“the european monetary union – return to stability”
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“The European Monetary Union – Return to Stability”. Klaus Regling, CEO of EFSF EESC, 9 November 2011. The Euro: a success story. Price stability Average inflation over last twelve years close to 2% Relative fiscal discipline - PowerPoint PPT PresentationTRANSCRIPT
“The European Monetary Union – Return to Stability”Klaus Regling, CEO of EFSF
EESC, 9 November 2011
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The Euro: a success story
Price stability Average inflation over last twelve years close to 2%
Relative fiscal discipline Aggregated fiscal deficit of eurozone before financial crisis at 0.6 % of GDP USA, UK and Japan close to 3% of GDP in 2007
EMU stimulated cross border trade Protection of Single Market against exchange rate volatility
Higher GDP growth*
Second most important world currency
* McKinsey, KFW
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EMU better positioned than other currency areas
Source: IMF April 2011Euro area without Estonia
Fiscal balance, euro area vs USA and Japan (in % of GDP)
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But, EMU needs to function better
Lack of fiscal discipline in some Member States led to sovereign debt crisis
Macro-economic imbalances emerged through loss of competitiveness
Lack of control over data
No crisis resolution mechanism
Problems emerged during first decade and were aggravated by global crisis
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Member States have reacted …
… at national level
Fiscal consolidation/debt reduction
Structural reforms to enhance growth potential
Measures to avoid excessive economic imbalances
Improving the health of the banking sector
… at European level
Better governance of EMU
Stronger financial market supervision
Credible statistics
Crisis resolution mechanism
National measures are showing results
Source: European Commission: Forecast – Spring 2011
Fiscal balance, general government (as % of GDP)
Unit Labour Costs relative to Germany, nominal (1998 Q1=100)
Portugal GreeceIrelandGermany
Current account balance (as % of GDP)
Source:OECD
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Enhanced economic governance at European level
■ Reinforcing the Stability and Growth Pact (SGP)■ Possible sanctions in corrective and preventive arm■ Reduced possibilities for political interference
■ SGP complemented by “European Semester”■ To avoid negative spill-over effects
■ New “Excessive Imbalances Procedure” ■ Multilateral surveillance to tackle imbalances early – also sanctions possible
■ “Euro-Plus-Pact”■ National measures to foster competitiveness■ Introduction of constitutional fiscal rules
■ “Europe 2020 strategy”■ Structural reforms to enhance growth and employment
■ More efficient decision-making process ■ Reinforcing the Eurogroup■ Creation of Euro Area Summit
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A clear commitment to future financial stability
■ Comprehensive regulatory reform agenda for financial markets■ Implementation of Basel III■ Regulation of Rating Agencies ■ Regulation of Alternative Investment Fund Managers (Hedge Funds)
■ New European Institutions■ Three new supervisory authorities – EBA, EIOPA, ESMA – to oversee banking,
insurance and securities markets■ A “European Systemic Risk Board” (ESRB) to monitor macro-economic risks
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European Financial
Stabilisation Mechanism “EFSM”
€60 bn
Available to all 27 EU member states
A new framework for crisis management
€750bn Financial Stability Package
European Financial Stability Facility
“EFSF”
€440 bn
For euro area Member States
International Monetary Fund
€250 bn max
Up to half the amount drawn fromEFSF and EFSM
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EFSF: a lean organisation
Board of Directors*
CEO Klaus Regling + about 20 staff covering:Operations:
Funding strategyLendingRisk management
ResearchLegalCommunicationCorporate governance, Audit, accounting & admin
Finanzagentur (German DMO)
Front/Back office debt issuance
cash managementrisk management
European Investment Bank
Accounting Documentation
Infrastructure (Facility)
ECB (Account opened)
European Financial Stability Facility
Shareholders Euro Area Member States
Founded 7 June 2010 with Tenure of 3 years - up to June 2013
Based in Luxembourg (“société anonyme” under Luxembourgish law)
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EFSF: AAA credit rating
AAA Stable
Aaa Stable
AAA Stable
The top rating and the long-term issuer rating reflect:
Strong shareholder support
Credit enhancement
An organisation supported by the best expertise
Conservative strategy of funding and investment
EFSF bonds are eligible as ECB collateral
Financial assistance programme for Ireland
Objectives of the programme Immediate strengthening and comprehensive overhaul of the banking
sector Ambitious fiscal adjustment to restore fiscal sustainability, correction of
excessive deficit by 2015 Growth enhancing reforms, in particular on the labour market, to allow a
return to a robust and sustainable growth
Financing The total €85 billion of the programme will be financed as follows:
– €17.5 bn contribution from Ireland (Treasury and NPRF*)– €67.5 bn external support
– €22.5bn from IMF– €22.5bn from EFSM– €17.7bn from EFSF + bilateral loans from the UK (€3.8bn),
Denmark (€0.4bn) and Sweden (€0.6bn)
Disbursements will be made over 3 years with an average loan maturity of 7½ years**
Ireland
IMF
EFSM
EFSF+bilateralloans
* National Pension Reserve Fund
** Maturity and lending costs are subject to revision following euro zone summit of 21 July
€35 billion
€50 billion
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EFSF inaugural issue : record breaking investor demand
On 25 January 2011, EFSF placed its inaugural issue in support of Ireland.
