Euro bailout chief sees hurdles to quick ‘coronabonds’

The head of the euro area rescue fund said it would take between one and three years to set up a new European institution to issue the so-called coronabonds. Any additional joint debt issuance should in the short term come from existing mechanisms.

As political temperatures rise during calls for eurozone governments to collectively issue bonds to fight the coronavirus pandemic, Klaus Regling, Director General of the European Stability Mechanism, said the European institutions have already issued more than 800 billion euros in mutual debt in total. He added that they could collect more if necessary.

If the objective is to cover short-term financing needs linked to the crisis such as the expansion of health care or business support “, I think the only way is to use existing institutions with the instruments existing, “he told FT in an interview. “In the longer term, there are other options.”

The Eurogroup has placed the ESM at the heart of its joint response plans to the economic impact of the coronavirus. Officials discussed the use of its so-called Enhanced Credit Line (ECCL) for governments to seek additional sources of finance. Regling said it was too early to expect consensus among eurozone governments on how the ESM tools would be adapted. But he expected that only limited conditions would be attached to the precautionary credit lines that his institution could deploy.

Last week, a group of nine EU member states, including France, Italy and Spain, called on governments to work jointly on a common debt instrument to raise “long-term stable funding for the policies necessary to counter the damage caused by this pandemic. ” However, the proposal failed at the European Council last week amid opposition from Germany and the Netherlands, who have long opposed deeper debt pooling.

Regling said it would be possible to create a whole new European institution to sell joint bonds if there was a political agreement, but such a project would be complex and time consuming. “It would take one, two or three years, and the member states must find capital or guarantees, or allocate future income,” he said. “You can’t create links from scratch.”

In the short term, the increase in the issuance of mutual debts should pass through three existing European institutions – the MES, the European Commission or the European Investment Bank.

For example, the Commission may have the opportunity to issue more debt under the auspices of its next seven-year budget, said Regling. He added that there are arguments for particularly affected countries, like Italy, to reconsider their contributions to the budget. He saw no current need to strengthen the lending capacity of the MES, which amounts to 410 billion euros, saying “that there are many available”.

He stressed that countries, including Italy, continued to benefit from easy access to markets, making a clear distinction between current circumstances and the euro crisis that started ten years 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 fear that the use of ECCL would harm a country’s position in the financial markets, Regling argued that the presence of similar IMF lines of credit tends to reassure investors. “It can be reassuring for the markets because they know that something unexpected is happening – if, contrary to the basic assumption, the money has to flow – it will be made available very quickly.”

The maturity of any ECCL loan will be discussed by the eurogroup of euro area finance ministers in the coming days, he said. He noted that the MES has greater flexibility than the IMF. “We have no limits,” he said.

The idea of ​​using the MES is politically dangerous in Italy, since the Eurosceptic parties claim there that it would lead to difficult conditions. However, Mr. Regling made it clear that the conditionality attached to ECCL loans would be very different from the era of the euro crisis.

Conditions would likely state that the money would be made available for health care spending or the funding needed to offset the economic consequences of the pandemic. There would also be a commitment to respect the EU surveillance framework – which is in any case an obligation for all EU member states.

“Our ECCL, as I see it, would have very limited conditions which essentially guarantee that the money is spent properly and that the MES will be reimbursed one day,” said Mr. Regling.

He does not envisage any financial role for the IMF in the current situation in the euro zone, saying that the fund has been overwhelmed by requests for financial aid from non-European countries. The IMF would however remain involved in its regular annual consultations with member states.

Editor’s note

Euro bailout chief sees hurdles to quick ‘coronabonds’ 1

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Regling called for solidarity as all member states enter a likely recession. Public debt in member states could end up being increased by 10 or 20 percentage points as a percentage of gross domestic product as a result of the crisis, he warned.

“Besides 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 is not enough to save your own economy. I think it is in the interests of each EU member state to ensure that all other EU member states can overcome this crisis, the most serious since the Second World War. “

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