The ears pop as the lift zooms towards the top of the European Central Bank’s swanky new skyscraper in Frankfurt. It takes just seconds to reach the 38th floor, where executive board member Benoit Coeuré awaits.
These are busy days within the ECB, whose divided governors are examining a new scheme to buy up euro zone sovereign bonds in a bid to avert deflation. The Germans in the bank’s high command are not happy about this, yet the mood is defiantly calm. So quiet is Coeuré, who is French, that you’d hardly hear him if he was not sitting directly across the table.
Of the ECB’s contentious involvement in the Irish bailout, he is unapologetic. While he says the ECB is greatly encouraged by Ireland’s advancing recovery, he warns the State is still not out of danger. He has concerns about the budgetary stance, the banks and policies to help unemployed people find jobs.
Ireland
“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,” says Coeuré.
“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.”
This raises questions about the expansionary budget for 2015. Was he unhappy with the plan? “We would like the budget to be as conservative as possible. That’s our advice.”
Was the 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.”
Still, he offers no judgment on tax cuts in the budget or on mooted pay talks with public sector unions. Although Coeuré says he has no observations to offer candidates whenever the election takes place, he says fiscal “continuity” will be important for the next government.
“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.”
No matter who forms the next government, is he saying that the fiscal position will remain constrained?
“Let me phrase it positively,” he says. “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.”
Coeuré was speaking on Monday, before ECB governors entered their “quiet period” in advance of next week’s meeting and three days ahead of the appearance of Central Bank governor Patrick Honohan at the Oireachtas banking inquiry.
The ECB’s refusal to participate is a source of acute discontent in Dublin, prompting Taoiseach Enda Kenny to ask Mario Draghi to reconsider. So is the position settled? And will the ECB be co-operating in any way?
“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.”
But that’s not the end of it. “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.”
Has there 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.”
Coeuré demurs when it is suggested that this smacks of a change, and he won’t say what might be involved in such an engagement. Private meetings? The provision of paper records? “Whatever can be useful provided that it’s consistent with our legal framework, notably in terms of confidentiality.”
This brings us to the immense controversy surrounding the “Trichet letter” in which then ECB president Jean-Claude Trichet threatened to withdraw ECB support for Ireland’s banks if a bailout was not immediately sought. Did he go too far?
Coeuré says this was a reaffirmation of an existing ECB policy in respect of the provision of emergency support to insolvent banks. “The ECB is a rules-based institution. We have to make it clear what are the constraints under which we are operating. 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.
“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.”
Bond
holders There is also the matter of the ECB’s outright refusal on three occasions in 2010 and 2011 to allow the Irish authorities impose losses on senior bank bondholders, which still rankles. Coeuré says the answer today would be “extremely different” but that, alas, is too late in the Irish context.
“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 €24 billion, or approximately 14 per cent 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.”
He says junior bondholders lost €14 billion, arguing that a move on senior bondholders would not have made a difference at the time 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.”
The international consensus has since changed. “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.”
Does he think the ECB gets a bad rap in Irish debate? “I can understand why the discussion has taken place and it just highlights the importance of this bail-in discussion . . . 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.”
Quantitative easing
If all of that is concerned with the recent past, the present action in the ECB centres on whether it finally follows the quantitative easing campaigns of counterparts in the United States, Britain and Japan.
Coeuré is aligned with ECB president Draghi, who has made the case to buy bonds. But the debate is not won. Within Germany’s economic establishment, there are dire accusations that something underhand is afoot to rescue “southern Europe”.
He recognises quite readily that the question facing the bank is “even less simple” than usual.
Although data shows consumer prices declined at an annualised rate last month, he insists the euro zone is not in deflation right now. But this is a “limited” risk, enough to merit serious scrutiny. “We don’t need to be in deflation to worry about low inflation, low inflation is bad enough.”
At issue is whether the low – and still decreasing – price of oil presents a temporary or permanent shock to inflation. “The usual answer in the ECB would be to see if that’s temporary.” That was the assessment in 2009 when the bank was last confronted with a significant decrease in commodity prices. “This time may be different,” Coeuré says.
“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.”
This brings us to the question of what the ECB would actually do to confront the threat. There is no scope to cut interest rates further and ECB interventions to buy financial securities from the market have not arrested the decline prices.
“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 baseline option is to buy sovereign bonds. Then you have all kinds of technical questions.”
Assuming German objections are overcome, news reports suggest a €500 billion programme may be in play when the bank’s governors meet next Thursday. Coeuré won’t go there, saying there is no decision yet. “The only thing I can say is that, for it to be efficient, it would have to be big.”
ECB divisions
So what of the divisions within the bank? The ECB governors prefer to work by unanimity yet they are far from that at the moment. He has nothing to say directly of Bundesbank president Jens Weidmann, who has been arguing against quantitative easing. Yet he acknowledges the risk of “unintended consequences”, adding that the Bundesbank has raised legitimate concerns throughout the euro zone crisis.
The challenge is still huge. After many years of turmoil and disruption in the euro zone, the question remains as to whether the ECB and the European authorities generally have it within them to turn the ship around. So how big is the credibility test?
“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.”
Then there is Greece, origin of the debt debacle in 2009 and a source of renewed uncertainty ahead of a general election on Sunday week. Leading the polls is the hard-left Syriza movement led by Alexis Tsipras, who wants to renounce some of Greece’s enormous debt, reverse budget cuts and increase wages. This has prompted whispers in Berlin saying Greece could be expelled from the single currency if Tsipras refuses to compromise.
Coeuré is clear on the “Grexit” question, although the ECB has its own demands.
“Any talk of Greece exiting the euro zone is unreasonable and unrealistic.”
Still, emergency ECB support for banks in Greece is contingent on the country remaining in an EU/IMF programme. This has been ECB policy since 2010 in respect of banks which do not meet its collateral requirements.
The problem the eventual election victor faces is that the present bailout arrangement expires at the end of February. So a new deal to continue the Greek programme will be required by that point to ensure ECB support continues? “That’s absolutely right.”
The stakes are therefore high, yet Coeuré says it not the ECB’s job to lead talks on a new bailout. The ECB meeting next Thursday takes place three days before the election. Given the doubt over the outcome, might the decision on quantitative easing be postponed until after the poll? “Not at all. These are two different discussions.”