Record breaking order book of €44.5 bn
Orders received from over 500 investors
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Breakdown by investor type
Geographical breakdown
Pension fund3%
Private banks2%
Corporate1%
Hedge fund1%
Central Bank/Govt/Sov wealth
fund44%
Insurance10%
Banks13%
Fund managers
26%
UK11%
Middle East2%
USA3%
Americas-others2%
Asia-Japan22%
Rest of Europe9%
Eurozone37%
Asia-ex Japan14%
Amount placed €5 billion
Maturity 18/07/2016
Coupon 2.75%
Initial pricing Mid swap +6bp
Reoffer yield 2.892%
Reoffer price 99.302%
Settlement date 1 February 2011
Lead managers Citi, HSBC, Société Générale
Effective lending cost 5.9%
Amount transferred to Ireland €3.6 billion
Financial assistance programme for Portugal
Objectives of the programme Restore fiscal sustainability through ambitious fiscal adjustment
Enhance growth and competitiveness via reforms and measures, i.e. Freeze govt. sector wages until 2013, reduce pensions over €1500 Reform unemployment benefits and reduce tax deductions Execute an ambitious privatisation programme (TAP, Caixa Seguros …)
Improve liquidity and solvency of financial sector Banking support scheme of up to €12 billion to provide necessary capital for
banks to bring Tier 1 capital ratios to 10% by end 2012 in case market solutions cannot be found
Financing The total €78 billion of the programme will be financed as follows:
– €26 billion from IMF– €26 billion from the EU (EFSM)– €26 billion from EFSF
Disbursements will be made over 3 years with an average loan maturity of 7½ years*
IMF
EU
EFSF
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9,1
5,9
4,5
3
2010 2011 2012 2013
GDP deficit reduction objectives
% o
f GD
P
* Maturity and lending costs are subject to revision following euro zone summit of 21 July
North America1%
UK12%
Asia-ex Japan19%
Euro zone43%
Rest of Europe4%
Asia-Japan21%
First issue for Portugal
On 15 June 2011, EFSF placed its first issue in support of the Portuguese programme
10 year maturity
Orders received from over 100 investors
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Breakdown by investor type
Geographical breakdown
Central Bank/Govt/ Sov
wealth fund37%
Insurance/ Pension funds
10%
Banks25%
Fund managers28%
Amount placed €5 billion
Maturity 05/07/2021
Coupon 3.375%
Initial pricing Mid swap +17bp
Reoffer yield 3.493%
Reoffer price 99.013%
Settlement date 22 June 2011
Lead managersBarclays, Deutsche Bank, HSBC
Effective lending cost 6.08%
Amount transferred to Portugal €3.7 billion
Middle East4%
North America4%
UK5%
Asia-ex Japan24%
Euro zone33%
Rest of Europe8%
Asia-Japan22%
Second issue for Portugal
On 22 June 2011, despite volatile market conditions, EFSF placed its second issue in support of the Portuguese programme
€3 billion issue with a 5 year maturity
Order book in excess of €7 billion
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Breakdown by investor type
Geographical breakdown
Central Bank/Govt/ Sov
wealth fund54%
Others3%
Banks25%
Fund managers18%
Amount placed €3 billion
Maturity 05/12/2016
Coupon 2.750%
Initial pricing Mid swap +6bp
Reoffer yield 2.825%
Reoffer price 99.636%
Settlement date 29 June 2011
Lead managersBNP Paribas, Goldman Sachs, RBS
Effective lending cost 5.32%
Amount transferred to Portugal €2.2 billion
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The new EFSF
Increased guarantee commitments of €780 billion
Effective lending capacity of €440 billion
New instruments linked with appropriate conditionality: Intervention in primary and secondary markets Precautionary programmes Finance recapitalisation of financial institutions through loans to governments including in non-
programme countries
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Primary market purchases (PMP)
Objective: maintain or restore a Member State’s relationship with the dealer/investment community and reduce the risk of a failed auction
Circumstances
Countries under a macro-economic adjustment programme or to drawdown of funds under a precautionary programme.
