Euro bailout chief sees hurdles to quick ‘coronabonds’
Short-term crisis response will require use of existing institutions and instruments
The head of the eurozone’s bailout fund said it would take between one and three years to set up a new European institution to issue so-called coronabonds. Any extra joint debt issuance would in the short term have to come from existing mechanisms.
With political temperatures rising over calls for euro area governments to collectively issue bonds to tackle the coronavirus pandemic, Klaus Regling, the managing director of the European Stability Mechanism, said European institutions have already issued more than €800bn of mutual debt in aggregate. He added they could raise more if needed.
If the goal is to cover short-term crisis-related financing needs such as expanding healthcare or supporting businesses “then I think the only way is to use existing institutions with existing instruments,” he told the FT in an interview. “In the longer term, there are other options.”
The eurogroup has placed the ESM at the heart of its plans for a joint response to the economic impact of coronavirus. Officials have discussed using its so-called Enhanced Conditions Credit Line (ECCL) for governments seeking extra sources of funding. Mr Regling said it was too soon to expect a consensus among euro area governments on how the ESM’s tools would be adapted. But he expected only limited conditions to be attached to the precautionary credit lines his institution can deploy.
Last week a group of nine EU member states, including France, Italy and Spain, called on fellow governments to jointly work on a common debt instrument to raise “stable long-term financing for the policies required to counter the damages caused by this pandemic”. However, the proposal foundered in the European Council last week amid opposition from Germany and the Netherlands, which have long opposed greater debt mutualisation.
Mr Regling indicated it would be possible to set up a brand new European institution to sell common bonds if there were political agreement, but such a project would be complex and time-consuming. “It would take one, two or three years, and member states have to come up with capital or guarantees, or assign future revenue,” he said. “One cannot create bonds out of nothing.”
In the short term, boosting mutualised debt issuance would have to come via three existing EU institutions — the ESM, the European Commission or the European Investment Bank.
There could, for example, be scope for the commission to issue more debt under the auspices of its forthcoming seven-year budget, Mr Regling said. He added there are arguments for particularly hard-hit countries such as Italy to have their contributions to the budget reconsidered. He did not see any current need to boost the ESM’s lending capacity, which stands at €410bn, saying “there is a lot available.”
He stressed that countries including Italy continued to enjoy ready market access, drawing a sharp distinction between the current circumstances and the euro crisis that began a decade ago. “There are no huge macroeconomic imbalances in the euro area, which is very different from 10, 12 years ago,” he said.
While some politicians worry that use of the ECCL would damage a country’s standing in the financial markets, Mr Regling argued that the presence of similar credit lines from the IMF has tended to reassure investors. “It can be reassuring for markets because they know if something unexpected happens — if against the baseline assumption money needs to flow — it will be made available very quickly.”
The maturity of any lending under the ECCL would be discussed by the eurogroup of eurozone finance ministers in the coming days, he said. He noted that the ESM has greater flexibility than the IMF. “We don’t have any limits,” he said.
The idea of using the ESM is politically hazardous in Italy, given claims by Eurosceptic parties there that it would entail harsh conditions. However, Mr Regling made it clear that the conditionality attached to ECCL lending would be very different from the euro crisis era.
The conditions would likely stipulate that the money would be made available for health sector spending or financing measures required to counter the economic consequences of the pandemic. There would also be a commitment to respect the EU’s surveillance framework — which is an obligation for all EU member states in any case.
“Our ECCL as I see it would have very limited conditions which basically make sure that the money is spent in the correct way and that the ESM will be repaid one day,” said Mr Regling.
He envisaged no financial role for the IMF in the present situation in the euro area, saying the fund has been swamped by applications for financial help from countries outside Europe. The IMF would remain involved via its regular annual consultations with member states, however.
Mr Regling called for solidarity as all member states head into likely recessions. Public debt in member states could end up being lifted by 10 or 20 percentage points as a share of gross domestic product as a result of the crisis, he warned.
“Apart from the national response, which is strong and growing, we also need a European response,” he said. “We need solidarity in Europe because if we want to protect the single market, it’s not enough to rescue your own economy. I think every EU member state has an interest to also make sure that all of the other EU member states can overcome this crisis, the biggest since the second world war.”