Transcript Pitchbook US template - EESC European Economic and Social

“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
 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
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* McKinsey, KFW
EMU better positioned than other currency areas
Fiscal balance, euro area vs USA and Japan
(in % of GDP)
Source: IMF April 2011
Euro area without Estonia
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But, EMU needs to function better
Problems emerged during first decade and
were aggravated by global crisis
 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
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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
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National measures are showing results
Unit Labour Costs relative to Germany, nominal (1998 Q1=100)
140
135
130
Portugal
Greece
Ireland
Germany
125
120
115
110
105
Source:OECD
100
95
Fiscal balance, general government (as % of GDP)
Source: European Commission: Forecast – Spring 2011
Current account balance (as % of GDP)
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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A new framework for crisis management
€750bn Financial Stability Package
European Financial
Stabilisation Mechanism
“EFSM”
European Financial
Stability Facility
“EFSF”
International
Monetary Fund
€60 bn
€440 bn
€250 bn max
Available to all 27 EU member states
For euro area Member States
Up to half the amount drawn from
EFSF and EFSM
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EFSF: a lean organisation
Founded 7 June 2010 with Tenure
of 3 years - up to June 2013
Shareholders
Euro Area Member States
Based in Luxembourg
(“société anonyme” under
Luxembourgish law)
Board of Directors*
European Financial
Stability Facility
Finanzagentur
(German DMO)
Front/Back office
debt issuance
cash management
risk management
CEO Klaus Regling +
about 20 staff covering:
Operations:
Funding strategy
Lending
Risk management
Research
Legal
Communication
Corporate governance,
Audit, accounting & admin
ECB
(Account opened)
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European Investment Bank
Accounting
Documentation
Infrastructure (Facility)
EFSF: AAA credit rating
AAA Stable
The top rating and the long-term issuer
rating reflect:
 Strong shareholder support
Aaa Stable
 Credit enhancement
 An organisation supported by the best expertise
AAA Stable
 Conservative strategy of funding and investment
EFSF bonds are eligible as ECB collateral
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Financial assistance programme for Ireland
Objectives of the programme
 Immediate strengthening and comprehensive overhaul of the banking
€35 billion
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
€50 billion
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**
* National Pension Reserve Fund
** Maturity and lending costs are subject to revision
following euro zone summit of 21 July
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Ireland
IMF
EFSM
EFSF+bilateral
loans
EFSF inaugural issue : record breaking investor demand
Geographical breakdown
On 25 January 2011, EFSF placed its
inaugural issue in support of Ireland.
Middle East
2%
 Record breaking order book of €44.5 bn
UK
11%
 Orders received from over 500 investors
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
Rest of
Europe
9%
Americasothers
USA
2%
3%
Asia-Japan
22%
Asia-ex
Japan
14%
Eurozone
37%
Breakdown by investor type
Pension
fund
3%
Insurance
10%
Banks
13%
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Fund
managers
26%
Corporate
Private
1%
banks
2%
Hedge fund
1%
Central
Bank/Govt/S
ov wealth
fund
44%
Financial assistance programme for Portugal
Objectives of the programme
 Restore fiscal sustainability through ambitious fiscal adjustment
% of GDP
 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 …)
9,1
GDP deficit
reduction objectives
5,9
4,5
3
2010
2011
2012
2013
 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
IMF
EU
Disbursements will be made over 3 years with an average loan
maturity of 7½ years*
* Maturity and lending costs are subject to revision
following euro zone summit of 21 July
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EFSF
First issue for Portugal
Geographical breakdown
On 15 June 2011, EFSF placed its first issue
in support of the Portuguese programme
UK
12%
Rest of Europe
4%
 10 year maturity
North America
1%
Asia-Japan
21%
 Orders received from over 100 investors
Asia-ex Japan
19%
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 managers
Barclays, Deutsche Bank,
HSBC
Effective lending cost
6.08%
Amount transferred to Portugal
€3.7 billion
Euro zone
43%
Breakdown by investor type
Insurance/
Pension funds
10%
Banks
25%
Fund managers
28%
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Central
Bank/Govt/ Sov
wealth fund
37%
Second issue for Portugal
Geographical breakdown
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
North America Middle East
4%
4%
UK
Asia-Japan
5%
22%
Rest of Europe
8%
 Order book in excess of €7 billion
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 managers
BNP Paribas, Goldman
Sachs, RBS
Effective lending cost
5.32%
Amount transferred to Portugal
€2.2 billion
Euro zone
33%
Asia-ex Japan
24%
Breakdown by investor type
Others
3%
Banks
25%
Central
Bank/Govt/ Sov
wealth fund
54%
Fund managers
18%
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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 nonprogramme 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 could
 Resell to private investors once market conditions have improved
 Hold until maturity
 Sell back to country
 Use 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 lines
Objective:
 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
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*SGP: Stability and Growth Pact, EIP: Excessive Imbalances Procedure
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
Why?

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
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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.
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Conclusions: from crisis to a better functioning euro area

Member States took action

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
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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?
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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?
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