Ireland but also
throughout the euro zone generally. I was not there. I'm just explaining the arguments. The
issue was to weigh the potential benefits of adding €3 billion-€4 billion or decreasing the
burden by €3 billion-€4 billion or shifting €3 billion-€4 billion to one particular stakeholder,
which were the senior bondholders, against the fact that there was no international
consensus. Or rather, the international consensus was against it. There was no European
framework and there were significant financial stability risks. So that was the judgement at
the time.
If the same question were to be asked today, the answer would be extremely different
because now we do have international consensus, we have European consensus, and as a
matter of fact we have European law (i.e. the Bank Recovery and Resolution Directive). So
we've moved on. The system has moved on from the bailout culture to the bail-in culture.
You can say it is unfortunate, that the question was asked in these terms at the time and I
would agree but that was the situation at this time in Europe and also at the global level. Now
we've moved on and these kind of questions hopefully will not be asked any more,
anywhere.
Do you feel, given the intensity of debate on this question in Ireland and the extent of
ECB support for Ireland's banks, that the ECB received a bad rap in the debate?
I can understand why the discussion has taken place and it just highlights the importance of
this bail-in discussion. In a sense it vindicates everything which has been done since ... at
the European level and ... at global level, most lately this new G20 decision on the Total Loss
Absorption Capacity which is also about bailing in bondholders. It shows how careful we
have to be when it comes to sharing the burden in a crisis. It shows how political the
discussion can be and it shows the need for a clear framework before the crisis happens. But
we didn't have it then. It's just unfortunate that this happened at that place and at that
moment. Now hopefully we have a stronger framework. So we've learned. Not just the ECB,
we collectively as public authorities. Collectively we have learned from this and we now have
a stronger framework.
What people in Ireland or elsewhere who would say that's all very well but that it's a
little bit late now in terms of the cost of Ireland's rescue?
We are preparing for the next crisis. We have to learn the lessons. It's our duty to learn the
lessons. As I said, meanwhile, Ireland has been supported. It has been supported by the
euro group, by the ESM, the EFSF, it has been supported by the IMF, and it has also been
supported by the ECB within our own mandate, in numbers, in size...
In this period you were in Paris. Do you have any observations as someone working in
the French system about what was going on in Ireland at this time? It's clear that the
Irish government - in the weeks after Lehman Brothers failed - guaranteed the
liabilities or the entire Irish banking system.
What I can say is that there was a certainly a lot of proximity between the views of the
French government and the views of the ECB at that time, on several accounts.
First, that the decision, that the blanket guarantee on deposits was not the right decision to
take. This was also the ECB's view because it created issues elsewhere in the euro zone.
And second, that there was high financial stability risk, that there were contagion risks which
justified a very careful look at these burden-sharing issues, so I think that the view was not
different in Paris. And certainly that Ireland had to be supported, which the French
government did also by supporting the programme and by being instrumental in the creation
of the EFSF...
What would have been the preferable route for the Irish government to take at that
time?
It's so difficult to take these kinds of decisions. I certainly would not claim to pass a moral
judgement here. You have to take decisions based on the information you have. There were
many negative consequences, and I take it that these consequences were not foreseen
when the decision was taken...
That remains the view?
From a European perspective, many of the interactions and cross border consequences and
effects were not properly understood initially and that's one reason why, in a sense, the euro
zone authorities collectively let the crisis develop and deepen. These kinds of interactions
and spillovers were only gradually understood. It was only late down the road for instance
that the ESM was created, finally, with adequate size. So it has taken quite some time for
Europe to understand what was going on and that this was a regional crisis. It was not only a
set of local issues, but one with the potential to disrupt the system as a whole. That's a
collective responsibility, not only an Irish one.
On deflation / Greece...
...The starting point is not deflation, but inflation being low, far away from our definition of
price stability which is below but close to 2% in the medium term. So the discussion is on the
risk of inflation being too low for too long and on the available instruments if we have to do
more. Deflation would be a compounding factor, I would say, because if the euro zone were
to fall into deflation, which is not the case today, but it certainly is a risk, it is a limited risk but
it is a risk...
We don't need to be in deflation to worry about low inflation, low inflation is bad enough. So
we have that discussion. An important part of that discussion relates to the impact of the low
oil price and whether this is a temporary or permanent shock to inflation...
The usual answer in the ECB would be to see if that's temporary ... and this is what we've
done, usually faced with commodity price shocks to commodity prices, up or down. This is
what we've done in 2009 for instance, the last time we saw a significant decrease in
commodity prices.
This time may be different. It may be different because we are starting from a different place
which is extremely low inflation, extremely low headline inflation and also decreasing inflation
expectations in the medium-term, and we see a stronger link between medium term
expectations and short term inflation numbers/outcomes. So anything that happens to
headline inflation rates has potential to feed into long term inflation expectations and that's
what we have to be wary of, where we want to be careful.
And then when it comes to possible instruments, the Governing Council has been clear
already that if anything additional had to be done, this would be about changing the pace and
composition of our asset purchases, meaning that we don't see scope to cut interest rates
further. We are at the lower bound in terms of interest rates.
We therefore have a discussion in terms of how to expand the universe of assets which we
are buying if needed and, as I think I've said already publicly, if we want to significantly
expand the universe of assets which we buy, the base-line option is to buy sovereign bonds.
Then you have all kinds of technical questions which are being discussed by ECB staff and
the Eurosystem more generally so that's where we stand.
