IN TIMES OF CRISIS SAFEGUARDING THE EURO SAFEGUARDING THE EURO IN TIMES OF CRISIS The inside story of the ESM The inside story of the ESM SAFEGUARDING THE EURO IN TIMES OF CRISIS The inside story of the ESM The description of the events in this book, and the opinions and recollections of the individuals quoted therein, represent the best efforts of the author, the ESM staff and other contributors, to depict an authentic and impartial version of the relevant period in the ESM’s history. None of the views expressed is necessarily that of the ESM itself, nor that of any of its governing bodies, and such bodies have not been asked to approve this work. Accordingly, the ESM takes no responsibility, express or implied, for any of the statements of fact or opinion made herein. Neither the European Stability Mechanism nor any person acting on behalf of the European Stability Mechanism is responsible for the use that might be made of the following information. Luxembourg: Publications Office of the European Union, 2019 Print ISBN 978-92-95085-34-3 doi:10.2852/47298 DW-06-16-056-EN-C PDF ISBN 978-92-95085-33-6 doi:10.2852/788601 DW-06-16-056-EN-N © European Stability Mechanism, 2019 Reproduction is authorised provided the source is acknowledged. For any use or reproduction of photos or other material that is not under the copyright of the European Stability Mechanism, permission must be sought directly from the copyright holders. Contents Acknowledgements 7 Foreword by Jean-Claude Juncker, President of the European Commission 9 Foreword by Klaus Regling, ESM Managing Director 11 CHAPTER 1 Defending a symbol: ‘the euro is here to stay’ 13 CHAPTER 2 Lurching towards crisis: a ‘very fragile’ world 23 CHAPTER 3 ‘Runaway train’: Greece sounds the alarm 31 CHAPTER 4 The €750 billion weekend: the EFSF is born 45 Focus: The European Central Bank steps up 56 CHAPTER 5 Enlisting Klaus Regling: ‘I have his number’ 57 Focus: A life in public service 61 CHAPTER 6 All eyes on Luxembourg: ‘let’s do this’ 65 Focus: A role for the European Investment Bank? 68 CHAPTER 7 Early days: the EFSF and its doubters 73 CHAPTER 8 Enter the troika: the European Commission, the IMF, the ECB 77 CHAPTER 9 Courting a top credit rating: preparing for the markets 83 4 SAFEGUARDING THE EURO IN TIMES OF CRISIS CHAPTER 10 Testing the EFSF: the case of Ireland 91 CHAPTER 11 A phone, a laptop, and an espresso machine: start-up culture 103 CHAPTER 12 ‘Make sure the project flies’: the EFSF’s first bond 109 Focus: A precedent-setting disbursement 116 CHAPTER 13 The crisis spreads to Portugal: a second call for aid 117 CHAPTER 14 Scaling up the fund: the ‘save Europe’ call 127 CHAPTER 15 Towards the ESM: ‘a solid legal foundation’ 133 CHAPTER 16 Expanding the EFSF toolkit: bonds, banks, and guarantees 141 Focus: Bond-buying power 146 CHAPTER 17 Meeting at the opera: the leverage debate 149 CHAPTER 18 Rethinking rescue funding: the diversified strategy 157 Focus: Transparent, flexible funding 162 Focus: Awards for the ESM/EFSF funding team 163 CHAPTER 19 From bailout to bail-in: towards a new programme for Greece 165 CHAPTER 20 European ‘bazooka’: the $1 trillion question 175 CHAPTER 21 The ESM takes shape: ‘something fresh’ 181 CHAPTER 22 A ‘big mistake’: Greece’s second rescue stumbles 189 Focus: €15 billion and 10 minutes to spare 193 5 CHAPTER 23 Debt sustainability: revising the metrics 201 CHAPTER 24 Breaking the doom loop: towards banking union 207 CHAPTER 25 Spain’s banks: the ESM’s first programme 213 Focus: When bonds are better than cash 226 CHAPTER 26 The ESM on trial: green light from Germany 229 CHAPTER 27 Financial milestone: the ESM starts operations 237 CHAPTER 28 Corporate governance: the ESM’s operating manual 243 CHAPTER 29 Capital backing: key to top ESM credit rating 251 Focus: How do you solve a problem like a downgrade? 253 CHAPTER 30 At home in Luxembourg: a look inside the ESM’s offices 255 CHAPTER 31 Crisis in Cyprus: ‘no negotiating power, no credibility’ 261 CHAPTER 32 Clean exit: Portugal wraps up its programme 277 CHAPTER 33 Ensuring repayment: the ESM’s early warning system 285 CHAPTER 34 ‘Just in case’: the direct bank recapitalisation tool 291 Focus: Carlo and Hugo 297 CHAPTER 35 Safeguarding the capital: building a modern, strategic investment architecture 299 Focus: Hedging against risk 308 CHAPTER 36 Moving towards Grexit: at the cliff’s edge 311 6 SAFEGUARDING THE EURO IN TIMES OF CRISIS CHAPTER 37 Turning the corner: Greece’s third programme 321 Focus: An unusual money market transaction 334 CHAPTER 38 Debt relief: ‘real savings for Greece’ 337 CHAPTER 39 Beyond the troika: the ESM’s evolving role 345 CHAPTER 40 The ESM: taking on new tasks 355 Epilogue 365 Annexes 369 Biographies 371 Timeline 378 EFSF and ESM disbursements 397 EFSF and ESM rating history 404 Loan re-profiling for