Benoît Coeuré: Interview in Delo
Interview with Mr Benoît Coeuré, Member of the Executive Board of the European Central
Bank, in Delo, conducted by Mr Miha Jenko and published on 15 February 2014.
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Delo: Mr Coeuré, your last visit to Slovenia was in October 2012 when it hosted an ECB
Governing Council meeting. How do you see developments in the country since then,
over the last 16 months?
Benoît Coeuré: Over the last 16 months, Slovenia has been through a very difficult period,
with many serious challenges both from an economic and also from a financial standpoint.
The Slovenian authorities have acknowledged and understood the challenges and have
been addressing them in a systematic and serious way. The first appropriate and important
steps have been taken, in particular when it comes to the restructuring of the banking sector.
By completing the asset quality review and the stress tests they have reached a milestone,
allowing for the restructuring of the banking system. But there remains a lot to be done.
Indeed, what else should be done? What are the tasks that still lie ahead?
Both the Slovenian government and Banka Slovenije have a very good understanding of
what has to be done. This relates to three key issues. The first is financial sector
restructuring. This is well advanced. The asset quality review and the stress tests have been
important and have been done in a serious and professional way, but this is only the first
step. From now on you need a comprehensive reform of the banking system as part of a
broader strategy for the entire economy. In this respect there are quite a few further steps to
be taken. Second, there is the fiscal dimension, where you need to bring down the fiscal
deficit, but it is also very important to bring down the public debt. In this respect, Slovenia
must observe the recommendations issued by the European Commission regarding the
reduction of the structural deficit. This fiscal effort should be aimed towards a visible
reduction in the debt level. And the third aspect is obviously economic reform and improving
the efficiency of the economy. No other effort will be successful if the economy does not
become more efficient.
Yes, the IMF has also warned Slovenia in its latest report about the risk of rapidly
increasing public debt which could soon go beyond the hard-to-manage level of 85%.
What are the necessary steps to reduce this risk of unmanageable public debt and
high interest rate costs?
One of the key policy actions is privatisation, which can be very useful both to improve the
efficiency of the companies and banks and also to reduce Slovenia's debt level.
Slovenian banks were subject recently to a very strict and a very conservative review
by auditing companies Roland Berger and Oliver Wyman. In the end, there was the
impression that we are forced to apply the most extreme, the most pessimistic and the
most costly scenario as calculated by Oliver Wyman. Do you agree?
I don't want to pass a judgement on the stress test itself which was done by the Slovenian
authorities. In principle we are in favour of a strict approach to the stress tests. It is important
to be on the safe side, to be prepared for the future and it is important that the banks are
sound again so that they can lend to companies. So recapitalising banks should not be seen
as a cost but as an investment in the future, so that banks can extend new loans to the
economy. Slovenia has to address its banking legacy issues and be on the safe side.
Are you also going to support such a strict, conservative approach this year when
128 key European banks will be analysed? Are these banks going to be examined as
rigorously as ours?
Absolutely, it will be the same philosophy. We will discuss all the parameters with the
18 supervisors - the so-called "national competent authorities" of the 18 euro area
countries - within the ECB's new Supervisory Board, which met for the first time on
30 January. This will be the place where all the assumptions, parameters and choices will be
discussed. This will be the first important contribution made by the Single Supervisory
Mechanism to the euro area. The principles will be the same and they will be very strict, to
make sure that we know everything about the situation of the banks this time - and to be
sure that measures are taken to prepare for the future.
Several critical reviews of the Oliver Wyman financial consultancy appeared recently
in the foreign press. Why has the ECB decided to use Oliver Wyman, of all companies,
to carry out such a demanding task and what were the selection criteria?
There was an open, competitive selection process and Oliver Wyman came first.
Taxpayers in Slovenia have paid over €3 billion, nearly 9% of GDP, for the
recapitalisation of troubled state-owned banks alone. Banks are now full of capital.
But on the other hand they are not lending money to companies for their working
capital and investments. How do you see this controversy?
