MNI POLICY: Pandemic Fund Has Room To Spare - ESM's Regling

By Luke Heighton

     FRANKFURT (MNI) - The European Stability Mechanism could exit the Covid-19

crisis with three quarters of its lending capacity untouched, ESM head Klaus

Regling said in an interview with news agencies on Tuesday.

     While all 19 euro area member states qualify for support from the Pandemic

Crisis Support, which is based on the ESM's established Enhanced Conditions

Credit Line (ECCL), with debt sustainability "a given" in every case, not all

are expected to apply for such support, Regling told the agencies including EFE,

ANSA and AFP. Of those which do, the majority are not expected to draw, he

continued, although the cost savings could be substantial - up to EUR2 billion a

year for Spain and EUR7 billion for Italy.

     "If I make a very rough estimate," Regling said, "maybe one-third might

become activated. That would represent EUR80 billion. That would mean given our

current unused lending capacity of EUR410 billion, we would still have EUR330

billion for whatever comes at another crisis, which I don't want to predict and

cannot predict."

     There is "no justification" for a repeat of the kind of conditionality that

previously accompanied loans other than that the money is spent on health sector

costs, direct and indirect, linked to the pandemic.

     Instead, Regling said, the ESM's Early Warning System "only looks at the

risks to repayment," including an analysis of a country's repayment capacity for

the next 12 months "and whether there is any risk that the payments due might

not be made."

     "Markets fully understand how the ESM operates," he continued. "They know

that this is cheap money so the country that needs to finance its deficit is

actually better off asking for some of the deficit to be financed by the ESM

than doing all of it on its own in the market, because the interest rate is

lower. This is good for the country's standing in the markets."

     Once the crisis is over, Regling said, "we can return to a normal

situation, the [Stability and Growth] Pact works and the monitoring that is

linked to ESM lending is exactly as described [...] there will be no special

monitoring."

     Regling said he "hoped" the economic recovery from the pandemic would start

in 2021 and last two to three years, and at least "some" of the additional

fiscal resources required would come in the form of grants, rather than loans.

     Suggestions that Greek debt was "exploding" as a result of the Covid-19

crisis were "not true," Regling said. "It is going up, of course, because Greece

will run a large fiscal deficit, like everybody else.

     "But when you compare debt ratios, you must realise that in the case of

Greece, more than half of their debt is with the ESM, so it is at very, very low

interest rates. So in that sense, the annual debt servicing cost for Greece is

lower in terms of GDP than in many other countries."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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