Risk-Sharing via Regional Financial Agreements: The ESM Experience

Transcription

1 Risk-Sharing via Regional Financial Agreements: The ESM Experience Aitor Erce (ESM) ADEMU Workshop Risk-Sharing Mechanisms for the European Union Florence, May 2016 Disclaimer: The views on this discussion are the author s and need not align with those of The European Stability Mechanism

2 How am I going to fill my slot? The last two days we have discussed about the various ways in which the effects from negative shocks can be lessened by pooling resources. There are at least two motives why a group of countries may desire to set up a common resource pool Convergence/Redistribution Motive Insurance against shocks Motive In what follows I will: Map these risk-pooling motives to the working of Regional Financial Agreements (Regional Safety Nets) Illustrate what the ESM experience can teach us about such mapping. 1

3 The Global Net of Regional Financial Agreements In addition to the IMF, with a global membership, there are 8 Regional Financing Arrangements (RFAs) covering almost 90% of world GDP. Although these RFAs have diverse operatives, all share the objective of providing a buffer of affordable financing to countries facing stress 2

4 RFA emergency lending: what risks are shared? RFAs do not address convergence motives: They are not permanently redistributive mechanisms Loans are not direct transfers (even if provide NPV transfers) Permanent shocks are to be dealt through developmental institutions RFAs mandate is closely linked to the Insurance motive: Provision of funding to help handle temporary negative shock using terms (maturities and charges) that deviate for what the countries would obtain from tapping private agents. Both common & idiosyncratic shocks can be addressed using RFAs RFAs financing aims at covering funding gaps (deficits + roll-over needs + other) while policies to resolve a crisis are implemented 3

5 RFA financing as Tri-Party (Credit-)Risk Sharing (More often than not) RFA financing amounts to a redistribution of pre-existing (and new) sovereign credit risk. Various layers of bilateral risk sharing involved in RFA financing: Borrowing Sovereign and RFA members: share the credit risk embedded in the financing provided engage in an NPV-transfer to the Sovereign (better-than-market terms) Private creditors and RFA members: share the credit risk from outstanding/new Sovereign borrowing seniority arrangements do not fully eliminate credit risk Borrowing Sovereign and private creditors: * share credit risk from their remaining sovereign exposures. share credit risk through debt restructuring if needed 4

6 Private sector risk sharing: roll-over versus PSI Financing from RFAs is subject to an ex-ante evaluation (DSA) If situation deemed unsustainable private creditors are asked to contribute (share the risk?) in the form of a debt default/restructuring/reprofiling/psi This setting gives private creditors, who fear risk sharing via PSI, incentives to look for the exit if they start doubting the Sovereign The resulting capital flight (absent PSI) implies that: The extent of risk sharing between private creditors and the sovereign is reduced (private sector exposure is reduced) The extent of risk sharing from the RFA to private creditors increases (private creditors are being bailed-out) * The extent of risk sharing between RFA and sovereign increases (larger loans to fill the larger financing gap are needed) 5

7 Tri-party risk sharing with the ESM: from flight to voluntary stay The literature is packed with studies documenting the lack of ability of RFAs (including IMF) to prevent capital flight (no catalytic effect) My interpretation of this result in risk-sharing terms is that the traditional approach to official support (aka IMF) reduces the extent to which the private sector shares risks voluntarily. At the onset of the ESM activity, the situation replicated the traditional results. Private capital flight accelerated as countries received ESM support. In a set of steps, the way in which the ESM provides support was changed to deliver more accommodative terms (more NPV transfer). * This modified form of risk sharing changed the behaviour of private creditors, who became more willing to voluntarily provide risk sharing 6

8 RFA support tools alters the form of the (credit-) risk to be shared While all RFAs (including the Fund) share credit risk, the instruments used to do so, affect the shape such credit risk has Irish debt profile before the programs Portuguese debt profile before the programs Bonds Irish debt profile after the programs Bonds Portuguese debt profile before the programs Bonds IMF ESM/EFSF Bonds IMF EFSF/EFSM 7

9 ESM-style support can foster private sector risk sharing Changes in the terms of ESM loan to Ireland in 2011 provide a natural experiment to assess the relation between the form/terms of support (risksharing?) by the ESM and private agents incentives to share risks 8

10 Conclusions Regional and multilateral crisis management mechanisms are a tool to share credit risk among public and private agents The European experience shows how public (credit-) risk sharing mechanisms can be designed to enhance the degree of private agents willingness to share those same risks. 9

11 Learning by doing Lending Terms: IMF versus ESM-EFSF Loan size Margins Maturities IMF Up to six times the country's quota under standard programs From 100 bps up to 400 bps on top of the SDR rate Five years for SBAs Above six times the quota, only via exceptional access policy Grows with the size and duration of the loan Seven to ten years for EFFs EFSF-ESM Size of the loan determined via DSA For standard loans its 10 bps above the ESM/EFSF funding cost Effective maturities have reached 40 years for EFSF and 22.5 for ESM No pre-defined upper limits For indirect bank recapiltalisation the margin is 30 bps No pre-defined limit on maturities 10