Benoît Coeuré: Interview in Politis
Interview with Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, in Politis, conducted by Mr Yannis Seitanidis on 8 March 2015.
* * *
The ECB's Governing Council had a meeting in Nicosia, two years after the "bail-in"
agreement on the recapitalisation of Cyprus' banking system. Many questions about
the role of the ECB during the crisis of March of 2013 still remain unanswered. Did the
ECB play a constructive role or did it put pressure on the Cypriot government through
the emergency liquidity assistance (ELA) mechanism?
Under the rules of the Eurosystem, ELA can only be provided by national central banks to
solvent banks. So, what was the situation in March 2013? The Central Bank of Cyprus had
been providing ELA to the two largest banks, which the central bank, as the supervisor, had
deemed solvent. But the negotiations on an EU/IMF programme, which had started in June
2012, had dragged on until the situation of the banking sector had become critical, and the
solvency of the two largest banks came under much closer scrutiny. The ECB simply
implemented the existing rules when it concluded on 21 March 2013 that a programme would
need to be in place in order for the ELA provision to continue.
The bail-in was something unexpected two years ago and now is a part of the
resolution procedure for European banks. Was Cyprus a laboratory where the
resolution of banks was tested?
No. The truth is that the financial sector of Cyprus was exceptionally large - in relative terms
- by European standards, and its capital needs were significant. The two largest banks were
estimated to need fresh capital in excess of 40% of GDP, as an independent due diligence
process revealed. If the sovereign were to shoulder this burden, on top of already strained
public finances, public debt sustainability would be critically endangered. Burden-sharing with
private investors was not only inevitable, but it also significantly reduced the financial impact
on Cypriot taxpayers and protected the vast majority of depositors. I wouldn't expect this to
happen again in any other place, given that the Bank Recovery and Resolution Directive now
requires banks to build a significant buffer of so-called "bail-in-able" debt, meaning that
investors will be hit before depositors have to pay.
The unpleasant legacy of the banking crisis - which still causes pain in the real
economy - is the huge number of non-performing loans. There is an ongoing debate
in Cyprus about how the country will handle this problem, a debate which practically
"freezes" the last review of the Cypriot economic adjustment programme. Do you see
any signs of a derailment of the Cypriot programme? What might be the effects on the
banking system?
Cyprus has a remarkable track record in implementing the conditionality of the programme.
One of the key objectives of the programme is to reduce the high level of non-performing
loans and restructure the excessive indebtedness of the private sector. This is a key
condition for the banking system to be in a position to finance economic growth and job
creation. In this respect, a swift adoption of the insolvency framework and application of the
foreclosure framework are not only key elements to guarantee compliance of Cyprus with the
programme, but also essential to support the economic recovery.
The main political goal of the government is to conclude the programme and the
financial assistance provided by the Troika earlier, probably before the end of this
year. The ECB is part of the troika. As such, does it consider this goal achievable?
Whether or not there should be a follow-up arrangement is for the Cypriot government to
decide. What matters to the ECB is to establish the conditions for sustainable growth and for
a lasting return of Cyprus to market funding when the programme ends, i.e. in the spring of
2016. To this end, it will be essential that the banking sector has turned the corner and the
non-performing assets have been addressed.
The ECB is starting its programme of quantitative easing (QE). How and when can
Cyprus benefit from that?
Cyprus should and will benefit from our asset purchase programme. This will be possible
whenever the review is successfully concluded.
Many analysts interpret QE as Europe's first step away from austerity programmes
and towards more growth-friendly policies. I also read that inflation is the safest way
for European countries to reduce their debts and the ECB will help them move in that
direction with its QE. In that respect, is QE a programme created as a result of
economic need, of political pressure, or as a result of fear for the future of the euro?
The ECB's sole mandate is to maintain price stability for the euro area as a whole, which we
define as consumer price inflation being below, but close to, 2%. The Governing Council saw
there was a risk of inflation being too low for too long and decided to act under its mandate.
This has nothing to do with politics, nor with the future of the euro. As all Governing Council
members have acknowledged, QE is just an instrument of monetary policy.
Considering the experience in other countries, such as the US, under what conditions
will QE have an impact on the real economy?
Purchases of public securities reduce the borrowing costs of the private sector given that
many financial instruments are priced with reference to the domestic sovereign yield curve.
They also provide an incentive for banks to supply more credit to firms and households
through the so-called "portfolio rebalancing" effect, which in turn supports consumption and
investment. And finally, they signal that the ECB - in line with our forward guidance - is
committed to maintaining an accommodative monetary policy for an extended period of time,
which pins down interest rates at a very low level - again benefiting firms and households.
We have already seen, after the announcement, some positive effects of our measures in
these directions. Lending rates to households and firms have come down since the summer
across the entire euro area. And credit growth to the private sector turned positive in
December - on a month-to-month basis - for the first time since mid-2012 and continued to
recover in January.
