Managing Borrowed Time The Man Responsible for Saving the Euro
Klaus Regling has been tasked with saving Europe's common currency. At his disposal are a dozen employees and 440 billion euros. He has spent recent weeks preparing for the worst.
There is nothing in Klaus Regling's new office to indicate that this is the place where 440 billion ($560 billion) in bailout funds will be activated, if necessary. The furniture is used, the shelves are empty and the blue carpeting is worn.
The walls could use a new coat of paint, and slightly darker rectangles reveal where the previous tenants' pictures were hanging. Regling has already brought his own piece of art, the only personal item in the 25-square-meter (270-square-foot) space. The picture of an idyllic village in Bali is leaning against the wall. Regling hasn't had any time to put it up yet. He's been far too busy preparing to save the euro.
"Everything went rather quickly," the 59-year-old says by way of apology for the makeshift impression of his office on the third floor of an inconspicuous office building on John F. Kennedy Avenue in Luxembourg. Regling has been the head of the bailout fund for the euro, officially known by the somewhat cumbersome name European Financial Stability Facility (EFSF), since early July.
The German economist has shouldered an enormous responsibility. The leaders of the 16 member states of the euro zone expect him to intervene with bailout money should the euro run into serious trouble in the next three years, the period for which the safety net will remain active.
Acute Fiscal Emergency
The new organization is intended to assist countries in the event of an acute fiscal emergency. If the government of a euro-zone country is having trouble borrowing new money, Regling's EFSF will intervene. The regulated procedure is designed to eliminate the need for spontaneous collections among the member states, as was the case with the bailout of Greece.
The European governments, though not exactly known for speed and agility, established the fund in record time. In early May, when the financial system was on the brink of collapse as a result of the turbulence triggered by Greece's financial problems, German Chancellor Angela Merkel, French President Nicolas Sarkozy and the remaining euro-zone leaders agreed, in the presence of European Central Bank (ECB) President Jean-Claude Trichet, to establish a "special-purpose vehicle" to save the euro.
The euro-zone finance ministers inaugurated the EFSF at the beginning of June. Regling, whose name was quickly brought up as a possible head of the new organization, received a call one evening. He was told that if he were interested in the job, he should appear in Luxembourg the next day.
Regling was interested and accepted the invitation. "I was interviewed by three finance ministers in the morning, I received the offer in the afternoon, and I accepted the job that evening," he recalls. The economist wants the monetary union to survive. He believes in its economic benefits and, in a sense, regards it as his baby. He has interacted with the euro in various capacities throughout his career. He seems perfectly suited for the new job.
'The World Isn't an Ideal Place'
As chief of the International Monetary Affairs Division in the German Finance Ministry, he played a key role in drafting the European Union's Stability and Growth Pact in the 1990s. Years later, as director-general for economic and financial affairs in the European Commission under then EU Commissioner for Economic and Monetary Affairs Joaquín Almunia, his job was to make sure that the member states adhered to the pact.
Regling has also worked at a hedge fund, taught at the University of Singapore and held two different posts at the International Monetary Fund (IMF). Most recently, he worked as an independent consultant.
For Regling, it isn't a contradiction that he now heads an organization that probably wouldn't even exist if his stability pact had worked as intended. "The world isn't an ideal place," he says. Governments make mistakes, reforms are postponed, and then along comes an economic crisis to complicate things even further.
To prevent a worst-case scenario from becoming reality, he is now feverishly assembling his staff. He has already hired half a dozen employees and expects to add as many more.
The streamlined structure is possible because Regling intends to use his team to take advantage of existing institutions. The European Investment Bank will provide the infrastructure and handle the accounting activities for the fund. Germany's Federal Debt Administration will issue the bonds if and when they are needed, and the ECB will manage the accounts.
Meeting Potential Investors
In addition to handling the tasks needed to set up the organization, Regling is already knee-deep in everyday business at the new fund. Representatives of major banks come to see him every day, all of them eager to secure the contract to help the EFSF issue its bonds.
As is standard in the industry, Regling himself travels to meetings with potential investors. He was in Beijing recently, where he presented the EFSF to the sovereign wealth funds of China and Singapore. Officials from both funds were interested in the new European investment opportunities. Of course, it didn't hurt that Regling has known the key players for years.
Regling plans to meet with representatives of major US pension funds soon to familiarize them with his new organization. The would-be savior of the euro believes that these promotional tours, known as road shows in the financial industry, are absolutely necessary. "We're new, and if no one knows who we are, no one will buy our bonds."
The success of those bonds in the marketplace will depend in large part on their credit ratings, which is why Regling is paying particular attention to the rating agencies. He has spent a full day with groups of experts from each of the three major agencies, Moody's, Standard & Poor's and Fitch, to explain the EFSF business model to them.
This is what the model looks like: If a member state encounters financial difficulties, Regling's team raises capital, which it then makes available to the country in question. Because the loans are guaranteed by the remaining member states, the EFSF is able to borrow the money at favorable rates. The country receiving a loan pays a markup interest rate, and the difference between the two rates is Regling's profit, which he can eventually distribute to the guarantor countries.
'The Most Likely Scenario'
The rating agencies are in the process of deciding whether to award the EFSF bonds the highest rating of AAA. The higher the rating the lower the interest rate Regling's fund will have to pay. The prospects of securing a triple-A rating are not bad, even though only six of the 16 euro-zone member states are rated AAA. To achieve a triple-A rating despite this handicap, each of the 16 euro-zone countries will guarantee 120 percent of its share of the 440 billion fund. Regling expects the rating agencies' decision within the next few weeks.
He is convinced that the beneficial effects of the new bailout mechanism can already be felt today. "The markets have settled down since we came into existence," he says, noting that the risk premiums for ailing countries like Portugal and Spain have not continued to rise, and that the markets have regained confidence in the monetary union.
Regling describes the most important objective of the undertaking as follows: "We are buying time with the EFSF bailout measures." Crisis-stricken countries and the euro zone are expected to use the time provided by the bailout funds to clean up their national finances and develop a permanent mechanism to cope with future crises.
If Regling has his way, the measures will not even be needed in the next three years. "It would be preferable if we didn't even have to intervene," he says. "In fact, I believe that's the most likely scenario."
He hopes that the very existence of his organization will bring calm to investors and deter speculators. "If that's the case, we'll close up shop here on June 30, 2013."
Translated from the German by Christopher Sultan