Part of the explanation has to do with the weakness of aggregate demand not only in
Slovenia but also across the euro area. Slovenia is a very open economy, selling a lot to
European markets. The overall weakness of growth in the euro area also weighs on
Slovenia. Now, it is true that the low level of ECB rates today translates very slowly to the
real economy. This is happening in many countries and it is not specific to Slovenia. It will
improve over time as we see convergence in the euro area and as we see reforms being
implemented in the countries. And this you can already see taking place in Slovenia in the
decrease in yields on the sovereign bond market. There has been a significant improvement
in the long-term interest rates on bond markets. Slovenia is one of the best performers in the
euro area in terms of decreasing bond yields, so that's a sign that convergence is taking
place. It takes time to feed into the real economy but it will happen; things are going in the
right direction.
What should be the main priorities for the Slovenian government and Banka Slovenije
to boost economic growth and improve lending to companies? Are there any
Keynesian recipes for fostering growth which you could recommend to us?
I think the priority currently is not really the Keynesian one. In Slovenia, the priority is to make
the economy more efficient, both in the private sector and in the public sector. This also
means that some companies should be moved from the public sector to the private sector
through privatisation. This will happen and it will also benefit the debt level. Some enterprises
will remain in the public sector - but their efficiency must also be improved. All the efforts that
are being made today by the government and by Banka Slovenije to restore the soundness
of the banking system are not going to achieve their goals, meaning to support growth and
employment, if the economy does not work better. It is good to inject capital into banks, but if
banks are facing projects that are not profitable they will be creating bad loans and make
losses and the capital will be burnt. So it is very important that, alongside the restructuring
and recapitalisation of banks, efforts are made to restructure the economy and to make it
more profitable. That is also the recommendation of the European Commission to all
countries and in particular to Slovenia in the so-called Macroeconomic Imbalance Procedure.
It is important that this is respected.
Haircutting the subordinated debt in Slovenian banks attracted a lot of public attention
and even anger in recent months in Slovenia. Why was it necessary to perform this
haircut in Slovenia, but not, for instance, in Ireland or other countries?
This is not specific to Slovenia. Europe has learned the lessons from the past crises and has
adopted a principle of responsibility for investors in bank bonds. All investors who put their
money in these bonds have to know that they will be part of the effort if anything bad
happens because bonds are an investment, not a deposit. These are the bail-in rules that
have been decided by the European authorities and are intended to protect taxpayers, who
should not be responsible for the situation of banks. When saving a bank, taxpayers should
come last, with shareholders coming first, followed by bond owners. This distribution of
responsibilities is now clear. This is not a decision of the ECB, it is a decision of the
European Council and the Commission, but one that we support.
True, but the decision is very recent and people didn't know before that something like
that could happen at all.
Slovenia is not the first case. It has already happened in Spain, for instance. But it's a
change in the regime, with the aim that taxpayers and depositors are better protected and
are not liable for the errors committed by banks.
The Bank Asset Management Company (BAMC) was set up last year in Slovenia and is
now being criticised for not being transparent enough. What should be the first
priorities and challenges for the BAMC?
The BAMC had a good start. It has built up expertise and human capital, started operating
and has already been receiving a first batch of bad loans. It now needs to continue its work
and to receive the next instalment of bad assets, subject to the authorisation by the
European Commission. Secondly, it needs to continue building up the institution itself so that
it is credible and independent. It is not only about restructuring the banking sector but also
about making the Slovenian economy function better. Bad loans are loans to the economy.
For this reason, the BAMC should take decisions that are in the interest of Slovenian
taxpayers and of the Slovenian people. It should keep resisting vested interests. For this
purpose it has to be independent and in this way it will best protect the interests of taxpayers
and workers in Slovenia.
The good news is that Moody's has just increased the ratings of the recently
recapitalised Slovenian banks. What should be done now by these banks to ensure
further improvement of their ratings so that they can improve their access to funding
and extend loans on favourable conditions?
