FinancialObserver.eu: Could the European Central Bank imagine a situation that a country such as Poland joins the euro zone without meeting the criterion of pegging its currency to the euro in ERM 2 mechanism for two years?
Yves Mersch: It is obvious that all those inside the euro area would be very heartened if Poland could as soon as possible meet all the criteria for joining the euro area, since we know that as of the referendum with which the Polish people joined the European Union, there is also an obligation, ultimately, to join the euro area. Now as to the criteria, they are the same for all countries and you know how important it is for an area like Europe to respect equal treatment and to respect the criteria being applied to every country equally. That means also the criterion of the two years of participation – at least two years of participation – in the exchange rate mechanism.
Poland fears that a sharp appreciation of its currency in the ERM 2 period could undermine the competitiveness of the economy and that capital inflows might lead to a new credit bubble. How could the ECB help to prevent this scenario?
I think the question of the exchange rate and competitiveness in is one that a country has to deal with outside the euro area, because when it joins the euro area this instrument is no more at its disposal. And that is exactly the reason why we have this period of two years to show that a country is able to join the euro area without undue fluctuations in its exchange rate and still to maintain its competitiveness through the adjustment mechanisms inside its own economy. Now I think why these two years: it is not only one country joining the euro, it is also one country becoming co-responsible for one of the largest currencies in the world. And in order to show that you are able to join the co-responsibility of managing this currency you must show that you are able to manage own currency outside the euro area. That is the reason why we have this two-year criterion which is in the Treaty, and which we cannot forgo.
Polish authorities have so far referred with caution to joining the banking union before we join the euro zone.
It is ultimately the decision of the Polish representatives to judge whether the structures of their economy are sufficiently convergent with the rest of Europe and then to determine what is the right timing to join the Euro area. And the same goes for the banking union. It is for the Polish authorities to decide whether they would be part of this Single Supervisory Mechanism, to have a much closer cooperation agreement with all the European authorities; also, given the fact that so many foreign banks are represented in Poland through their subsidiaries; or whether the Polish authorities would consider that it is to their advantage not to participate as closely and to stay separate. In the end I think, nevertheless, the decisions will be taken by the headquarters of the foreign banks that are represented here.
But the debate around joining the euro area has flared up again. What is your advice – to hurry up or to wait?
It would be certainly not for me to be pretentious and to give advice to the Polish authorities about the state of their own economy. I am confident that the Polish authorities will take the right decisions and I can assure you that from inside Europe we would consider it with great satisfaction if the Polish authorities in the end took decision on when their economy would be reaching the maturity to join the Euro area and to join, then of course, the Supervisory Mechanism and to be full member of the core of European policymaking in the area of economic and monetary union.
Is the banking union a sufficient step to restore the bank lending channel?
Well you know that it is exactly the reason why we do this comprehensive assessment, which is under way right now. We have to restore the confidence of the market and of the investors in the European banks. And it is inevitable that this means that we have a thorough examination of the balance sheets and that all the banks bring to the open all possible hidden bad loans that might still be simmering on one or the other bank’s balance sheet if so is the case. However, it is true that this could at the first stage bring the banks about to slow down their lending operations, and in some countries we have seen it. But this is a prerequisite to resume lending on a renewed basis of confidence and on a renewed basis with more sound balance sheet and better equipped with capital to withstand loss absorption capacity in the future. So from that point of view, I think it is exactly the right sequence – restore confidence and the lending channel will also restore. But on the other hand you see that on the monetary policy side we already also try to start the bank lending channel again, but we must acknowledge that Europe is for the moment depending for 80 pct. on bank lending to finance the economy, which is maybe a percentage which is a little bit on the high side. That is the reason why we also need to develop more integrated capital markets in Europe as a funding source. And since Europe is so much dependent on small and medium-sized companies we also need to develop the channel of securitization.
What is the importance is the decision of the Governing Council to intensify work related to outright purchases in the ABS market?
Exactly as I said this is to support the access to funding to small for small and medium-sized companies, which are too small to be able to benefit from developments in the capital markets and which also are excessively dependent on lending decisions that are concentrated in all European countries among a few large players in each country. So this high concentration of dependence on a few large banks, the absence of capital market access leads us to try to encourage a revival of a segment of the market, which has suffered during the crisis, because there has been excessive risk taking and complexity in this area. And we try to revive this market segment through transparent, simple instruments that could help to extend funding access to small and medium-sized companies again in all the European market.
As a result of the SMP and OMT operations and the collateral related to them, the share of bonds of highly indebted countries on the balance sheets of the ECB and the Eurosystem has increased. Isn’t that a new vicious circle linking the governments with central banks?
It has always been one of the safe assets which have been considered so far in the regulations as risk free. And I have in the past already several times been on record of saying that this is probably one area in regulation which we will have to revisit sometime in the near future in order to avoid the situation that you mentioned. But we first have to do one step to the other and I think this is not the most urgent. You rightly say that some indebted countries are beginning to find again access to the markets and I think this is the success of the program countries. This is also only possible because the necessary reforms have been implemented and this is a sign that we see some confidence returning in the markets. Now I think it has always been the case that a central banks has had as one of its most important assets on its balance sheet government securities. I think that it will not change in the future and I would say that the European Central Bank has rather less government assets on its balance sheet compared to central banks in other parts of the world.
How important is the European Commission’s proposal for a “Regulation on indices used as benchmarks in financial instruments and financial contracts” for the ECB and when could it be adopted?
Well, I’m not able to give you timetable when the political side in the parliament, the Council of Ministers will adopt. It is their relevance and competence. You know that ECB will only give its own opinion on this piece of legislation. I think it is important to restore confidence in the market to put these indices on firm ground. But I think more than the question of new rules or new ways of calculation, I think what is more important is, in the future, to make sure that we implement and control the existing framework.
Is there a need to change the way the indices in currencies are calculated?
As I said, it is more important probably to implement the standards and to abide by the rules and to check whether the rules are being obeyed rather than now to move from one standard another standard, which could be done, but which in my opinion is not of the same priority.
Are the money markets in European countries perceived by the ECB as transparent and deep enough to be an indicator of the actual cost of funding?
I think in every market economy you are as the central bank interested in having deep and well-functioning money market. Because those are the market in which we operate most directly, much more then longer term segments of the capital market. So it is certainly important for central bank to have well-functioning money markets. You know that consequence of the crisis this money markets totally ceased up. We feel encouraged that we see a certain revival of these money markets but we will also see that there will be changes among the actors, among the instruments and among the ways these money markets will function. And this is a consequence of new regulations, it is a consequence also of determined will to de-risk the financial systems and there will be inevitably money markets which will function differently in the future. However, you need to give this change some time. What we see now is renewed revival of money markets. Maybe we are not yet back at the level of debt and liquidity that we have seen before the crisis, but if we are at levels of debt and liquidity which are safer, so be it.
Is the interbank market for unsecured loans important for the effectiveness of the ECB transmission mechanism?
I do not think again that we will ever revert to the level of unsecured loans in the market as we have seen in the past. But obviously there it is still a place for unsecured loans, so as every single instrument in money market is important in the transmission mechanism. We also believe that this instrument is an important element in the transmission mechanism. However, during the phase of recovery it is particularly important to restore the bank lending channel and to some extent this is part of it. But we can also help this restoration of the bank lending channel. And this is exactly what we intend to do with our targeted long term refinancing operations (TLTRO) which are scheduled for September. We will announce in due time how it will be done in precise detail.
Tomasz Mirończuk, Jacek Ramotowski