That said, monetary policy can support short-term growth but it cannot lift production and
living standards in a durable way. This can only happen if euro area governments use this
window of opportunity to step up reforms in their economies.
Last, but not least, some questions regarding Greece. The Greek government has
declared that the Troika and the Memorandum of Understanding no longer exist. How
would you describe the state of play?
On 24 February, the European Commission, European Central Bank and International
Monetary Fund considered the list of reforms presented by the Greek government as a valid
starting point for a successful completion of the review under the current arrangement, and
the Eurogroup agreed to extend it by four months. In this context, the authorities have
committed to fully cooperate with the three institutions, in order to allow for a speedy and
successful conclusion of the review. We are looking forward to working with the Greek
authorities. Time is running short.
The new government looks determined to boost reforms. Besides, this is the only way
in which to restore trust with the European authorities. But the country has and will
have specific financing needs over the next 18 months. Is a new programme for
Greece a scenario that's being considered?
The Eurogroup has outlined a clear sequence. When the current review is concluded
successfully, and if the Greek authorities so wish, a follow-up arrangement will be discussed
with the Eurogroup. But it is first and foremost the responsibility of the Greek government to
create growth and regain financial independence. This requires in my view a clear resolve to
boost economic reforms, a prudent fiscal path and an unequivocal confirmation that Greece
will honour its international commitments. Doubts about the country's creditworthiness will
then recede and foreign investors will return to Greece.
The new government is negotiating with the European Commission, the ECB and the
IMF in full awareness of the fundamental hypothesis that in the end no one would want
a Grexit. If that is true, why didn't Europe realise earlier that the Greek programme was
not working effectively? The recession and unemployment in Greece cannot be
compared with the recession and unemployment in Cyprus, Ireland, Portugal and
Spain. My question is: would a failure of the programme eventually undermine the
future of the euro area?
From a very difficult starting position, and through painful efforts, Greece has made good
progress in restoring fiscal and external sustainability, as well as in putting banks on a sound
footing and strengthening the basis for growth and job creation. By the end of 2014,
economic indicators were clearly pointing to positive growth and better prospects ahead.
Indeed, in its forecast released one month ago, the European Commission expected Greece
to grow by 2.5% in 2015 and 3.6% in 2016, one of the highest growth rates in the euro area.
And the arduous efforts of the Greek people need to be recognised here. But let's not fool
ourselves: adjustment was inevitable and, believe me, it would have been much worse
without European and international support.
That said, we should always learn from the past. For instance, I believe that the programme
should have put more emphasis, at an earlier stage, on reducing rents - in the economic
sense - and fighting vested interests in the Greek economy, to allow for a fairer sharing of
the adjustment burden. Also, in its crisis-fighting toolbox, Europe did not have at its disposal
instruments available to institutions such as the World Bank, which supports social safety
nets when countries undertake structural adjustment.
According to some rumours, the ECB played a key role after the Greek election,
accelerating the developments by exerting pressure on the Greek government through
the ELA mechanism. Are you happy with the impression (given by various media) that
the ECB is "manipulating" elected governments? Is this appropriate for a central
bank? (The US President and the Chair of the Federal Reserve, for example, sit on the
same side of the table, not on opposite sides).
If you are referring to the decision taken by the Governing Council on 4 February to suspend
our waiver for Greek government-related collateral, the intention was exactly the opposite: it
was a decision to enforce our rules in a transparent and accountable way, free of political
interference. Let me explain. Given their low credit rating, Greek government-related bonds
should in principle not be eligible at all as collateral for our refinancing operations. In 2010,
the ECB took an extraordinary decision to suspend the minimum rating threshold for such
collateral (the so-called waiver), and allow them as collateral, on the premise that an EU/IMF
economic adjustment programme for Greece would be in place and implemented. After the
election, given the intention of the new government to substantially change or even terminate
the programme, the Governing Council could no longer assume that the programme review
would be successfully concluded, and the waiver was lifted. It will of course be reinstated
when such a prospect can again be assumed, based on the outcome of the discussions
between the Greek government and the institutions. I hope this will be the case soon, when
these discussions have made progress.
As for your comparison with the US: indeed, the ECB is the central bank of Greece, and we
have shown our commitment by continuing to provide liquidity, as a matter of fact, in
increasing amounts, to Greek banks, provided that they use it to fund the economy. The
central bank funding of Greek banks has doubled since end-2014 and today stands at more
than 100 billion euros. But the ECB is also the central bank of 18 other countries and we are
bound by the EU Treaties, which require us to lend to solvent banks, against adequate
collateral, and to refrain from financing governments. This applies to all euro area countries;
Greece is no exception in this respect.