Primarily used towards the end of an adjustment programme to facilitate a country’s return to the markets
Conditions: Those of macro-economic adjustment programme or the precautionary programme as stated in relevant MoU
Limit: No more than 50% of the final issued amount
Once purchased: EFSF couldResell to private investors once market conditions have improvedHold until maturitySell back to countryUse for repos with commercial banks to support EFSF’s liquidity management
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Secondary Market Purchases (SMP)Objective:
1.Support the functioning of the debt markets and appropriate price formation in government bonds
2.Market making to ensure some liquidity in debt markets
3.Give incentives to investors to further participate in the financing of countries
Conditions:
Programme countries: conditionality of the programme applies as in MoU
Non-programme countries: conditionality refers to ex-ante eligibility criteria as defined in the context of the European fiscal and macro-economic surveillance
framework appropriate policy reforms as in MoU
Procedure:
Initiated by a request from a Member State to Eurogroup president.
Exceptionally, ECB could issue an early warning.
In all cases, subject to an ECB report identifying risk to euro area and assessing need for intervention.
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Precautionary credit linesObjective:
prevent crisis situations by assistance before MS face difficulties raising funds in the capital markets
avoid negative connotation of being a programme country
In line with established IMF practices:
Precautionary conditioned credit line (PCCL) access limited to countries with sound economic and financial situation, Clear track record of access to capital markets, respect of SGP* and EIP* commitments
Enhanced conditions credit line (ECCL) access open to countries with moderate vulnerabilities that preclude access to PCCL
Conditions:
Beneficiary placed under enhanced surveillance during its availability period
All conditions stated in MoU
Size: Typical size 2-10% of GDP of beneficiary country.
Duration: 1 year renewable for 6 months twice
Procedure: lighter request procedure for swift implementation
*SGP: Stability and Growth Pact, EIP: Excessive Imbalances Procedure
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Finance recapitalisation of financial institutions Objective:
limit contagion of financial stress by assisting a country to finance recapitalisation of financial institution(s) at sustainable borrowing costs.
Open to all MS, particularly to countries with disproportionally large financial sector.
Circumstances: Any loans must be requested and disbursed to Member States. EFSF will not loan directly to financial institutions
In order to determine eligibility for an EFSF loan, a three step approach is applied:1.Private sector (shareholders)2.National level (government)3.European level (EFSF)
Conditions:
Sine qua non condition of restructuring/resolution of financial institutions.
Compliance with European state aid rules
Additional conditionality on financial supervision, corporate governance and domesic laws on restructuring/resolution.
All conditions stated in MoU
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A comprehensive approach – the euro summit of 26 October 2011
Optimising the EFSF’s firepower using two options Credit enhancement approach – partial protection certificates for newly issued euro area Member
States’ bonds Co-financing with private investors (CIF – Co-Investment Fund)
Second rescue package for Greece including agreement on Private Sector Involvement Proposal of a voluntary bond exchange with a nominal discount of 50% on notional Greek debt
held by private investors. Exchange to be completed early 2012 Collateral for voluntary bond exchange of up to €30 billion Additional programme financing of up to €100 billion until 2014, including required recapitalisation
of Greek banks
Recapitalisation of the European banking sector Facilitating access to term-funding through a coordinated approach at EU level Increasing the capital position of banks to 9% of Core Tier 1 by the end of June 2012
Governance Strengthening of governance structure – bi-annual Euro Summit Strict surveillance of euro area Member States
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The need for a permanent crisis mechanism
Unlike the US, the Euro zone has no fiscal centre to tackle crises
Europe already had Balance of Payments instruments in place for EU members and EU neighbourhood countries but no financial assistance mechanism for euro area members
The Great Depression and the Gold Standard (fixed exchange rate) made the need for a global institution to provide financial support clear
This is why the International Monetary Fund was established in 1944
Why?
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Creation of a permanent crisis mechanism
The creation of the European Stability Mechanism (ESM)
an intergovernmental organisation under public international law, operational from mid-2013
ESM will take over all instruments of the new EFSF effective lending capacity of €500 billion total subscribed capital of €700 billion, with paid-in capital (€80 billion) and
committed callable capital and guarantees (€620 billion) private sector involvement
– Case-by-case based on debt sustainability analysis– Following established IMF policies– ESM will claim preferred creditor status – Standardized and Collective Action Clauses (CACs) will be included for all new
euro area government bonds from June 2013
ESM treaty to be ratified by euro zone country parliaments in 2012.
Member States took action National austerity packages and reforms to enhance competitiveness Sharpening of Stability and Growth Pact European procedure to tackle macro-economic imbalances Strengthening of Financial Market Supervision New crisis resolution mechanism New powers for Eurostat
Through adjustment, reforms and deeper integration The European Monetary Union will function better Eurozone will play stronger role globally
But is more needed? European Finance Minister? Commissioner for Eurozone? Right of Action to take Member State to European Court of Justice? True Political and Fiscal Union including Eurobonds? Democratic legitimacy?
Conclusions: from crisis to a better functioning euro area
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