Greece, Ireland, and Portugal 406 Acronyms and abbreviations 411 Index 413 Acknowledgements It was at a weekly ESM management board meeting some years ago that the idea first emerged to write the story of the rescue funds. Our story is deeply intertwined with that of the euro crisis, and it therefore provides some important chapters in the history of the euro, whose 20-year anniversary we are celebrating this year. Since the rescue funds were created only recently, all the key players were still available to recount their part in the story. With this in mind, we interviewed many of those who contributed to setting up the temporary EFSF and permanent ESM so the tale could be told by those who first envisaged and then built the institutions. We are deeply indebted to those who took the time to share their memories with us. They all played a role in shaping the euro area’s response to the crisis: as finance ministers, leaders and representatives of institutions, and programme country experts. We would like to thank those who spoke with us: Maria Luís Albuquerque, Benjamin Angel, Marco Buti, Alfred Camilleri, Kevin Cardiff, MitsuhiroFurusawa, Vítor Gaspar, Timothy Geithner, Vittorio Grilli, Georges Heinrich, Deborah Henderson, Christine Lagarde, John Lipsky, David Lipton, George Papaconstantinou, Olli Rehn, Michael Sarris, Wolfgang Schäuble, Yannis Stournaras, Fernando Teixeira dos Santos, Jean- Claude Trichet, Euclid Tsakalotos, Maarten Verwey, ThomasWeinberg, and ThomasWieser. We would also like to thank those who provided written comments: Mário Centeno, Jeroen Dijsselbloem, Luis de Guindos, Mario Draghi, Jean-Claude Juncker, and Peter Kažimír. But we could not have chronicled the creation of the institution without the first-hand accounts of those who were on the inside from day one, especially Klaus Regling, ESM managing director and the founder of the rescue funds. Chief Economist Rolf Strauch, Deputy Managing Director and Chief Finance Officer Christophe Frankel, and Secretary General Kalin Anev Janse were among the first to joinRegling, as were a number of ESM colleagues from the various divisions and departments, from junior to senior level, many of whose voices you will hear throughout this book. A number of ESM colleagues were 8 SAFEGUARDING THE EURO IN TIMES OF CRISIS also later involved in the daunting task of reviewing several drafts of the book and annexes, as well as contributing expert material. Without their admirable efforts, this book could not have been written. We were fortunate to have Rebecca Christie as our lead author for this book. A former Bloomberg reporter in Brussels, she covered the crisis and its aftermath until 2016 when she established herself as an independent writer. We owe a great deal to her profound background knowledge, quick grasp of new information, compelling writing style, and ability to work under immense time pressure. Special thanks go to ThomasWieser, President of the Eurogroup Working Group until early 2018, who reviewed the final book manuscript and provided extremely valuable comments. Safeguarding the euro in times of crisis: The inside story of the ESM could not have been published in its final form without the invaluable support of the Publications Office of the European Union in Luxembourg and its very dedicated staff. We are very grateful for their work on this book, their advice, and assistance. We would also like to thank Emma Vandore and James Neuger, whose expertise helped to transform this project into reality. Most big undertakings have unsung heroes. For this publication there are two: one is Sharman Esarey, the ESM’s principal editor. Without her outstanding talent as an editor and her exceptional social skills there would simply not have been such a book. The same is true for Assistant Editor Rachel Calero. Her unparalleled organisational skills and her friendly insistence on deadlines and deliveries brought structure to a process that sometimes seemed too complex to master. ESM management board Credit: Steve Eastwood/ESM Foreword by Jean-Claude Juncker, President of the European Commission At 20 years young, the euro has already come a long way. A generation ago, it would have been unthinkable for 340 million Europeans in 19 countries to share a currency. Our single currency has always been more than the notes and coins in our pockets and wallets. It is the symbol of unity and the promise of prosperity and protection. It allows us to enjoy stable prices, lower transaction costs, protected savings, more transparent markets and increased trade. It creates jobs at home and gives Europe more influence in an increasingly competitive world. It was not always easy – quite the opposite. As someone who was there from the start, I witnessed the ups, downs, and teething problems that our Economic and Monetary Union went through.