Beyond the ratings, what matters for Slovenia is the renewed trust of financial markets and
investors, and the ultimate goal would be for these banks to be able to diversify their funding
sources in the market, which would make them more resilient, and in turn support the
Slovenian economy. Their objective should be to access to stable funding in financial
markets. Banks should now properly manage their loan books and make adequate
provisions, if necessary. But ultimately what matters most will be profitable projects in the
economy. And this does not depend so much on the banks but also on the government,
which needs to ensure a more efficient public sector, and on reforming the economy so that it
is more efficient and able to thrive in the European environment. The key to success,
therefore, lies in the real economy, not in the financial sector.
I agree. Slovenia's economy generates nearly 70% of GDP from exports. What is the
ECB's assessment of our main trading partners, Germany, France, Austria and Italy?
Could we expect more demand from these countries this year?
Certainly demand in the largest European economies is steadily improving. This is obviously
not enough, but growth is positive again and it is accelerating. All the recent signs from the
economy across Europe suggest that this scenario is again taking place. It is a scenario of a
slow but steadily improving growth, also in the larger European economies. So demand from
these economies is picking up and improving, and should benefit smaller, very open
economies such as Slovenia. So there is ground for optimism. The euro area is going in the
right direction. Two years ago, maybe even one year ago we didn't have this direction, this
steady and improving growth. Certainly it is not enough and everything should be done to
prop it up - but it is very important to know what the direction is.
So is the euro safe now after some very turbulent years when there was even
speculation it might break up? Is the euro on the safe side now, out of the worst
trouble?
The euro is no longer being challenged as a project. This is an important achievement.
European policy-makers have confirmed their commitment to the single currency project and
to the integrity of the euro area and this has restored trust in the euro in international capital
markets. This is why many international investors are now coming to the euro area - it's a
sign of trust in the reform process here. That's good news. What remains very challenging is
growth, which is too low, and it should be Europe's priority to support it not only in countries
with adjustment programmes but also in all other euro area countries. This cannot be
achieved through additional public spending but through additional investment. All countries
have to restore a climate of confidence that will be conducive to investment, and this includes
large economies such as Germany, France and Italy.
According to the latest figures, the inflation rate in the euro area has dropped as low
as 0.7%, the lowest level in years. How serious is the problem of deflation for the
ECB?
The Governing Council's assumption is that the rate of inflation will gradually increase
towards our target of close to, but below, 2%. We are however closer to the area where
inflation expectations could be altered and create downside risks to price stability. So we are
very vigilant regarding risks to our baseline scenario, which envisages inflation slowly going
back to 2% over the medium term. This is our primary mandate and we take it very seriously.
At its last meeting, the Governing Council firmly reiterated our forward guidance, whereby we
expect the key ECB interest rates to remain at present or lower levels for an extended period
of time. We remain firmly determined to maintain the high degree of monetary
accommodation that is appropriate for the euro area economy, and will not hesitate to take
further decisive action if required.
Could you explain why an inflation rate of 2% is better than, for instance, 0.2%?
Inflation being below 2% and close to 2% is the definition of price stability that the ECB has
chosen. In the uncertain environment with the euro area in transition and the participating
economies undergoing a lot of structural change, it is very important that the ECB sticks to its
inflation objective and maintains its credibility as an anchor for the reform efforts in Europe.
The reason why the 2% number has been chosen is that this is a level that is neither too high
nor too low. We know that inflation which is too high can be detrimental for the economy as it
can lead to destabilising feedback loops, for instance, through wage settlements and price
indexation, and ultimately erode trust in the currency. But very low inflation can also be
destabilising. That's why inflation which is too low is also contrary to price stability as it can
create a self-fulfilling spiral of expectations that prices will continue falling. That would
discourage households from consuming and companies would stop investing. This is the
definition of deflation. So we want to be in the safe area between high inflation and deflation,
and below but close to 2% is exactly the right level. Note that since 1998, when this number
was chosen, most of the major central banks around the world have converged towards the
same number: it has been adopted by the US Federal Reserve, the Bank of England and
most recently by the Bank of Japan.