Newswires say a programme of €500 billion may be in play?
I don't really comment because that's a technical decision going on, we'll discuss it on
January 22nd and no decision has been taken in this respect.
Is it fair to say that the question must be if opening the door to QE the question must
centre whether you have a programme large enough to achieve what is required but
which isn't too large to disrupt the economy and to stoke too high an inflation rate?
Let me put it extremely simply: for it to be efficient is has to be big. How big is big enough?
This has to be an informed decision based on what we know are the transmission channels:
is it more a direct impact on interest rates, is it more on the so-called portfolio rebalancing
effect, that banks would buy other kinds of assets, etc? Given the persistent degree of
fragmentation that we have in the euro zone, this would also depend on the scope, on the
universe of assets, on which government bonds we buy. So you have a set of connected
decisions which are being studied. The only thing I can say is that for it to be efficient it would
have to be big.
There must be a preference for unanimity yet the Governing Council is far from
unanimity?
If you would need unanimity all the time, we would not need a Governing Council. That's a
serious answer. We have monetary policy committees all throughout the world, and the
reason we have monetary policy committees is to have diversity of views, an exchange of
views, because nothing is ever that simple. And that particular decision is probably even less
simple than usual. It's a new instrument.
There may be unintended consequences, there may be negative impacts. It might create
risks to financial stability because it will drive assets prices up. We want to know precisely.
So we want to exchange views. We want to make sure we've answered all questions, that
whenever a negative collateral effect is identified that we have an answer... that we know
how to mitigate it... At the end, certainly the larger the number of governors who vote for it
the better because it shows that we've taken all concerns on board and found the answers,
so certainly it's preferable to have as many governors on board.
Mr Weidmann in particular has concerns about this?
I will not comment on Jens Weidmann who sits in the Council in a personal capacity but
throughout this crisis there have been concerns raised by the Bundesbank, which are
legitimate concerns and which had to be addressed. These are good questions to ask, and
then it is our duty to try to find answers.
We have the precedent of OMTs, which was also a new instrument designed to face a new
situation in our monetary union, which was redenomination risk, the risk of countries being
pushed to exit by financial markets. This instrument raised many questions.
We've spent some time to have a broad discussion in the Governing Council to have the
right way to design it to have a broad discussion, answer as many questions as possible, and
at the end it seemed as if we had answered almost all questions and all but one governor
agreed to it, this is public knowledge.
How big a decision is this now, is this test faced by the ECB. How big a test is this of
the ECB's credibility and from the perspective of the credibility of the European
authorities that you have it within your capacity to turn the ship around and engineer
recovery?
The way you ask the question is exactly the right way. The situation we are facing is a test
for European authorities, all of them, including but not only the ECB. They have to make the
case in a convincing way to the European people that they use all available instruments to
move the European economy out of the situation it's in today, before it becomes a trap for
the economy, which is low growth and low inflation.
So we have to make the case in a convincing way that we have the resolve and the
instrument to move the European economy out of the low growth, low inflation situation
before it becomes a trap... And then all institutions have to contribute according to their
mandate. The ECB has a mandate which has to do with inflation. We certainly have to act
and show in a convincing way that we have instruments to act to deliver on our mandate
When it comes to growth, this is really up to governments to answer given their instruments.
That has to do with fiscal policy and with structural reforms but the answer has to be
collective.
Then there is the matter of Greece. Will the uncertainty surrounding the Greek election
on January 25th delay any decision on quantitative easing to be taken that day?
Not at all, not at all. These are two different discussions.
What's the position of the bank in respect of Mr Tsipras? He is ahead in opinion polls.
He is looking to increase the minimum wage, to decrease the burden of the debt. He's
looking for a number of things yet there are whispers out of Berlin saying Greece will
be on its way out of the euro zone if Mr Tsipras doesn't play ball?
First, any talk of Greece exiting the euro zone is unreasonable and unrealistic. There has
been an extremely strong commitment by European leaders to maintain the integrity of the
euro zone, back in June 2012 and ever since this was confirmed. So there is no discussion
on an exit and nobody in Europe is working on an exit. So that's really not a discussion.
Now when it comes to policies the ECB is not a political institution, so we'll take the outcome
of the election as it is. This is a matter for the Greek people to decide. We'll engage with the
new government whenever it is identified or in place or in charge to know more about their
policy programme and the continuation of the programme. And certainly different government
will have different conceptions about what a reform programme should look like, which is just
democracy. But I don't want to pass a judgement here.
What we've said is that whatever happens in Greece, the ECB will have to abide by its rule
but that's nothing new. This has been made public last week. We have a rule that any
government collateral can be accepted under monetary policy operations either only if its
credit is rated well enough or, if it's not well rated enough, if the country is under an EU/IMF
programme. And this is not new. This has been ECB policy since 2010.
Second we've made it clear that the so-called Securities Market Programme portfolio of
Greek bonds bought by the ECB cannot be restructured because that would be equivalent to
granting an overdraft to the country and that would be contrary to article 123 of the treaty.
The liabilities are in the order of €25 billion?
Close to €20 billion.
We're not passing judgement, we are not putting pressure on anybody, we are making clear
what our own constraints are in the discussion. These are constraints on us, not pressure we
would be putting on others.
The current Greek programme ends in February. So a new Greek programme is
required then for the ECB - under its own rules to continue - supporting Greek
banks?
That's absolutely right. But it's not for us to lead the discussion on a new programme. That's
between the new Greek government and the euro group and the Commission.