In short, 2% inflation is some sort of a lubricant for the economy.
Such steadily increasing prices do not distort economic choices. My personal definition of
price stability is a rate of inflation which does not distort economic behaviour.
To come back to Slovenian issues: our authorities have taken the decision to avoid
using the ESM funds, which also carry certain conditionality. Based on the philosophy
that we will solve our problems by ourselves, we have also tried to sell bonds in the
US market. What is your view of that? Would it be better for Slovenia to return to the
euro market and issue euro-denominated bonds? After all, we are a euro area
country...
I don't have any advice to give to your finance minister. He certainly does what is in the best
interest of Slovenian taxpayers. In the medium term, stable funding for the Slovenian budget
would benefit from a mix of dollar issuance and euro issuance. But so far the funding
strategy has been successful.
The biggest opposition party in Slovenia has proposed changes in central bank
legislation to allow a representative of the political opposition to attend sessions of
the Governing Board of Banka Slovenije. Is this proposal in line with ECB policies?
We are in the process of looking at that particular proposal but it is clear that in every euro
area country, small or large, the independence of the national central bank has to be
ensured.
According to one estimate, the 128 largest European banks which will undergo the
asset quality review and stress test this year will require up to €500 billion of
additional capital. Is this a manageable amount?
It is absolutely premature to comment on any number. We are at the start of the process,
getting organised and collecting the data.
Once these tests have been completed, will European taxpayers be on the safe side?
Will they have any guarantee that such a banking crisis will never happen again?
The best safeguard to make sure that the banking crisis doesn't happen again is tough
supervision, which will be ensured through the Single Supervisory Mechanism that will start
operating in November. This is the best protection. The ECB, as the single supervisor in the
Single Supervisory Mechanism, will have to be tough. Together with the new banking rules,
this will be the best way of preventing future crises. I very much believe that taxpayers are
now much better protected than they were before the crisis, in particular thanks to the new
bail-in rules that make sure that investors in banks will be the first to cover any losses. If any
capital shortfall is identified by the ECB stress test and asset quality review, it will have to be
covered first by the private sector.
The ECB is a part of the troika, together with the IMF and the European Commission.
What is actually the ECB's role in the troika?
The ECB has had a very clear role since May 2010, when we were invited to join the troika
and advise the European Commission on matters where we have specific expertise. Those
are generally financial sector issues, the situation of banks and also the general
macroeconomic balance. This has been our role, but otherwise all the decisions related to
financial support to countries have been taken by the Eurogroup and by the countries
themselves. The Eurogroup is the politically and democratically accountable authority. Key
decisions can only be taken by authorities, or politicians who are accountable to their
parliaments. Decisions on reforms in individual countries can only be taken by local
governments under the scrutiny of national parliaments. The work of the troika has to be
accountable to democratic institutions. The ECB can explain what it does in the troika, but we
only act as an adviser.
The ECB is this year moving to a beautiful new building in Frankfurt. How many
people will work in the new building and what will change with the move?
The ECB's new building is a long-term project. All of our staff, some 1600 people, except
those in charge of banking supervision, will move to the new building. The new banking
supervisory body within the ECB will be located in another building in the centre of Frankfurt
because its staff have to be together. It is also good that the monetary policy part of the ECB
and the supervisory part are separated, as they are two different functions.
Additional question: Mr Coeuré, what is your comment on the key decisions taken by
the Governing Council of the ECB on 6 February?
The Governing Council has confirmed its main scenario of a steady recovery, with inflation
gradually moving back towards our policy objective of below, but close to, 2% over the
medium term. As explained by President Draghi, we didn't see enough reasons for policy
action at our last meeting. Over the next weeks and months, if risks to our main scenario
materialise, we will be ready to act, consistent with our forward guidance.